Economic Observer reporter Song Di Tian Jin
One
"Is there overcapacity in China's economy at the moment?"
Almost all of the researchers interviewed gave a similar answer: the situation is complex and needs to be carefully analyzed.
Overcapacity refers to overcapacity, that is, the production capacity of enterprises is not fully utilized, and there is a certain amount of idle or waste. Overcapacity does not mean that the product cannot be sold if it is produced too much, but that the production capacity is not fully utilized.
The Central Economic Work Conference at the end of 2023 and the Government Work Report in 2024 both mentioned "overcapacity". In December 2023, the relevant person in charge of the Central Finance Office explained in detail the Central Economic Work Conference, saying that "some emerging industries have duplicate layouts and involution competition, and some industries have overcapacity".
On the other hand, as one of the important indicators to examine overcapacity, China's industrial capacity utilization rate above designated size in the first quarter of 2024 was 73.6%, the third lowest since 2013, and the first two lows occurred in the first quarter of 2020 (67.3%) and the first quarter of 2016 (72.9%), respectively. In 2023, the capacity utilization rate is already at a historically low level, with an annual capacity utilization rate of 75.1%. According to Zhong Zhengsheng, director of the China Chief Economist Forum and chief economist of Ping An Securities, and other three people, they believe that this capacity has been "below the consensus range of 76%-80%".
From the perspective of policy expression and capacity utilization, China does have the phenomenon of "overcapacity in some industries". However, the next question – "Which industries in China are experiencing overcapacity?" – is more complex.
In the above-mentioned article written by Zhong Zhengsheng et al., they synthesized the data on the fixed asset turnover rate of subdivided industries and listed enterprises released by the Bureau of Statistics, and came to the following conclusion: In the second half of 2023, the overall capacity utilization of China's manufacturing industry is lower than the historical pivot level. Among them, the equipment manufacturing industry such as computer communication electronics, electrical machinery, and automobile manufacturing has the weakest performance, and the overlap with the high-tech manufacturing industry is relatively high. The capacity utilization of the raw material industry is also insufficient, concentrated in non-metallic mineral products and chemical-related industries. In the consumer manufacturing industry, whether it is necessities such as medicine, food manufacturing, agricultural and sideline product processing, or optional consumer goods such as textiles and garments, furniture manufacturing, leather shoes, and textiles, there are varying degrees of underutilization of production capacity.
Lu Feng, a professor at Peking University's National School of Development, has been paying attention to the problem of overcapacity since the beginning of this year. Through the analysis of industry data, industry analysis and relevant media reports, Lu Feng came to several "immature, for reference" views. He believes that the industries currently facing capacity challenges: first, the traditional fuel vehicle sector is facing overcapacity pressure, second, the rapid expansion of petrochemical basic raw material investment and supply exceeds demand, third, the chip industry is structurally oversupply, and fourth, the power battery industry is facing a high risk of structural capacity redundancy. In addition, he also mentioned that "although new energy vehicles are in the stage of rapid development, they will face the hidden concern of oversupply in the future".
Two
Overcapacity itself is just a general market economy phenomenon. In the real market, it is often difficult for supply and demand to reach a state of complete equilibrium. Production capacity is not a product, and moderately advanced capacity construction is the norm in industrial development, especially for emerging industries.
During the pandemic, China's manufacturing industry has been able to supply goods to the world steadily despite the near-shutdown of the global supply chain. As a result, fixed asset investment in industry, especially in the manufacturing sector, has maintained a high rate of growth. However, today's investment translates into capacity in the future, and with global demand declining, it's not surprising that some industries are experiencing overcapacity.
In April this year, the debate about "overcapacity" gradually heated up. At an April 8 news conference in Beijing, U.S. Treasury Secretary Janet Yellen said that China's economy is now too large for the rest of the world to absorb this huge capacity. She mentioned industries such as electric vehicles, lithium-ion batteries and solar energy, which are key industries supported by industrial policies, and are increasing investment.
In response to Yellen and other such "overcapacity theories" and "subsidy advantage theories", several Chinese departments have argued.
Jin Xiandong, director of the Policy Research Office of the National Development and Reform Commission, pointed out at a press conference of the State Council Information Office that the view that more exports is overcapacity is untenable. He asked rhetorically: "China imports a large number of chips, aircraft, soybeans, crude oil and other commodities every year, so are the exporters of these commodities overcapacity?" Jin Xiandong elaborated on the example of new energy vehicles. He said that according to the International Energy Agency, the global demand for new energy vehicles in 2030 will be more than three times the global sales in 2023, and this will be a common opportunity for the development of all countries.
