Preface
Yellen's visit to China has been a big move.
The satchel and dinner are the most lively discussions on social media, and the "results" are not small, the two factions are torn up, some say it is simple, some say it is a show;
"Overcapacity" is the most discussed in the temple, and the "results" are not small, and the two factions are also torn up, some people think that the Americans are really good and give advice to China's economy, and some people hum and say, she has that good heart?
Not to mention the dinner and the satchel, the idle two sentences of "overcapacity" are purely offside output after reading the views of the gods from all walks of life.
Yellen is said to have criticized China's "overcapacity" five times during her time in Guangzhou, which shows that this matter is worth discussing.
01
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In fact, Americans have been talking about "overcapacity" for half a century.
In the 1970s, trade frictions between the United States and Japan became more and more serious, and the United States also criticized Japan with the rhetoric of "overcapacity".
In response to criticism from the United States and the constant initiation of sanctions, Japan has also come up with a new word: supply-side reform (you read that right, the Japanese pioneered it).
This word, as the name suggests, is to adjust and upgrade the problems of "overcapacity", excessive energy consumption, serious pollution, and insufficient innovation on the supply side of the manufacturing industry.
However, in essence, the supply-side reform was forced by Japan to do it under pressure from the United States.
Of course, this word has a positive side of actively pursuing high-quality development and industrial upgrading. China has put forward the same slogan for the sake of the positives, not for the pressure of anyone, which is the essential difference between the two countries' supply-side reforms.
This distinction is important.
Since the 1980s, Japan's manufacturing industry has removed the label of imitation, plagiarism, and low quality, and soon became known for its precision, high technology and advanced technology.
But the unforeseen negative effects are also very serious:
Among them, Japan's supply-side reform, the essence of which is subtraction, has caused the transfer of advantageous industries and the rise in manufacturing costs, which is one of the most typical "negative effects". Let's take steel as an example.
In 1976, Japan cooperated with the requirements of the American Iron and Steel Institute and signed the "Special Steel Import Quota Restriction Agreement" to reduce production and limit prices. To this end, the Japanese government has restricted the output of the steel manufacturing industry and transferred industrial workers through subsidies and taxes, but the result is that:
01) As early as the 70s of the last century, Japan's annual steel output reached 100 million tons, but after the restriction of development, 50 years later, its annual output still stayed at 100 million tons, and in contrast, China from 10 million tons in the 70s to 1 billion tons today, forming a crushing trend.
02) Speaking of which, you may say that the output is limited, and it is not profitable anyway, so it is a good thing to engage in more high-tech and low-pollution industries.
Theoretically, it is. But there is a more complicated side of things, because the industry is interrelated, steel production can not go up, then other industries that need a lot of steel, especially some fast-growing industries, the demand for steel has skyrocketed, and there is no domestic, then it must be imported from abroad, which is bound to increase costs, which may lose competitiveness.
So one of the phenomena we see is that after Japan's steel production is restricted, the steel production of China and South Korea has skyrocketed, and at the same time, an industry with a great demand for rigid iron, that is, the shipbuilding industry, Japan has also lost its advantage and has been surpassed by China and South Korea, and now China is the world's first shipbuilding industry, followed by South Korea.
03) Furthermore, from an economic point of view, supply and demand are mutually beneficial, that is, sometimes not only demand determines supply, but supply also "creates" demand. There are cheap steel raw materials, according to the current market demand, there may be a surplus, but if it is not enough, it will give rise to new industries and new demand.
For example, the first high-speed railway we built in Indonesia was officially opened last year. To win this demand, technology is one thing, and it is also extremely important to have a complete industrial chain that can provide cheaper raw materials and make manufacturing costs low enough. Otherwise, your construction cost will be high, the quotation will be high, and you will naturally not be able to compete with other countries, and you will not be able to get this demand.
It is said that now Indonesia is going to build a second high-speed railway, but this time it seems to have been signed to Japan, the reason is that Indonesia is shopping around, whoever offers a low price will give whomever it wants, and the interests are not emotional - this time Japan has provided extremely preferential and low-interest loans that may also lose money, becoming the main starting point for winning this project.
