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China's Overproduction Issues and Responses to Economic Environmental Changes
- Writing language: Korean
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- Base country: Japan
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- Economy
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Summarized by durumis AI
- The Chinese economy is likely to maintain its production-intensive growth strategy due to a lack of 'cyclical growth momentum', and the relative oversupply situation may persist.
- Following the COVID-19 pandemic, Chinese consumer preferences have shifted, leading to an increase in online shopping, digital content consumption, and health and hygiene product consumption. New trends are emerging, such as experiential consumption, personalized products and services, and sustainable consumption.
- While the Chinese economy is expected to recover somewhat by the end of 2022, improving the economic structure is essential for long-term sustainable development.
There are concerns that the Chinese economy lacks “cyclical growth drivers.” Without alternatives, Chinese authorities may have no choice but to rely on production-intensive growth strategies to stimulate the economy, as they have done in the past. “Cyclical growth drivers” refer to the forces that allow the economy to grow naturally through consumption and investment in line with economic cycles.
When Japanese and German leaders recently visited Beijing, their warning that China’s skewed growth policies could lead to Chinese manufacturers exporting overproduced goods, creating unfair price pressure on global companies, drew attention. However, real macroeconomic data makes it difficult to definitively prove the existence of overproduction.
In the short term, China is likely to experience a situation of “relative” oversupply. Measures to stimulate consumption and rebalance the economy could mitigate the risks associated with relative oversupply. However, if consumption stimulation policies are delayed, a more serious problem of “structural” overproduction may arise. Unlike “cyclical” overproduction, “structural” overproduction is characterized by a long-term decline in the utilization rate of industrial assets. This leads to increased operating and other costs to maintain production, resulting in reduced profitability. While not yet at a serious level, recent indicators suggest a decline in profitability across China’s generally inefficient industries.
“Structural” overproduction is already occurring in some specific sectors due to unique factors. First, global demand for Chinese products has decreased since the COVID-19 pandemic, leading to lower utilization rates in related manufacturing industries. Second, continued adjustments in the housing sector are leading to accumulated inventory across the board. Third, government support for strategic high-tech manufacturing, particularly in the solar cell sector, has led to excessive capacity expansion among related companies.
Some optimists point to the world's reliance on China for certain advanced products such as new energy vehicles, batteries, and solar panels. According to the International Energy Agency (IEA), global solar manufacturing capacity is expected to double this year, with China accounting for over 90% of the increase. Supporters of government policies argue that China's expanded production and export policies in these areas are advantageous.
However, given the lack of evidence for overproduction in macroeconomic indicators, it is unlikely that Chinese authorities will drastically revise their current industrial development policies. Given China’s past experience, price pressure from China's manufacturing expansion is expected to continue to impact other countries around the world.
On the other hand, Chinese consumer behavior has changed significantly since the COVID-19 pandemic. First, there is a trend towards reducing overseas travel and increasing domestic travel and consumption. Second, social distancing policies have led to a surge in online shopping and digital content consumption. Concerns about the spread of COVID-19 have also boosted consumption of health and hygiene products, while high-income earners have increased spending on high-quality goods.
Along with this, new trends such as experiential consumption, personalized goods and services, and sustainable consumption are emerging in China. If companies fail to adapt to these changes, they will struggle in the Chinese market after COVID-19.
With growing awareness of resource depletion and environmental issues, Chinese companies are also expanding investment in resource recycling and renewable energy. As part of its carbon neutrality policy, China is focusing on developing green industries such as wind, solar, and electric vehicles, while also working to improve product life cycles and resource efficiency. In particular, China is focusing on recycling rare metals such as rare earths.
China is deeply integrated into global supply chains, so the recovery of the Chinese economy after COVID-19 will have a significant impact on other countries. Despite challenges such as overproduction, housing market weakness, and rising prices, the prevailing view is that the Chinese economy will see some recovery by the end of 2022. However, there are also arguments that structural economic reform is essential for the long-term sustainable development of the Chinese economy.