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China’s most senior leadership concluded a major political meeting in July with a communiqué correctly identifying a “grave and complex international environment” and “arduous tasks” at home. But as expected, there was limited indication of new policy approaches to revive its slowing economy and recover from a real estate crisis. Nor did the meeting portend a serious effort to defuse growing backlash in the United States, the European Union, Indonesia, Brazil, and others against China’s economic playbook, which emphasizes increased investments in manufacturing for exports to boost its sluggish growth.
The closely watched Third Plenum of the Communist Party’s Central Committee, which occurs approximately every five years, set goals of “innovation-led growth” and “self-sufficiency” in science and technology. But these and other approaches are seen as effectively pushing other countries to absorb ever more Chinese exports of goods like batteries, solar panels, electric vehicles (EVs), and steel while domestic demand remains anemic.
A post-plenum press conference on July 19 and a more detailed resolution released on July 22 did contain more positive signs, however. A top economic official highlighted “insufficient effective demand” at the forefront of economic challenge, while promising to build a more robust safety net, shore up the beleaguered private sector, address imbalances between the central government and localities, and implement other reforms to boost consumption, setting a five-year deadline to achieve these goals. Beijing did not follow through on many reforms promised at the last major plenum in 2013, and implementation of promised reforms this time will be challenging.
The official communiqué and the details released afterwards also show that Beijing does not see any reason to deviate from its overall strategy of “innovation-led growth” that emphasizes self-sufficiency and manufacturing. Beijing’s overall economic strategy seems on course to continue boosting manufacturing investment and exports, further expanding trade surpluses and increasing economic tensions with the United States. No matter who wins the US presidential election in November, tensions with the United States appear likely to become further strained.
To be sure, China’s economic challenges and their spillovers are not black and white issues with simple solutions or simple implications. China’s surging production of green technologies has led to sharp declines in prices of goods the world needs to decarbonize, making it easier for more countries to adopt renewable energy and convert to less polluting vehicles. Chinese manufacturers of solar panels, batteries, and EVs are not just producing cheap, subsidized products being dumped, but they are at the cutting edge of innovation in their fields. Chinese automakers, for example, forged through cutthroat domestic competition and are now able to compete with well-established foreign brands, even in luxury segments. Some of the contentious issues are also not about current but past subsidies, as Beijing has substantially reduced subsidies in the EV space.
But China’s own data as of June 2024 lend credence to critics who accuse China of overproduction of manufactured goods for export, as part of its industrial policy and efforts to spur economic growth. The continuing evidence of what is called China’s “overcapacity” strategy is likely to exacerbate trade tensions and lead other countries to erect barriers to Chinese imports, especially as surging investment leads to even more production. Hopefully, the more detailed reform agenda that is emerging after the plenum will adjust policy and put both China’s economy and US-China economic relations on a more sustainable path.
China’s Growth Slowdown Weighs on Demand
China’s recent slowdown in growth was dragged down by a weak consumption recovery after the pandemic and government restrictions on financing to real estate developers, an effort to pop a property bubble. Consumption was strong in 2023 as the economy reopened, but it fell short of the bounce back in other economies and is losing steam. Retail sales in the first half of 2024 were up only 3.7 percent year-on-year, slower than the pace of economic growth. Overall per capita consumption expenditure was better, up 6.7 percent, but consumer prices were up only 0.1 percent, dangerously close to deflation.
The shrinking real estate sector, which once directly and indirectly made up around 25 percent of China’s economy, has reduced demand for commodities like cement and steel and led to declining housing prices and losses for homeowners. Local governments, which have been crucial engines of growth in China, have been hit particularly hard because they have historically relied on land sales to now shrinking developers for nearly a third of their revenue. Land sales have plummeted since 2021, falling a third by the end of 2023 and then declining another 35 percent in the first half of 2024, leading local governments to reduce investment and cut salaries and essential services like transportation.
