Unexpected China Factory Contraction Confirms Deflationary Headwinds, Overcapacity

Anti-globalists and China bulls fiercely resist the idea that China can do much of any wrong. And China is certainly better led that the US and has had a simply extraordinary economic run. However, China’s leaders, from Xi Jinpeng on down, are admitting to something they had fiercely denied was happening: that China’s answer to shifting its growth model away from exports to more dependence on investment, has hit its limits and is generating what in the US was once called “ruinous competition.”

One sign has been deflationary tendencies, as confirmed by Chinese investors, as we warned in January in China’s Government Bond Market Sounding Loud Deflationary Alarm. Is the Japanification China Has Warded Off Finally Arriving?. There we also explained long form why deflation is more destructive than inflation.

We explained earlier this month that the Chinese government was not only admitting to an overinvestment/overcapacity problem, but also moving to implement policies to address it. To give a sense of the magnitude:

This is not the first time China had has to deal with deflationary pressures; China had a bout from 2012 to 2016 and did turn it around. But as we explained, it largely exhausted the easy measures.

One thing that may not be evident from articles in the last day or so on the Chinese economy is that senior party official, including Xi, just had a Politburo meeting at which they announced new policy measures, some of which had been prefigured in earlier statements. New official initiatives take some planning and packaging, so these new campaigns were already in the works. But immediately on the heels of their announcement was a fresh data report that suggested that the overcapacity issue may be even more severe than recognized when the anti-deflation program was devised. We’ll turn first to the new information, on factory activity, and then return to what the Chinese government intends to implement.

Let’s go first to the bare facts of the latest development, that of an unexpected fall in Chinese factory activity. It may not sound that bad on the surface, but we’ll peel the onion. From Bloomberg:

China’s factory activity unexpectedly deteriorated in July to a six-month low despite a tariff truce with the US, as early signs emerge that exports are slowing and weak domestic demand persists.

The official manufacturing purchasing managers’ index (PMI) was 49.3, versus 49.7 in June, said the National Bureau of Statistics (NBS) on July 31. The median estimate of economists surveyed by Bloomberg was 49.7. A reading below 50 indicates contraction…

The PMI figures are the first official data available each month to provide a snapshot of the health of the Chinese economy….

That came after the country registered a record trade surplus in the first half of the year on soaring shipments to southeast Asia and stabilizing exports to the US.

But China’s resilience is facing headwinds. Cargo throughput at the nation’s ports last week was the lowest in almost three months and dropped nearly 7% from the previous seven days, a sign trade may be starting to slow…

Weak consumption could intensify deflationary pressures. A recent survey by the central bank found that Chinese households became more pessimistic in the last quarter and their view of the jobs market fell to its worst ever. That has fanned fears of a slowdown in the second half of the year, even after a strong first six months of activity exceeded the official annual expansion target of about 5 per cent.

The lowest factory output level in six months, in the abstract, is a nothingburger. But this follows a period early in the year of US importers stockpiling goods, which was somewhat unwound in the later part of the second quarter, and gave a lift to US GDP reports. And then after the Liberation Day tariffs were announced, exports to Southeast Asia grew markedly. Keep in mind that despite all the noise about the trade deficit with the US, its deficit with ASEAN is even larger. Chinese exports to Southeast Asia similarly exceed those to the US or the EU. Admittedly, some of these exports are transshipments to the US, and analysts opined that a lot of the second-quarter surge to Southeast Asia was a simple effort at circumvention. But Thailand at least complained about China dumping products, so there appears to have been some channel stuffing too. Thailand has also criticized its Chinese factories as “zero dollar” operations, designed to provide as little as possible benefit to the host country and as much as possible to the Chinese owner/operator.

Admittedly, skirting trade rules can be hard to detect, but US tariff threats against Southeast Asian countries have led to tightening in procedures. How much of a difference they make in the long term remaind to be seen.

Nevertheless, the key point is that the continuing deterioration in factory activity came in a six months with a higher level of exports to the US and Southeast Asia than is likely to be sustained going forward.

Now let’s turn to the Politburo admissions that China indeed has a real overcapacity problem and what the government intends to do about it. From Reuters:

China’s top leaders have pledged to support an economy that is facing various risks, by managing what is viewed as disorderly competition and beefing up capacity cuts in key industries in the second half of the year.

