Former UBS Chief Economist George Magnus said in an article in the Financial Times that China’s industrial policy is destroying its economy. Now a researcher at the Oxford University China Center, Magnus has long been studying and providing unique insights into the Chinese economy.
He pointed out that the Chinese government’s industrial subsidy policy has long been destined to fail in truly eliminating overcapacity issues, as subsidies distort the economy, and massive subsidies only lead to even greater distortions.
The industrial policy of the Chinese Communist Party is aimed at achieving two core goals. The first is the urgent need for new alternative growth engines due to the lack of a clear shift to a consumption-driven growth model in the Chinese economy, compensating for the structural weakness in real estate and the excessive construction of non-commercial infrastructure leading to losses. The second is that the Chinese Communist Party aims for self-reliance in critical technologies and resilient supply chains, with ambitions of leapfrogging and leading other countries.
Magnus wrote, “To be frank, China’s (CCP’s) industrial policy is a state-sponsored initiative aimed at pulling the United States down from its global technological leadership position. As narrated by the CCP, adhering to the Marxist theory of the productivity role, China (CCP) must now strive to lead the Fourth Industrial Revolution.”
“This includes new technologies such as artificial intelligence, big data, quantum computing, and biotechnology,” he added. “Unlike other countries using industrial policies to catch up with competitors, Beijing aims to surpass all countries.”
However, this policy has not been successful, with many industries facing prolonged overcapacity and deflationary pressures. The electric vehicle industry is a prime example of severe polarization. Magnus cited that in China, about 10 top electric vehicle companies are profitable, while the remaining 150 companies are mired in darkness, deep in a quagmire of losses, waste, and corruption.
Many other industries are facing similar challenges, including lithium batteries, photovoltaic cells, wind turbines, building materials, metal processing, digital finance, semiconductors, standard medical devices, and pharmaceuticals, with real estate and infrastructure being particularly severe.
Magnus said, “This is a systemic issue, not an adjustable random or cyclical issue.”
Massive subsidies severely distort the market, and even Chinese leader Xi Jinping himself refers to this as “internal competitionization,” which is destructive competition and price reduction caused by overproduction and anti-competitive behavior.
Magnus stated that even if the Chinese government wants to stop this phenomenon, it is easier said than done because the problem lies at the root of the government itself.
He said, “It is the government’s massive transfer of investment and funds to enterprises and industries, encouraging obedience rather than (healthy market) competition, and setting unrealistic high economic growth targets for investment and export-oriented economies.”
China’s industrial policy not only causes internal economic distortions but also triggers backlash in overseas markets. Developed markets have begun resisting the influx of cheap Chinese electric vehicles, and now even emerging markets and middle-income countries are taking a series of trade protection measures, such as Mexico, Turkey, Brazil, India, South Africa, Vietnam, and Thailand.
China is an important trading partner for these countries, and often their largest trading partner. With global barriers against Chinese products, China’s export-oriented economy is facing even greater pressure.
A report released by the International Monetary Fund (IMF) on Tuesday showed that the fiscal cost of China’s industrial policy is staggering, accounting for about 4.4% of GDP and leading to approximately 2% productivity loss per year (meaning a decrease of 2% in GDP growth).
Estimates from the OECD, CSIS, and the Kiel Institute show that China’s industrial policy costs account for about 1.5% to 2% of GDP. This ratio is four to five times the average level of major economies in the OECD.
Magnus bluntly stated, “Outstanding companies and strong vertically-driven industrial policies cannot protect a country from the adverse macroeconomic consequences. The more Beijing invests in the former, the greater the macro risks.”