In June, President Joseph R. Biden Jr. called China’s economy “on the brink,” asking, “Where is it going to grow?” The Chinese annual growth rate has halved since the 2009-12 average of 10 percent to just under 5 percent today. Chinese authorities report that growth registered 5.3 percent in the first quarter and 4.7 percent in the second quarter of 2024. The International Monetary Fund (IMF) projects a further decline to 3.3 percent by 2029, and even that rate is at risk.
Industrial Policy Side Effects Heighten Economic Tensions
US Treasury Secretary Janet Yellen has assailed China’s way of dealing with its slowdown, pointing out that it has resulted in “overcapacity” defined in a substantive speech by Treasury Undersecretary Jay Shambaugh as “production capacity in excess of domestic demand and untethered from global demand.” The Biden administration contends that China is “pushing manufacturing” to drive growth beyond what its economy demands, expecting the rest of the world to absorb Chinese-made industrial goods at the expense of their own industries. The administration argues that China’s support for an industrial policy in key areas is boosting production capacity that significantly overshoots domestic demand and is producing an unfortunate side effect, intentionally or not.
The official data for 2023 partially support the US argument. Beijing’s reported growth of over 5 percent in 2023 came mostly from consumption; exports eked out only 0.6 percent growth, and manufacturing investment was up 6.5 percent, somewhat higher than overall growth. But hidden in the macroeconomic data was a trend that even Chinese policymakers and market participants characterize as overcapacity in specific industries, especially electric vehicles, solar, batteries, and steel. And China was planting the seeds for a large further buildout of capacity in these sectors, with a surge in lending to manufacturing, rising between 30 and 40 percent per year from late 2020 to late 2023 while property lending stagnated.
China’s most recent macroeconomic data reinforce the arguments of those accusing China of macro-level overcapacity. In June 2024, China recorded its largest ever trade surplus, at $99 billion.[1] At the same time, monthly imports fell from a year earlier, and year-to-date imports were only up 2 percent. Falling export prices overall but also for EVs, semiconductors, batteries, and solar panels mean that even that record surplus understates the increased quantity of goods reaching world markets. China can legitimately argue that it has improved its balances, producing trade and current account surpluses that are smaller as a share of its economy than in the past, but its critics can also legitimately say China should be held to a higher standard. China’s smaller surpluses as a share of its GDP today translate into a larger impact on trading partners, because of its larger share (20 percent) of world manufacturing exports as of 2020, double its share in the mid-2000s.
The production and investment figures portend further tensions. Production of EVs and plug-in hybrid vehicles, and semiconductors—areas the Biden administration has targeted with new tariffs on Chinese exports in May—were up over a third and 29 percent year-on-year, respectively. The June 2024 data also show a surge in manufacturing investment of 9.5 percent, nearly double the overall economy’s growth rate, which will further expand future capacity and exports.
Reinforcing concerns in the US and elsewhere, China is doubling down on industrial policies that steer both private and public resources into specific favored industries, which could insulate decisions of investment and production from market forces. The plenum contained mixed messages. On the one hand, it endorsed “new quality productive forces that aim to make China a leader in technological innovation,” including in “future manufacturing” and “future energy,” which emphasizes expanding and improving the supply side of the economy even further as a growth engine. On the other, the plenum’s detailed resolution reiterated the call to make the market “decisive” in resource allocation and contained other positive language on the importance of the private sector and the need to “concentrate” state firms in specific policy-relevant fields.
Another trend could risk excessive production in some sectors—more uniformity in industrial policy. Previously, local policymakers could focus on the industries and technologies that each was well placed to develop, but increasingly local governments have piled into industries seen as favored by the central government (such as EVs and solar) as a sign of loyalty. If China’s local government resources are all chasing the same favored industries and none wants to appear disloyal or ineffective by lacking a local champion, overcapacity could worsen. Senior Chinese officials have acknowledged the problem of excessive local EV production aided by local governments, but progress to curtail this overproduction is not yet visible. Still, one hopeful sign that would seem to acknowledge this problem is that both mentions of “new quality productive forces” in the plenum readout include “in line with local conditions,” which would seem to give more room for different approaches.