In summary, in macroeconomic theory, "overcapacity" is a negative word, but from the experience of Japan's supply-side reform, we need to look at it more dialectically and comprehensively.
After World War II, Japan was essentially a vassal of the United States, and its domestic industry was heavily dependent on the market demand and currency settlement system of the United States. So as soon as the United States is furious, it trembles.
Today, the United States is using the same "overcapacity" rhetoric to criticize and restrict China. In the final analysis, it is also due to historical inertia. It's just that China is not Japan.
In the past few days, I have seen Yellen frequently mention China's "overcapacity" on different occasions, and she looks like she is high-minded and teaching people, so that I can't understand how she imagines the role relationship between China and the United States? Does she still think that China is a Japan that will give in at the first threat?
Speaking of which, I am reminded of the phrase used by the United States at the 2021 Anchorage-China Strategic Dialogue: "from a position of strength", that is, "from a position of strength". For nearly 150 years, China has had enough of being bullied and threatened by foreign powers, so both emotionally and intellectually are extremely disgusted and disgusted by this kind of domineering rhetoric.
I can only say that some politicians in the United States really do not understand what they consider to be their "biggest competitor" and "biggest threat", or they are not interested in understanding it, or they are still accustomed to the single-level imperial mentality that was held and pampered in the past. In this way, it is not surprising that it caused a miscalculation.
02
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Let's return to the topic of "overcapacity".
Let's take Japan as an example. Back then, Japan carried out supply-side reform because of "overcapacity", thinking that if it changed, it would be able to shut up the United States and then knock on the door of American market demand, but this is not the case.
When Japan's industry goes up, the United States is still not happy. Therefore, in the 1960s, the United States restricted Japan's cotton textile industry, in the 1970s, steel and radios, in the 80s, it began to restrict televisions and cars, and in the 90s, it began to restrict semiconductors and chips.
As a result, no matter how Japan changes and upgrades, the United States is not happy. Therefore, Japanese companies can only reduce the real industry in an all-round way, and turn to capital exports, or overseas direct investment, resulting in a boom in overseas industries and a "hollowing-out" of domestic manufacturing.
In terms of capital exports, the Americans are not allowed to buy their own core and high-tech industries, and are only allowed to buy soft assets such as the Rockefeller Building and Columbia Pictures.
In short, it is impossible to eliminate the so-called "excess capacity" anxiety through supply-side reform, and then satisfy the United States. You can interpret this rhetoric as an early warning of raising protectionist barriers.
In fact, for Japan, what is more troublesome is that with the increase of US trade protection barriers and the closing of the door to market demand, Japan's manufacturing industry is becoming more and more difficult to do, profit margins have plummeted, and domestic supply-side reform is restrictive, which has prompted Japan's industry to "move from real to virtual".
- Not necessarily just the rise in the share of GDP in finance or insurance, but mainly the withdrawal of capital from manufacturing to more conservative bank deposits, or speculative foreign exchange speculation, such as the famous "Mrs. Watanabe" phenomenon.
The real estate market, the stock market, the bond market, and the foreign exchange market are the hottest topics in the Japanese economy today, as for the new energy wave, the Internet tide and the smart phone tide, Japan has something to be proud of, it seems that no one cares anymore, and in the seventies and eighties of the last century, a large number of popular electronics, automobiles, home appliances and other manufacturing brands in Japan seem to be two worlds.
I am not saying that the supply-side reform to remove "excess capacity" is bad, nor is it that the supply-side reform is the only factor leading to the "hollowing out" of Japan's manufacturing industry. I just want to say that everything has a degree, and don't be superstitious about "overcapacity" and other words in economics, we should look at it more comprehensively and three-dimensionally.
Don't look at logical deduction, but also look at the road traveled by predecessors and the lessons left behind.
03
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If we look at the example of Indonesia's high-speed rail, we can also see that the so-called "overcapacity" must also have a time and place limit.
Many products and raw materials, if you look at the current domestic market, or only in the current market demand of China and the United States, it seems to be "overcapacity".
But what if we zoom in on the world? Is it still in surplus? Including some of the steel production capacity that seems backward, China or the United States is in surplus at this stage, but what if it can be exported to Africa and Latin America? Is it still in surplus?