On the afternoon of April 16, Premier Li Qiang of the State Council and German Chancellor Olaf Scholz said that China's new energy industry advantage is obtained by real ability, shaped by full market competition, rather than formed by government subsidies.
Wan Guanghua, director of the Institute of World Economy at Fudan University, said that some overseas countries accuse China of overcapacity and affect local industries, essentially because these countries have demand for new energy vehicles, photovoltaics and other products, but local companies lack competitiveness, and finally form the survival of the fittest under the international market mechanism. Such accusations are unfounded unless they can demonstrate that the relevant domestic industries have taken steps that violate international trade rules.
In the arena of international public opinion, we need to forcefully refute those groundless accusations. However, what really worries researchers is not whether there is overcapacity in China's emerging industries themselves, but whether those emerging industries that have prepared production capacity for the international market really face the risk of overcapacity when some countries take trade restrictions in a way that violates international rules and market rules on the grounds of "China's overcapacity theory".
Huang Yiping, dean of the National School of Development at Peking University, said: "On average, the capacity utilization data does not seem to reflect the widespread overcapacity in China, but it is a question of what it means to be overcapacity." For example, in 2023, China's exports of the 'new three' (electric vehicles, lithium batteries and photovoltaic products) will increase by nearly 30% year-on-year, and if the 'new three' lacks international market demand, the problem of domestic industrial surplus may become more prominent. ”
Lu Feng said that there is no doubt that the protectionist measures of trading partner countries to suppress Chinese enterprises in the name of overcapacity should be clearly opposed and argued on the basis of reason, and the right to take countermeasures should be reserved to safeguard the due rights and interests of Chinese enterprises and the development of domestic industries. However, it should also be noted that even if the government and enterprises work together, there is still uncertainty about how open overseas markets, especially those in major developed countries, will be to China's exports, and it is necessary to appropriately distinguish between reasonable will and objective reality when looking at this situation.
He suggested that while actively managing external economic and trade relations and clearly resisting foreign protectionist impulses, the suitability of domestic industry production capacity should still adhere to the prudent assessment based on actual and effective demand. When the uncertainty of the external environment rises, enterprises need to pragmatically assess the risks and take precautions to avoid a passive situation after high capacity redundancy becomes a fait accompli.
A number of researchers agree on this point: regardless of the outcome of this debate, companies in emerging industries should prepare in advance to deal with a possible "labor pain period" by diversifying overseas markets and flexibly adjusting product strategies.
Three
Understanding overcapacity is an important window into understanding China's economy.
Since the 90s of the 20th century, China has experienced at least two cycles of overcapacity and decapacity, both of which have had a profound impact on China's economy.
In the mid-to-late 90s, the problem of overcapacity was mainly concentrated in light industries such as textiles. In the early 90s, with the establishment of the Southern Talks and the socialist market economic system, the enthusiasm of the market was stimulated, and the production capacity accumulated by the accumulation of high investment for several years hit the Asian financial crisis in 1997, and the phenomenon of overcapacity began to appear.
From 2013 to 2015, the problem of overcapacity was mainly concentrated in upstream industries such as steel, cement, and electrolytic aluminum. In the first decade of the new century, China's basic industry ushered in a period of rapid development, especially after the 2008 financial crisis, large-scale stimulus policies have further exacerbated the problem of overcapacity in some industries.
Both overcapacity have complex causes that cannot be attributed solely to the capacity cycle. For example, overcapacity in the 90s was associated with SOE reform and regulation of the financial system, while overcapacity in 2013-2015 was inextricably linked to stimulus policies, the existence of zombie firms, and the role of local governments. The commonality of the two overcapacity is that the affected industries are mainly state-owned enterprises. The administrative power plays a dual role in this, being both the "bell tieer" and the "bell breaker" of overcapacity. The process of de-capacity not only means the clearance of production capacity, but also accompanies major reforms in state-owned enterprises and financial systems.
In the opinion of some researchers, compared with the previous two overcapacity, the current overcapacity phenomenon presents more diverse characteristics in the distribution of industries, and there are differences in the formation mechanism. On the one hand, traditional industries such as cement and petrochemicals are facing overcapacity, mainly due to fluctuations in demand in the real estate industry and changes in demand in overseas markets.