The official news agency Xinhua said on Wednesday that leaders have signalled they will rein in price wars among producers, amid growing expectations that Beijing may be about to start a new round of factory capacity cuts in a long-awaited but challenging campaign against deflation….

Analysts said policymakers may feel less urgency to introduce new stimulus measures, as stronger than expected economic data and a continued tariff truce with Washington allow greater focus on supply-side measures to combat overcapacity and deflation.

And South China Morning Post:

On the same day [as the Politburo meeting], Xi held a symposium on the economy with prominent figures from outside the party, stressing the need for stability and calling for efforts to boost consumption and break free from destructive intra-industrial competition – reiterating the sentiments in the Politburo’s statement….

Action was urged [by the Politburo] to “regulate disorderly corporate competition in accordance with laws and regulations” and “advance capacity governance in key industries”, part of a broader push to combat neijuan – a term referring to cutthroat competition between firms that erodes profits and fuels deflationary pressure.

Local governments were also instructed to regulate their promotional activities for investment, prevent the accrual of new hidden debts and continue to clean up local government financing vehicles – hybrid public-private entities used to bypass borrowing limits.

Channel News Asia unpacked these developments in Why China is finally starting to acknowledge its overcapacity problem:

For years, Beijing dismissed Western concerns about Chinese overcapacity as protectionist rhetoric..

That narrative has now fundamentally shifted. In a remarkable policy U-turn, China has not only started acknowledging the overcapacity problem but is treating it as a national priority that requires urgent intervention….the clearest signal of this messaging transformation came through recently on China’s own policy channels.

In July, the Communist Party’s leading journal Qiushi warned that “disorderly competition has destroyed entire industry ecology”. This wasn’t diplomatic language about market dynamics – it was an admission that destructive competition had reached crisis proportions.

Around the same time, President Xi Jinping chaired a meeting of the Central Financial and Economic Affairs Commission, calling for “low-price competition to be regulated” and outdated production capacity to be “phased out in an orderly manner.” Weeks later, the State Council explicitly linked “irrational competition” to weak domestic economic circulation, naming high-profile sectors like new energy vehicles as targets for immediate oversight….

The shift reflects a sobering recognition that China’s industrial overcapacity has moved beyond an export problem to become a domestic economic threat.

The cost of some raw materials has reached historic lows due to supply chain deflation, yet factory prices are being cut even further as manufacturers engage in suicidal price wars. The result is unsustainable profit margins that are forcing many manufacturers to suspend operations entirely.

This deflationary spiral now threatens what Chinese leadership calls the “whole-chain manufacturing model” – the integrated production networks that Mr Xi recently reaffirmed as a national priority. When factories cannot operate profitably, the entire industrial ecosystem becomes vulnerable..

Importantly, China is not using the language of “overcapacity” that has dominated international criticism. Instead, Beijing frames the problem as “price wars” and “disorderly competition”.

This distinction matters because it allows Chinese policymakers to address the underlying issue while avoiding the admission that their industrial policy created systemic overproduction.

By focusing on pricing behaviour, China can position itself as promoting fair competition rather than acknowledging fundamental structural imbalances. This semantic shift enables policy action without losing face internationally or undermining confidence in China’s economic model.

However, the practical effect may be similar. Whether addressed as overcapacity or predatory pricing, the solution requires reducing output, consolidating industry players, and restoring sustainable profit margins across key sectors.

Note that a sector widely viewed as one of China’s stellar successes, electronic vehicles, is now a target for rationalization. A fresh story in OilPrice includes another one-time celebrated success, solar panels:

China’s undisputed leadership in electric vehicle sales and renewable energy expansion has come at a cost for numerous companies that have been running a race to the bottom in recent years.

The surge in EVs and solar and wind power installations has resulted in excessive manufacturing capacity in these key clean energy industries, igniting price wars that have hurt most companies in the cleantech sector, including the biggest solar panel manufacturers.

Chinese authorities realized last year that cutthroat competition, overcapacity, and low-quality manufacturing are hurting enterprises.

Overcapacity has been a persistent issue in China’s clean technology industries, undermining the profitability of solar panel and EV manufacturers….

The manufacturing boom and the competition for market share have prompted some Chinese manufacturers to sacrifice quality for the sake of higher profits. Companies are looking to survive in the race to the bottom in China’s solar component market, and some are skimping on quality and testing.

The Chinese solar panel market remains oversupplied, and this glut could last up to two more years, one of the top manufacturers, Longi Green Energy Technology, said last year….