In fact, it is an indisputable fact that China's abundant industrial capacity has benefited the whole world. If we don't produce enough steel and switch to the United States, do you think the price will be cheaper?
I mentioned a statistic in the article "Why Xiaomi Can Build Cars, but Apple Gives Up": The price of hot-pressed steel plate for automobiles is $1,630/ton in the United States and $799/ton in China.
In this way, the cost of the cars we produce will naturally be lower, and then exported to the world, won't more people buy cheaper and better performance cars?
Of course, you may have to say, China does not produce, and there is no new industrial country like India?
In fact, what Lao Mei has been doing today is not to "diversify" the global industrial chain? There's nothing wrong with that.
In 2014, for example, Apple began to plan to "decentralize" its suppliers in the industrial chain to prevent excessive concentration in one country. Especially in the past few years, the mask has accelerated the pace of Cook's work.
But the problem is that after so many years, it's not that China hasn't let Apple disperse, it's just that it hasn't been able to turn around.
As of 2023, China still occupies the majority of Apple's industrial chain suppliers, with 98, and India has only 14 suppliers that have worked hard for many years. In addition, about 90% of the parts used by Indian suppliers are imported from China.
What is the reason? Is it cheap in China? Of course not. India's labor cost is 1/4 of China's, but the cost of making an iPhone in India is 10% higher than China's.
In fact, the most important reason is that China's industrial chain is really complete and abundant - that is, what many people call "surplus", of course, the technology is good, and the workers are also skilled, which can be enough to offset the rise in labor costs, which makes Apple want to stop.
As of 2023, there are 2 Apple retail stores in India, 272 in the United States, and 56 in China, and as for revenue, India is less than 1/10 of China.
So what is "overcapacity"? Is there a surplus of iPhones made in China? If they are not produced in China, including the Americans themselves, they may have to spend more money to buy iPhones.
Here, stretch it out and say a few more words.
Now the old American elites have a myth that moving the production capacity of the manufacturing industry chain outside of China can reduce the risk to a greater extent.
But these elites of the United States may not even realize it, in fact, it is not so much a "myth", but actually a "self-confidence".
As in the past, they still imagine the United States as a landlord with a lot of money in their hands, and they want to buy things to live a chic life, which is nothing more than choosing a more obedient and cheaper "worker," and choosing whoever they choose is like "rewarding them with food."
This time Yellen came to China, she has been emphasizing that she does not seek "decoupling" from China -- such an absurd and impossible thing to do, as if the United States has given China a great favor, but in fact it is still a kind of "appreciation" mentality.
The real situation is that "migrant workers" like Japan and South Korea can be manipulated at will, and today's China does not accept this set.
On the one hand, it is the United States itself, which is no longer as rich as it used to be, although it still maintains a luxurious life and maintains the illusion that it is very rich, but in fact it has long been in debt because of its lack of food, and the debt ceiling has been raised again and again, and the interest alone is almost exceeding military spending, and the national debt ceiling is raised by $1 trillion every 100 days, which is so outrageous.
It is precisely because of its high debt that the more it cares about "risk" and "security", the more it is afraid of China's blackmail and price increases. As Treasury Secretary Yellen, she probably knows this better than anyone else, and it is not easy to come all the way to China.
But on the other hand, there is really no substitute for today's China.
As we said earlier, China's advantages lie not only in the complete and abundant industrial chain and good technology, but also in the fact that its own market demand is large enough, and the volume of production and consumption is incomparable with the size of countries like Japan and South Korea.
India is also a large country, but after so many years, it has been democratic, English superiority, and support, has it risen? Isn't it just because it can't get up?
Moreover, India's riotous operation is to let you "make money in India and spend in India", go to them to produce and build factories, where is the "risk" to share, doesn't this clearly find "risk" for yourself?
Didn't Wistron, an Apple supplier that moved from the mainland, withdraw from India last year and sell its factory to the local Indian company Tata Group?
It is precisely because China has a unique advantage that other "workers", such as Southeast Asia and Mexico, cannot get it even if they receive a production order from the United States, because they find that if they re-erect the production line and start production, the cost is far less than that of China, so it is better to import from China, label it, and then export it to the United States. This is also why, in recent years, the import trade volume between ASEAN and Mexico from China has suddenly risen.
