The Chinese Communist Party (CCP) is expanding industrial capacity despite weak domestic demand, leading to multiple countries openly rejecting China’s surplus cheap products and causing Chinese manufacturers to struggle domestically.
The CCP’s “zero-COVID” policy and unresolved real estate crisis post-lockdown have deeply impacted the Chinese economy. With consumers tightening their wallets and refraining from spending, China’s economy continues to weaken. Instead of stimulating consumption, the CCP persists in investing in the manufacturing industry, particularly in emerging sectors like electric vehicles and solar energy, in line with its goal to become a “strong industrial and technological nation”.
Both the US and EU have imposed tariffs to counter China’s cheap exports, exacerbating the issue of surplus capacity alongside weak consumer demand. This has forced Chinese enterprises to significantly reduce prices, leading to shrinking profits and making survival in the domestic market even more challenging.
According to a report by the Wall Street Journal on July 21, approximately one-fourth of listed companies in mainland China are currently unprofitable, compared to just 7% a decade ago.
On July 9, Longi Green Energy announced an estimated net loss of 4.8 billion to 5.5 billion yuan for the first half of 2024. The company attributed this loss to the overall supply-demand mismatch and significant price declines in the photovoltaic industry, despite an increase in component sales volumes.
Similarly, Angang Steel also issued a performance forecast predicting a loss of 2.679 billion yuan for the first half of 2024, mainly due to the persisting weak market conditions in the steel industry, sluggish downstream demand, and fluctuating low steel prices.
Jiangsu Lopal Tech, a supplier of lithium iron phosphate for battery manufacturing, reported a net loss of 1.233 billion yuan in 2023, attributing it to the oversupply in the Chinese lithium iron phosphate market and slowdown in domestic battery demand.
Economists believe that excess capacity is a foreseeable consequence of China’s economic system. The Beijing government often redirects capital to favored industries through subsidies, tax cuts, state-owned banks, and investment funds.
A study by the Kiel Institute for the World Economy in Germany on April 10 revealed that BYD, as part of Beijing’s push for dominance in electric vehicles and clean technologies, received at least 3.4 billion euros (3.7 billion dollars) in direct subsidies from the CCP.
Dirk Dohse, one of the co-authors of the report, pointed out that CCP subsidies are widespread in China, with over 99% of listed companies receiving government subsidies in 2022. The CCP strategically uses subsidies to advance market competition in vital technologies.
Over 100 Chinese factories produce nearly 40 million internal combustion engine vehicles annually, roughly twice the amount people in China intend to purchase.
During a press conference at the Third Plenum last Friday, CCP officials announced plans to accelerate the development of “emerging and future industries” like electric vehicles and solar energy to address the real estate slowdown.
However, analysis by Goldman Sachs in 2023 found that the three major industries prioritized by the CCP – electric vehicles, lithium-ion batteries, and renewable energy – only account for about 3.5% of China’s GDP and do not create enough job opportunities for millions of struggling university graduates and migrant workers.
Mary Gallagher from the University of Michigan states in her recent research that excess capacity is part of the CCP’s broader governance approach, from the Great Leap Forward to the prosperity of China’s real estate, emphasizing “excessive production” and overfulfillment of goals.
Logan Wright, partner at Rhodium Group and head of market research for China, told Huari Daily that “investment-driven growth can only go so far because demand ultimately has to exist,” indicating an imminent reckoning within China.
In order to maintain competitiveness, Chinese companies are seeking markets globally, investing in overseas production, or enduring higher losses to continue selling products in high-tariff countries. These practices ultimately limit the ability of Chinese enterprises to invest in new products domestically, raise wages, or hire new employees.
Chief economist Louise Loo of the Oxford Institute for Economic Research in China emphasized that by increasing supply to the point of supply-demand imbalance, the CCP is prioritizing short-term growth at the expense of long-term sustainability. “Whatever you produce now, you will not be producing in the future,” she said.