In the EV market, “fierce competition among EV and battery manufacturers in China for state-based incentives has led to a sharp decline in EV and battery prices, helping scale deployment, but has led to massive overcapacity in batteries,” research firm Rhodium Group said in a report last month.

Today, China’s battery manufacturing capacity is two times the demand in China and 1.2 times global demand, according to Rhodium Group.

Going after high-fliers won’t be easy. As Channel News Asia adds:

But meaningful action faces significant obstacles. Local governments have strong incentives to protect regional champions, often offering subsidies to maintain employment and economic output. Provincial leaders compete to attract investment in priority sectors like artificial intelligence, electric vehicles and semiconductors – creating the very fragmentation that fuels destructive competition.

Recall that China had shifted its growth strategy away from housing as a significant driver to investment in high-tech industries. There’s still a deflationary overhang in property; even though prices are not too much out of line in Beijing and Shanghai, they are still reportedly elevated in most of the rest of the country. That continuing unwind will make it hard to get consumers to spend more, since the loss of wealth tends to lead households to save more to try to restore their finances.

In other words, rectifying this situation is a lot harder than it might seem. China may finally have run into Stein’s Law: “If Something Cannot Go on Forever, It Will Stop.“

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26 comments

  1. NevilShute

    Perhaps one solution to the over-supply of Chinese solar panels would be for governments around the world to purchase these panels and start installing them on every rooftop. Temperatures are now hitting 50 deg. Celsius (122 def Fahr.!!) in SE Turkey, as the planet continues to heat up. There would no doubt be the objection that “we can’t afford it,” but somehow these same objections don’t apply when the world now spends ~ 3.7 $ Trillion a year on ‘defense.’ Either we get our priorities straight, and soon, or there won’t be much left to defend.

    Reply
    1. alrhundi

      What a shame we have an oversupply of cheap renewable energy technology in the middle of a fossil fuel caused climate crisis. Let’s build more LNG.

      Reply
  2. jefemt

    If deflation, economic slowdown, pessimistic sentiment set in, seems the next shoe to drop is defaults and foreclosures. How does that work in China’s semi-free market command economy?

    The Student Loan debacle in the US is about to rear its ugly head, and there will be blood and tears for the working poor indentured servants.

    Lotta trouble, everywhere. Anyone here try to sell a perfectly good, well-maintained useful second-hand item?
    No body is buying.

    Peak production meets pocketed hands— and I mean no one is reaching for their wallet.

    Reply
    1. marku52

      Put an item up on CraigsList for $5 or $10, and no takers.
      Put it up for free and the email box fills up with takers.

      possibly an economic signal…..

      Reply
      1. Jeremy Grimm

        Where do you guys live!? I prefer strongly serviceable used stuff to the new enshittified stuff. BUT, I will not pay new or “almost new prices” for stuff when I have to drive out to Timbuktu and try to find the seller. I definitely prefer and WILL buy “perfectly good, well-maintained useful second-hand items.” I will NOT pay the inflated NEW “and improved” prices for old stuff!

        Where do you guys live? “Perfectly good, well-maintained useful second-hand items” WOW! I would very gladly and have paid much more than $5-$10 for such good stuff, but as in the retail world, not all claims, and warranties, can be trusted. I have to judge each seller when I meet them and hope that my sense of them is not mistaken.

        What state or states do you guys live in? I might drive some distance to get a fair, FAIR to both seller and buyer, deal on “Perfectly good, well-maintained useful second-hand items”?

        Reply
    2. Antagonist

      Considering I lived and worked in China years ago, I know surprisingly little about Chinese economics and polity. When I was there just working and staying afloat was so stressful that I didn’t have time to observe these things.

      However, I did notice how uncommon and difficult it was to sell used goods. When I asked some local Chinese how do I sell a used item that is still in excellent working condition over the internet via a simple website like Craigslist, I was met with shrugs. I was not hoping to extract maximum and top dollar (renmenbi). I just didn’t want to waste something that I had paid a fair amount for. Do the Chinese use ebay or Facebook marketplace or some Weibao equivalent? I don’t think Alibaba does that. Undoubtedly, Chinese people buy bulky and moderately expensive furniture. What do they do with it when they move to another place? I remember when I moved how frustrated I was just trying to give my stuff away for free. I invited a couple of friends, colleagues, and their friends and family over, and I said, “Take anything you want. I don’t have time to pack and keep this stuff. Anything.” That experience was so stressful that I changed my mind and simply discarded my stuff. It was even more stressful that I couldn’t find anybody to help me throw away my stuff.