China has acknowledged in the plenum the need to expand domestic demand, and the plenum’s resolution contains positive reform promises that could help demand including building out a more robust safety net. Expanded social insurance for retirement and health benefits would give the Chinese people the confidence to spend and more secure land rights for rural populations. but these reforms will take time, and pre-plenum measures, like encouraging trade-ins of old goods, fall short of the large-scale stimulus economists have suggested to encourage more healthy consumption levels. Still, no major stimulus in this area has been announced, though not for lack of resources. Government initiatives have poured staggering resources into production of favored goods, like its $47.5 billion fund to invest in chip production and an estimated $1.6 trillion in government guidance funds.
Overcapacity Tradeoffs
For decades China has acknowledged at different times that overcapacity (产能过剩) is an issue to be addressed in specific sectors. Overcapacity is related but not identical to typical trade concepts of dumping or macroeconomic concepts of balances. If excess capacity is “dumped” on foreign markets at prices below cost or fair value, or if unfairly subsidized foreign competition harms domestic producers, then World Trade Organization (WTO) rules allow countries to impose “antidumping” or “countervailing” duties to stop harm to their domestic industry. China has faced many of these allegations—even before former president Donald Trump’s trade war, 7 percent or $100 billion in China’s exports to G20 economies faced antidumping or related trade restrictions. Many industries, like semiconductors, experience cycles of demand and supply in which sometimes there are shortages and other times there are gluts. Much of the problem lies not necessarily with nefarious plans to bankrupt foreign producers but with poorly coordinated industrial policy in which local governments subsidize producers in industries favored by Beijing, leading to subsidized competition that produces nonmarket distortions, preventing local firms from failing and in the process driving down global prices.
China is not wrong when it says that its solar panels, batteries, and EVs are not just cheap, subsidized products but are highly competitive and innovative. In addition, precipitous price declines because of “overcapacity” is only one side of the tradeoff. While a bane for foreign producers, low prices can be a boon for buyers of these goods. If prices are low because of Chinese subsidies, then Chinese public money will have subsidized the global green transition. The landscape is uneven, however: While Chinese producers benefiting from local government subsidies sell below cost in the solar sector, China’s leading EV producer BYD in fact charges more and makes solid profits from sales in Europe, not a typical dumping case. Past examples of steel overcapacity seem to fit and were met with antidumping measures, but these map less easily to EVs.
The Biden administration has legitimate concerns about the US and the world being completely dependent on Chinese green technology and is willing to pay a large cost through tariffs and subsidies to develop its own offerings. Tariffs and subsidies alone, however, will not replicate Beijing’s formidable green energy sector, so resilience benefits from reliance on non-Chinese production will come at a significant cost.
Conclusion
China’s most recent plenum sent some positive signals for boosting domestic demand, but without rapid implementation of tough promised reforms, that goal may fall short. Meanwhile, Beijing’s overall economic strategy seems set to continue boosting manufacturing investment and exports at the cost of increasing economic tensions with the United States and other countries.
Beijing’s current and past subsidies and other policies have played a role in creating globally competitive, innovative firms producing green technologies that could accelerate the world’s green transition. But China’s leadership should recognize that China’s perceived overcapacity, unless dealt with seriously, is likely to exacerbate the international backlash, imperiling China’s access to foreign markets it needs for future economic growth.
The author received an honorarium from the Center for New American Security for writing this blog post.
Note
1. Strangely, China’s reported current account surplus based on balance of payments data has shrunk, creating a large mismatch between the trade data based on customs information. While there are reasons these might not be identical, the large and rising gap raises questions about the reliability of the current account data.
Data Disclosure
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