In addition, in recent years, because of the issuance of bonds and huge fiscal stimulus, the illusion that the United States has money has become more serious, so it is also more motivated to "de-rely on China".
For example, Apple, whose stock price has skyrocketed many times, is very typical, and in recent years it has become more and more active, as if it is impatient to withdraw suppliers from China to Vietnam or India, and even does not hesitate to encourage local companies in the mainland to set up factories in India or Vietnam.
Many Apple suppliers in China are actually developed by OEM for Apple, and once they lose Apple's orders, they may not be able to survive, so if Apple asks for it, they dare not disobey.
In fact, Apple is the most representative symbol of strength in the United States in the past, with technology, brand, innovation and money.
But the problem is that today's United States is not Apple, and even today's Apple has to worry that the market will be robbed by competing products like Huawei.
04
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So, how exactly should we correctly see "overcapacity"?
In the past, our textbooks generally said that "overcapacity" is an inherent contradiction of capitalism and the root cause of economic crises.
Moreover, "overcapacity" is generally accompanied by the process of "deindustrialization", which is the general law of economic development, and it is unavoidable. So today almost all countries that have experienced rapid manufacturing growth have seen the phenomenon of "deindustrialization".
But is that really the case?
In fact, there are many types of "deindustrialization". Some are natural industrial upgrading, while others are pathological and abnormal. Therefore, the supply-side reform must be gradual, and it is the proper meaning to prevent sick and abnormal "de-overcapacity".
A very simple standard, "de-industrialization" and "de-capacity", cannot sacrifice the foundation of a country's competitive strength, and there is no reason to cater to the needs of competitors to "de-capacity".
It is not advisable to "deindustrialize" too early and too violently, and the most premature examples are Latin American countries such as Brazil and Colombia.
Brazil's industrialization was very successful, from 1968 to 1974, Brazil's GDP grew at an average annual rate of more than 10%, known as the "Brazilian miracle", and soon realized the transformation from an agricultural country to a new industrial country, and also had a relatively complete industrial system.
But since the late 70s of the 20th century, Brazil has not known what is going on, the economy has come to a state of stagnation, and after entering the 80s, there has been a serious recession and debt crisis.
The average annual growth rate of Brazil's GDP dropped sharply from 7.3% in 1947~1960 and 7.35% in 1961~1980 to 2.60% in 1981~2010.
Why is this so?
In 1994, Brazil's industrial and manufacturing added value accounted for 40% and 23.66% of GDP, but in 1995, these two figures suddenly plummeted to 27.53% and 18.62%, compared with the proportion of GDP added in the service sector.
Why?
Quite simply, because the industrialization of Asia (mainly the mainland) has gained momentum, and there are very obvious advantages in terms of taxes, interest rates, credit and labor costs. At the same time, the Brazilian government blew a "hair dryer" that focused on welfare, trade and financial liberalization, and "deindustrialization" in disguise. And capital is profit-seeking, and if there is no profit or low profit, it is withdrawn from the industrial and manufacturing sectors.
Speaking of which, it is necessary to mention another problem that Yellen mentioned during her visit to China, that is, she believes that the Chinese savings rate is too high and the proportion of consumption in GDP is too low, because the welfare of the Chinese is too poor, and the high cost of housing and education limits consumption.
To be honest, the old lady said nothing wrong, and from a personal and emotional point of view, I want to give her a compliment. But living examples like Latin America have shown it all: premature welfareization may not only lead to premature "de-industrialization", but also that ordinary people will not get real benefits over time.
It is a very simple fact that only abundant industrial production capacity can provide cheap industrial consumer goods and even cheap service consumption.
Therefore, like many countries in Latin America, the welfare is particularly good, and populist politicians are also willing to allocate a lot of money to meet the needs of voters for welfare and high wages, but as a result, ordinary people have a life to take money and not a life to spend.
Because, when they get high welfare and high wages, they will find that all domestic consumer goods, services and even agricultural products are extremely expensive, they will find that it is better to die than to go to the hospital for surgery, and they will find that the money in their hands is worthless, because they will inevitably encounter serious inflation.