      Nevertheless, I am talking about all of this because the practice of not re-using things, not recycling, and not donating clothes or other items to those in need seems like a common practice and ethos in China. This sort of thing has to cause problems eventually, right? In addition, there is the discrepancy between the large number of money worshiping Chinese that I know and the related belief that originally expensive items must have inherent value.

      By the way, the people behind Craigslist deserve praise for their ethos because they do not charge fees for allowing me to sell a used item. In contrast, ebay takes a cut, and selling things on ebay takes a great deal of time. I am usually happy that somebody can continue to use my perfectly good item that I no longer need. And it’s not the small amount of money I get back that makes me happy. Several years ago, I did notice when selling my used goods on Craigslist, those people I met seemed pretty desperate. The class warfare waged upon the poor by the extremely wealthy seems to be working.

      Reply
  3. Socal Rhino

    I follow Michael Pettis on X. He has been discussing Chinese economic imbalances for years, and as I understand it, has been advising the Chinese leadership. I believe he has said that China understands the issues and addressing them poses challenges, including that many have benefited from the current policies. (His view is that the US economy is imbalanced to a similar degree, in the US case being extreme income inequality and an equal reluctance to address that, for much the same reason).

    Reply
    1. chuck roast

      I do not follow Pettis on X, but I read his occasional columns when I can. It has been his view that China suffers less from over investment than from an excess of savings. This is consistent with nation-wide economic uncertainty following the collapse of the property bubble…and if I might add, an ageing population.

      As an aside I can recall reading of the deep seated concern of American economists post WWII. Americans were constantly told that things were good, the Depression and war were behind us and it was our patriotic duty to spend and consume. It worked for quite a while, and of course we had the world’s markets to ourselves. No ruinous competition in those days.

      Reply
    2. Plutoniumkun

      As Pettis has stated in other circumstances, when a problem is obvious and the solutions are straightforward, but nothing is happening, then you have to assume there are fundamental institutional structures blocking the necessary policy moves.

      Chinese policy makers have been talking about the problem of excess capacity for over two decades now – from even before the last crash. They studied the Japanese lost decade very closely and have been perfectly aware of the pitfalls of depending on exports to make up for suppressed domestic demand (which is the core of the ‘rapid industrial catchup’ model of development). However, understanding the problem and fixing it can be very different things.

      There are actually very strong voices within the Chinese establishment who strongly argue that the overcapacity problem is a myth, and there is plenty more scope for industrial growth – most prominently Lu Feng.

      Jonathon P. Sine has an overview and critique of this view in his substack here. Sine argues that China has probably maxed out its potential markets. Its hard to argue with his thesis that there is simply no more economic or political capacity worldwide to take any more of a Chinese surplus, particularly in Asia where multiple developing countries are finding themselves under strain from Chinese competition as they try to develop their own economies.

      Reply
      1. little red book

        This economic problems with China has become very complex, and a major reason is that in China, the local governments are the landlords.

        When you have the local governments relying, on average, 30% of their income on land premiums (and in certain cities like Guangzhou, 40+%), this obviously has become a particularly difficult issue for the central government to crack down on. To be fair, the central government has been trying to curb the rising land prices since 2018-2019, but at the same time, since such excessive investment in housing and infrastructure undertaken by the local governments also drove the much needed national GDP growth post-2008 GFC as exports slumped, the measures taken by the central government were at most, half-hearted. As a result, the rot continued to fester, and the debt eventually ballooned to a scale that can no longer be ignored today.

        Another important point to remember is that the huge investments in infrastructure and housing over the past 15 years had been driven almost entirely through borrowing or debt issuance to the private sector, instead of direct new money creation through the central bank like what the US Federal government does, as described by MMT proponents. The Chinese government is extremely allergic to running large deficits and treats the 3% deficit rule defined the IMF as sacred. Socialism “with Chinese characteristics” should really be understood as a type of socialism that chooses to adhere to the (neoliberal) market principles at all cost.

        The third point is that many local governments are now locked into bitter competition with one another, after spending billions in subsidies and tax breaks to the manufacturers they have courted. The sunk costs have made it almost impossible for them to back down now – corporations now engage in mutually destructive price wars in bids to become the sole survivor of such unprecedented neijuan (involution) that threatens to kill off the entire industry (the central government is now only starting to intervene in industries like solar panels, where huge losses were registered last year). Similarly, local governments that lose out on the value-added tax (the most important form of tax revenue in China) will find themselves in increasingly precarious financial situations with severe debt overhang.

