Xi now insists that there is no “China overcapacity problem,” and that the Chinese government argues that, from a global perspective, there is in fact a capacity shortage in the new energy sector.
Still, the Chinese government’s concerns and appreciation of unchecked manufacturing have been well documented over the past three decades, and institutional and mechanistic factors, including over-involvement of local governments, have long contributed to overproduction. It is acknowledged that capacity has led to instances of economic strain.
“The system goes like this: China has a plan and they put a lot of money into it. And China is trying to keep foreigners out to give Chinese companies a chance to scale up. “Then every state wants to have the same things: the same steel, aluminum, chemicals, cars, batteries,” he explained. “And all of a sudden, you see an incredible increase in performance.”
China has seen the rise and fall of overcapacity since the beginning of its transition from a purely planned economy to a market-oriented economy (a nearly 20-year transition that began in 1978).
The first wave of involvement in consumer products such as televisions occurred in the 1990s, when manufacturing boomed in response to latent consumer demand.
China’s overall manufacturing capacity is growing, putting more pressure on the West
“After China joined the WTO, its large industrial capacity was certainly designed to serve the whole world, especially the United States and Europe,” said Tao Lan, a professor at the School of Humanities and Social Sciences at the Chinese University of Hong Kong. (Shenzhen) specializes in China’s economic transition and has closely followed land reform and urban development.
“Of course, China’s overall production capacity is growing, putting more pressure on Western countries,” Tao added, noting that, coupled with government subsidies and loosening environmental regulations, fierce competition among domestic companies is certain. He pointed out that the company is increasing its production capacity and trying to break away from foreign companies. Companies have little room to compete.
For local governments around the world, the appeal of attracting manufacturing investment typically includes increased jobs and tax revenue, but Chinese local governments have a deeper view of strengthening their respective economies to gain political advancement. Many Chinese scholars argue that they tend to have a motive.
Furthermore, according to Tao, the country’s tax reform, which was implemented from 2012 to 2016 and shifted the burden of business tax on companies to value-added tax on consumers, will reduce the tax revenue generated by these companies after the reform. The ability to reserve more at the local level has increased incentives for local governments to attract more manufacturing investment.
On the other hand, the policy toolbox of Chinese local governments is always larger than that of foreign local governments.
Previously, local governments could reduce land prices, labor costs and environmental constraints by cutting compensation to farmers. Over the past decade, much of this has shifted to so-called government guidance funds, investment vehicles for China’s private equity market used to direct capital to some strategic emerging industries such as semiconductors. And such sources of capital mainly relied on bank borrowing, Tao said.
“Ultimately, if the industry fails to develop, it will ultimately be the banks that will suffer the losses,” he added.
“There is serious overcapacity and there is no longer any money to set up factories; [guidance] Lack of funds inevitably leaves projects unfinished in some places, which means funds are being thrown down the drain,” Tao said.
