China's Overproduction Issues and Responses to Changing Economic Environments

There are criticisms that the Chinese economy lacks 'cyclical growth momentum'. Without an alternative, Chinese authorities will likely resort to production-intensive growth strategies to stimulate the economy, as they have done in the past. 'Cyclical growth momentum' refers to the driving force that enables the economy to grow naturally through consumption and investment, in line with the business cycle.

When the leaders of Japan and Germany visited Beijing recently, their warning that "China's skewed growth policies could lead to Chinese manufacturers exporting excess goods, creating unfair pressure on global companies in terms of price" drew attention. However, it is difficult to definitively prove the existence of overproduction based on actual macroeconomic data.

In the short term, China is likely to experience a 'relative' oversupply situation. Addressing this through consumer stimulus policies to achieve rebalancing could mitigate the risks associated with relative oversupply. However, if consumer stimulus policies are delayed, a more serious issue of 'structural' overproduction could arise. Unlike 'cyclical' overproduction, 'structural' overproduction is characterized by a prolonged decline in the operating rate of industrial assets. This leads to a decline in profitability as operating and other costs increase to maintain production. Although not yet at a critical level based on recent indicators, the profitability of Chinese industries, generally characterized by high inefficiency, is declining.

Some specific sectors are already experiencing 'structural' overproduction due to unique factors. Firstly, global demand for Chinese products decreased during the COVID-19 period, leading to lower operating rates for related manufacturers. Secondly, ongoing adjustments in the housing sector have resulted in a build-up of inventory across the board. Thirdly, government support for strategic high-tech manufacturing, particularly solar cells, has led to an excessive increase in production capacity among related companies.

Some optimists point out that the world relies on China for certain advanced products, such as new energy vehicles, batteries, and solar panels. According to the International Energy Agency (IEA), global solar panel manufacturing capacity is expected to double this year, with China accounting for over 90% of the increase. Proponents of government policies argue that China's policies to expand production and exports in these areas have advantages.

However, given the current lack of macroeconomic evidence for overproduction, it is unlikely that Chinese authorities will drastically revise their current industrial development policies. Based on China's past experience, it is expected that the price pressure resulting from the expansion of Chinese manufacturing will continue to affect other countries globally.

Meanwhile, the consumption patterns of Chinese people have changed considerably since the COVID-19 pandemic. Firstly, there has been a trend towards reducing overseas travel and increasing domestic travel and consumption. Secondly, social distancing policies have led to a surge in online shopping and digital content consumption. Concerns about the spread of COVID-19 have also increased consumption of health and hygiene-related products, and spending on high-quality goods has risen among high-income earners.

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 appropriately, they will inevitably face difficulties in the Chinese market post-COVID.

Furthermore, with growing awareness of resource depletion and environmental issues, Chinese companies are increasing their investments in resource recycling and renewable energy. As part of the carbon neutrality policy, they are focusing on fostering environmentally friendly new industries such as wind power, solar power, and electric vehicles, while also working to improve product lifecycles and resource efficiency. In particular, they are focusing on recycling rare metals like rare earth elements.

Since China is deeply integrated into global supply chains, the recovery of the Chinese economy post-COVID will have a significant impact on other countries. Despite various challenges such as overproduction, a slump in the housing market, and rising prices, the prevailing view is that the Chinese economy will recover to some extent by the end of 2022. However, there are also suggestions that improving the economic structure is essential for the long-term sustainable development of the Chinese economy.