        I will reproduce the paragraphs I wrote in response to a Michael Hudson’s article the other day to give a very brief primer on why wealth inequality in China is structural and baked into to its unique system of governance:

        As you know, the Chinese economy is highly decentralized. The central government grants a lot of autonomy to the local governments to drive local economic development, and in turn, the central government sets the national priorities by controlling the career promotion of local officials. A main KPI is GDP numbers, which explains why Chinese officials are so obsessed with reaching certain GDP targets.

        The over-reliance of land revenues by the local governments has become a huge problem in China today, where land premium still maintained an average of >30% of local government revenues today (in some cities like Guangzhou, a key manufacturing hub that is now experiencing slowed export, that proportion is more than 40%). Local government expenditures have been heavily curtailed due to the implosion of the property market, and deflation has made their loans harder to service, after having taken out massive amount of loans for infrastructure building over the past decade.

        This antagonistic/oppositional relationship between the central and local governments can be traced back to the reform and opening up era since the 1970s. Initially, local governments only had to pay a fixed amount of fiscal tax. However, with the rise of light export industries in the coastal provinces in the Southeast, those regions began to accumulate a disproportionate amount of wealth and GDP, but only small proportion of their income had to taxed by the central government.

        This eventually evolved to those wealthy provinces exempting corporate taxes altogether and even began to share their wealth together with the private corporations. Meanwhile, by 1993, the central government received only ~20% of tax revenues, while still having to finance for state-owned enterprises (SOEs) and many large scale investments across the country.

        To counteract this unequal tendency, the 1994 Tax Sharing Reform was introduced to rectify such imbalance of power. Under this new arrangement, 75% of value-added tax (the most important form of tax revenues in China) would go to the central government, and are then re-distributed downward to the provinces again. More importantly, the new policy would relegate the responsibilities of investment and SOE financing to the local governments.

        The first provinces to suffer under 1994 Tax Sharing Reform were the Three Northeastern Provinces (东北三省) where the heavy industry SOEs were centered. The large scale investments and operation budgets required for their heavy industries prompted the local governments, now burdened with the responsibility of financing their own industries, to privatize those SOEs, and the resulting “reforms” led to mass layoffs and the ensuing economic crisis in the 1990s. It is estimated that between 1996 and 2002, more than 60 million workers were laid off under the privatization wave, and would not be reversed until China joined the WTO in 2001.

        Perhaps more importantly, the new tax sharing policies drove local governments to seek for non-tax revenues to finance themselves, and this is where land revenue and property market came into play. After the 2008 GFC erupted, the slump in the export economy, in conjunction with the central government’s push for infrastructure building (the 4 trillion yuan stimulus) drove many local governments into speculating land prices by borrowing massively, first through the shadow banks (LGFVs) and from 2015 onwards, by issuing government bonds themselves to build endless amount of housing and infrastructure to raise their GDP numbers. Many local officials made the career promotions of their lifetime during this period, until the inevitable implosion that started in late 2019.

        The reckless (over-)investment has caused local governments to rack up debt that, because there is no debt cancellation mechanism in China, has become increasingly difficult to service. This is why the Chinese government has been pushing hard to save the plunging property market to ensure that there is no mass mortgage defaults, which would have caused significant a chain reaction to the financial sector and the local governments that rely on such land premium, and in turn, the industrial sector that relies on local governments subsidies. As a result, the home purchasers will continue to spend more and more of their savings into the property market, socializing the costs to prevent a nation-wide economic crisis.

        This explains, in part, the deflation and the difficulty of raising consumption demand in China today.

        As you can see, wealth is still being transferred to the financial sector, just not in the same way that occurred in Western neoliberal economies. Without a complete reform of the relationship between central and local governments, relinquishing the adherence to Western neoclassical economic theory, reducing the reliance on export revenues and instead raising wages/job guarantee through new currency issuance MMT-style, and formulating mechanisms for debt cancellation, it is unlikely that China will be able to form the alternative that can meaningfully challenge Western neoliberal hegemony.

        This is why, in spite of the amazing development and technological advances that China has experienced over the past decade, the working class finds themselves working longer hours, the retirement age has increased, and the exponential increase in productive capacity has failed to translate into wage growth and purchasing power for the average working people.

