Earlier this week, US Treasury Secretary Janet Yellen met with senior officials in Beijing and stated that she had reached an agreement with the Chinese Communist Party to “engage in deep discussions on balanced growth of the domestic and global economy.” Drawing from historical lessons, it can be concluded that this is only an empty agreement that will likely delay some inevitable outcomes.
Secretary Yellen’s main purpose for her Beijing trip this time was to discuss China’s overcapacity issues in key industries such as solar panels and automobiles. Behind this phenomenon lies the fact that China’s low consumption rate and high investment rate have been driving rapid growth in areas like manufacturing capacity and infrastructure.
Chinese and international economists have begun to raise concerns about China’s high savings rate, which suppresses consumption and increases investment in uncertain prospects such as infrastructure and capacity. Despite borrowing simplistic “cut and paste” solutions from economic textbooks, the Chinese Communist Party has been evading the issue of overcapacity for the entire century.
During the administrations of George W. Bush, Barack Obama, and Donald Trump, as long as there were no extreme contingencies, the Chinese regime has been willing to establish working groups, hold bilateral meetings, and promise to discuss solutions with Washington. Despite various commitments and working groups, China’s overcapacity issues are only worsening with no signs of stopping.
So, what significance does the agreement to “engage in deep discussions” with the Chinese Communist Party truly hold?
At best, China’s consumer demand is sluggish. Since around 2015, China’s automobile demand has remained stagnant, despite continuous capacity increases. The overflow of Chinese automobile exports stems from both insufficient demand and overcapacity. All the capacity built by Chinese and foreign companies in China has not been effectively consumed in the Chinese market.
The main obstacle lies in China’s lack of intention to restrict capacity. The primary goal of the Chinese leadership is to create 10 million jobs annually, decoupling from the U.S. and controlling future industries. Only through massive investments by Chinese savers can these goals be achieved. In other words, the Chinese government has little interest in reducing overcapacity issues and competing for market share worldwide.
China’s state-led financial model has led to this problem. When Beijing designates priority industries for development, local governments compete with state-owned banks to attract these industries to their provinces, resulting in a surge of subsidies and state-controlled investments into capacity expansion. This model is reflected in low profit margins, stagnant profit growth, and increasing bad loans. Despite China’s massive trade surplus and high savings rate, its capital utilization efficiency is very low, as seen in the uninspiring performance of the stock market over the past century and banks facing bankruptcy.
Although the press release issued by Secretary Yellen after her visit to China is uplifting, U.S. negotiators have been trying for years to cooperate with the Chinese side to reduce their overcapacity issues, which have led to global price declines and unfair impacts on global markets. Meetings between U.S. officials and Chinese government officials have been ongoing throughout the century, but they have always resulted in much sound and fury signifying nothing.
This situation leaves the U.S., as well as other regions like Europe and Japan, in a awkward position: if China is unwilling to change, what unilateral actions should they take to address China’s government subsidies? These subsidies have globally impacted a range of products through overcapacity and have become a malignant tumor affecting global market stability.
Objectively speaking, to address this malignancy, the U.S. and its allies have many cards to play, from anti-dumping measures to legal actions at the World Trade Organization, to tariff impositions. The reality is that the U.S. should not rely on China to solve this problem, as China’s responses have consistently fueled the fire instead of suppressing it.
Christopher Balding, a former professor at Fulbright University Vietnam and Peking University HSBC Business School, with expertise in Chinese economy, financial markets, and technology, points out the discrepancies in Chinese economic policies and the never-ending negotiations regarding overcapacity issues with Beijing. Balding currently works as a senior researcher at the Henry Jackson Society in London, having lived in both China and Vietnam for over a decade before moving to the U.S.