Taking the photovoltaic industry as an example, the production capacity of the photovoltaic industry will increase significantly in 2023. Zhong Baoshen, chairman of LONGi Green Energy, said at the 2023 annual meeting of the photovoltaic industry that the current overcapacity is essentially caused by non-market-oriented resource allocation. He believes that there are two sources of money: one is the capital market, and the other is the willingness of local governments to attract investment. Similarly, Gao Jifan, chairman of Trina Solar, proposed four reasons for companies to expand production at the annual meeting of the Chinese photovoltaic industry: the willingness of enterprises to invest, the support of local governments, the financing convenience of financial institutions and the strong willingness of other industries to cross borders.
Local governments play an important role in promoting the increase of production capacity in emerging industries. For example, some local governments offer various tax incentives and set up guidance funds to attract investment from emerging industries and enterprises, while others link bidding for photovoltaic power plants to production capacity and require enterprises to build factories in the local area.
Lu Feng, a professor at Peking University's School of Government, said that some local governments are chasing a few fashionable "high-tech" industries in the implementation process, and nearly 3,000 counties across the country want to develop biopharmaceuticals, new energy and semiconductors (after 2018).
A local government person believes that the essence lies in the problem of the positioning of the central and local economic roles: the central government and local governments are not unified in terms of responsibilities, powers, and interests, coupled with the evaluation mechanism of political performance, resulting in an increase in quantity, homogeneous development, and duplicate construction, and the local government has not formed an industrial chain.
Four
On January 23, 1998, Guangming Daily published a piece of news: The mainland's textile industry has struck the first hammer today in Shanghai Pudong Iron and Steel (Group) Company in three years to destroy 10 million backward spindles. Shi Wanpeng, president of the China Textile Association, gave an order, and the scrapped spinning machine parts were smashed into a pile of scraps, and then put into the furnace and burned.
An important reason why researchers pay close attention to "overcapacity" is that when this word frequently appears in top-level documents, it often indicates the arrival of a new round of "de-capacity" policy cycle. Based on previous experience, the impact of such a strong administrative capacity reduction measure on the economy is far-reaching and complex.
The overcapacity itself and the process of de-capacity are not very worrying, but the real question that attracts attention is: "In what form will the capacity be de-capacity?"
Wan Guanghua said that if the government intervenes to reduce production capacity, it is difficult for government departments to judge which company to reduce how much capacity is the best plan due to the lack of sufficient information. In practice, it often leads to "one size fits all", which does not conform to the law of economic development. On the contrary, the market mechanism led by the capacity reduction is more efficient, and it can also naturally eliminate those enterprises with poor operations. He believes that the role of the government in this process should be to actively communicate the fluctuating information of market demand to enterprises, and provide the necessary financial and technical support when enterprises encounter difficulties in transformation. The specific decision of capacity adjustment or enterprise transformation should be made by the enterprise according to its own situation.
Huang Yiping said that in 2016, the top-down "de-capacity" was really out of helplessness. Although the policy measures have achieved some results, they have also caused many problems, such as the production capacity of private enterprises that has been removed, not the production capacity of state-owned enterprises.
If the last two rounds of overcapacity are mainly concentrated in the field of state-owned enterprises, the intervention of administrative forces is an important cause of overcapacity, so it is inevitable to use administrative means in the process of de-capacity, then the current industries with high capacity redundancy are dominated by private enterprises, whether they still need to strengthen the administrative color of the production capacity, need to think carefully.
An authoritative source once said: "Those fields that have no administrative intervention and market mechanisms have played a good role should stop pointing fingers." For example, in the field of consumer goods, the degree of marketization is high, the competition is relatively sufficient, the market can be automatically cleared, and whether they go to production capacity or not can completely rely on market regulation. ”
Huang Yiping said that to resolve the current problem of overcapacity, first of all, it is necessary to make efforts to reduce macroeconomic imbalances and contradictions; second, the focus of industrial policy should be shifted to the front end of the innovation chain, and not too much support for the replication of production capacity; third, it is necessary to restrain local governments and financial institutions from swarming to support the so-called emerging industries; and finally, it is necessary to strengthen market discipline; since most of the overcapacity problems are private enterprises, the market will help them clear a considerable part of their excess capacity.
More researchers mentioned the need. Wan Guanghua believes that the better approach is not to reduce the supply of production capacity, but to increase demand. "In general, people need to get more money out of the 'economic cake', and at the same time make people willing to spend most of their income instead of saving it," Wan said.