If you look at the inflation rate in Brazil, it is above 3% all year round, and it is above 10% when it is fierce.
In fact, these countries in Latin America are all urine. Argentina, for example, has a more populist tradition, and inflation is even greater.
Milley, who came to power last year, has made a wave of reforms, which seem to have dropped a little, but what is the use? This is a quagmire that cannot be pulled out, and after a while, the common people will be unhappy again, and they will be replaced by someone who promises them high welfare.
conclusion
Regarding the matter of "overcapacity", I originally thought that everyone had a consensus, but after Yellen came this time, I felt that many people still did not understand, and they were especially willing to follow the violent arguments of people like Yellen and Tai Qi who were based on the interests of the United States.
The day before yesterday, I watched a big V and said that Yellen came this time to help China get out of trouble. Because of China's "overcapacity", it is about to be in crisis.
I debate the concept of "overcapacity", not really to raise the bar, nor to oppose "de-overcapacity", but to say that "overcapacity" is a relative concept, you have to strictly define, and you have to look at it dynamically, not static, combined with the lessons of predecessors, not just listen to competitors.
Specific to electric vehicles. Prior to her visit, Yellen claimed in Georgia that a "surge" in Chinese exports of electric vehicles, batteries and solar panels could cause problems for the United States, and that China's "excess capacity" was hurting American companies and workers.
U.S. Trade Representative Katherine Tai also declared in Brussels that China's "overcapacity" in steel, aluminum, solar panels and electric vehicles is worrying, especially since the "overcapacity" of electric vehicles has given Europe the impetus to take action.
But what is the real situation?
In the field of electric vehicles, the United States has long engaged in trade barriers. So far, Chinese electric vehicles have not entered the U.S. market at all, and naturally there is no problem of "overcapacity" of Chinese electric vehicles hitting the U.S. market.
In addition, until today, electric vehicles account for less than 10% of Chinese vehicles. Therefore, China's domestic market demand alone is large enough, and it is far from the point of "overcapacity".
As of 2023, electric vehicles average as much as $50,000 in the United States, which is much more expensive than gasoline vehicles. And because of the obstruction of American oil truck interest groups, Biden's $7.5 billion plan to build 200,000 charging piles and 5,000 charging stations is said to have only built 7 charging stations in the past two years.
In fact, if the market can be opened up and Chinese electric cars can enter the American market, just like Tesla entered China, it will definitely be beneficial, and ordinary Americans will benefit from driving cheaper and better performance electric cars, which will also greatly promote the popularization of charging stations in the United States, thereby driving the energy revolution.
In short, since Lao Mei said that there is "overcapacity" of Chinese trams, it is a very bullshitty thing, and it is not targeted.
The last point I want to say is that you can "go to overcapacity", but you really have to be very careful about "de-capacity", and only with sufficient "capacity" can you have pricing power, security, and industrial price stability.
For example, oil, the United States is now the world's largest oil producer, but it still has to import, and it still has a lot of reserves. As a matter of fact, isn't the so-called reserve "excessive"? Then why doesn't it go away? Because oil is a strategic resource, it can only be "surplus" and not "shortage," or even "just right." The fluctuation of its price will seriously affect and interfere with industrial production.
Another example, diamonds. De Beers is a company that controls 80% of the world's diamond production capacity, so it has the power to price diamonds, and a whole sentence or two can make a huge profit.
But isn't diamond actually carbon? Now the factories here in China have mastered the technology of manual production. So since last year, the price of diamonds has plummeted, and some people joke that in the future, buy soap and give diamonds away. So you see, that's how important it is to master capacity. Behind it, there is pricing power involved.
Another example of adequate capacity security. You still remember the mask period, for a while, we quickly built a large number of isolation hospitals, and also produced enough medical equipment, so that the whole world came to our side to import masks, protective clothing, ventilators, testing reagents, for example, in the case of global vaccines, half of which are made in China.
I don't know if you know a little bit after all that you've said a lot. In fact, what kind of medicine is sold in Yellen's little satchel? Isn't it very clear?