PKU Prof. Lu Feng on Chinese Overcapacity

"China's new energy vehicle sector is still in a phase of rapid growth, and there is no overcapacity."

Today’s edition begins with an introduction by Dr. Jost Wübbeke, managing partner and co-founder of Sinolytics, a China-focused consultancy based in Berlin and Beijing. Jost is an expert on Chinese industrial policy and supply chains. My thanks go to him and to Robert A. Kapp, who translated today’s text. – Thomas

Overcapacity has become a big issue in trade disputes with China. The US and the EU use it as a key reason to justify trade defence measures against Chinese imports. China, on the other hand, tries to downplay it to avoid these measures. Chinese policymakers know that overcapacity is both a blessing and a curse for their economy: it helps industries grow quickly and cheaply but also causes harmful price wars and inefficiencies. The new challenge is that overcapacity now affects high-tech industries like electric vehicles (EVs), batteries, and semiconductors, unlike in the past.

Lu Feng's analysis offers a conceptual view on overcapacity, which is a notable effort given how politicised the topic is. He highlights that determining overcapacity is complex, especially in new industries with expected high demand. For example, is low utilisation in a new industry with high future demand still overcapacity?

There are some points where I disagree with Lu Feng. He argues that private companies mainly drive overcapacity, but it is also true that massive subsidies and government support in China contribute to this problem. Additionally, while Chinese companies have the right to compete internationally, the support they receive from the Chinese state makes the market environment unfair. China should take its trade partners' concerns seriously to avoid protectionist responses.

Lastly, the US and Europe should be cautious about falling into a protectionism trap. Imposing tariffs and other measures can backfire if they don't have the innovation and cost-competitiveness to build their own industries, leading to higher costs and reliance on outdated technology.

Jost Wübbeke

Key Points

1. Chinese enterprises prone to overcapacity fall into two main categories: first, mature and low-end industries; second, firms undergoing rapid technological changes and those in high-growth sectors.

2. The first category includes industries that produce such things as traditional fuel cars, petrochemicals and mature-node semiconductors.

3. The second refers to such goods as electric vehicles and car batteries.

4. Although overcapacity and overproduction may be concerning for the first type of enterprise, low-capacity utilisation rates in high-tech and high-growth firms can be normal. Immediately stigmatising this second type of industry with the term “overcapacity” is wrong.

5. Relying solely on traditional methods for assessing overcapacity is not suitable for high-growth and high-tech industries.

6. Moreover, overcapacity should not only be viewed in a negative light; it can also produce positive outcomes, such as higher efficiency and market competitiveness.

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Prof. Zheng Yongnian on Chinese Overcapacity

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7. Overcapacity in China is being caused or exacerbated by several factors:

   1. The post-pandemic decline in demand for certain goods.

   2. Large-scale investments by private companies.

   3. Production capacity growing faster than demand due to rapid technological advances.

   4. The imbalance between strong domestic supply and weak domestic demand in China.

   5. Protectionist policies around the world.

8. To address China’s overcapacity problem, Beijing should rely on a combination of market mechanisms and macroeconomic policies. However, it should ensure that China’s emerging industries are not harmed in this process.

9. Beijing should also work to reduce China’s trade imbalances with developed countries and encourage Chinese firms to invest abroad. But foreign protectionist measures should be counteracted.

10. Boosting domestic consumption at home remains a top priority.

The Author

Name: Lu Feng (卢锋)
Year of birth: 1951 (age: 72/73)
Position: Professor of economics and director of the China Macroeconomic Research Centre at the National School of Development, Peking University
Other: Advisor to the PRC’s Ministry of Finance, Ministry of Human Resources and Social Security, and to the The People's Bank Of China
Research focus: Open-economy macroeconomics; Chinese agricultural economics; development economics
Education: LLB Renmin University of China (1982); MA Renmin University of China (1985); PhD University of Leeds (1994)
Experience abroad: Visiting scholar at the UK’s Institute of Development Studies (1989), the Australian National University (1996) and Harvard University (2003); Lecturer at Leeds University (1994-1995)

HOW TO VIEW OBJECTIVELY AND DIALECTICALLY THE CURRENT PRODUCTION CAPACITY ISSUES IN SOME INDUSTRIES
Lu Feng (卢锋)
Published by the Shanghai Development Research Foundation on 24.05.2024
Translated by Robert A. Kapp
(Illustration by DALL·E 3)

I. The Concepts of Overcapacity and Redundant Capacity