        Reply
        1. Mikel

          A hat tip for mentioning the two words: wealth inequality.

          Outside of China’s borders, I imagine if any country had been doing anything that significantly tackled issues of global wealth inequality, they might have found more places with the ability to absorb all of those exports fast enough.

          Reply
        2. Plutoniumkun

          Excellent summary. The relative independence of local governments in China has been both a strength and a weakness of the system – it has allowed for a high level of experimentation and competition within the country, but the failure to put in place a proper funding mechanism for local development has allowed debt to run out of control. This works so long as there is still growth in property values, but once that source runs out – there is deep trouble in store. China may not be ‘financialized’ in the way the US or other western economies are, but the underlying problem is the same – out of control debt and speculation which has become disconnected from real productivity growth.

          Reply
    3. nyleta

      I hope China is not depending on Mr Pettis too much , he is after all mostly American and the US is playing for all the marbles now. I sometimes suspect him of angling for a spot on the CFR with Mr Setser. Russia once depended on US advisers but learnt their lesson the hard way.

      Whether they are in a slump or not this notion of continual economic growth has to go into the rubbish bin of history or human civilisation will once again collapse. The financial situation is much more immediate for all countries than the economic. Half of central bank gold purchases are now directly from the mines, so trust is low and I have seen suggestions that the ruble/yuan trades are physically settled with regular specially configured trains. If this is true the ideas of Glazyev and his crew are already being implemented.

      Reply
  4. TimD

    Pretty typical of an industrial economy, even one with Chinese characteristics. Supply grows faster than demand, leading to falling prices and then consolidation through mergers and factory closures in the industry. This sort of thing used to happen in the West every once in a while when it was industry focused. I would even say that it happened in IT the late 90s where there was a huge amount of investment in safeguarding and building out infrastructure for Y2K, then after the crunch, there was large flushing sound and businesses folded or got took over. This is just another on the list of challenges that the Chinese will have to work through.

    Reply
    1. alrhundi

      Interesting that you mention mergers and factory closures because that’s where my mind went to. China has shown no hesitation to shut down private business once the supply is reached. I wonder if we see government acquisitions and mergers into state owned industry

      Reply
    2. Plutoniumkun

      There is a difference between a Minsky style bubble and an overinvestment in capacity resulting from deliberate industrial policy (i.e. the difference between hard and soft budget constraints). The former tends to hit the buffers relatively fast (i.e. the normal boom-bust cycle), but the latter can keep going far longer until – well, it can’t. The biggest problem China faces is that relatively small economies can typically find export markets for its excess, and, if it plays its cards right, can maintain this over the long term (e.g. Taiwan or ROK). China is simply too big for this, there comes a point where its trade partners can’t sustain the deficits.

      Reply
    3. NotThePilot

      If I’m not misinterpreting this line, Yves implicitly agrees with you some…

      Note that a sector widely viewed as one of China’s stellar successes, electronic vehicles, is now a target for rationalization.

      I’m in the camp that China probably does have a huge overcapacity problem, but it’s actually one of the relatively easier problems for China to fix for the exact reason you mention. AFAIK, throughout Chinese history, as long as the state is strong and unified, its culture and political tradition give it a lot more space to “punish failure” than in most cultures.

      I’ve only ever been able to think of 3 ways for china to process its huge level of excess savings: invest abroad (like in the BRI), invest domestically (thus the overcapacity), or vaporize them by writing down capital. The 3rd option not only plays to China’s cultural strengths but if done right, theoretically improves the overall efficiency, stability, and quality of the economy. If you ever check out Veblen’s Theory of Business Enterprise, he has an argument that capitalists retaining obsolete plant is a main catalyst in boom-bust cycles (fully-depreciated assets are usually inefficient technically & socially but very profitable for an individual firm until a pullback in demand).

      So if anything, I’d be very surprised if the Chinese government doesn’t start methodically going through the bottom x% producers in many sectors with ultimatums to merge or close shop.

      Reply
      1. Polar Socialist

        From what I can understand (and read), the Chinese central government currently believes (I’m simplifying this a lot here) that overproduction should be blamed on the local governments that, by preferential treatment of businesses, are giving a different signal than the markets are.

        I believe Mr. Xi himself said, not that long ago, that not every province needs to make EVs and semiconductors.

        And, according to Chinese research Chinese domestic consumption seems to be very underestimated for several reasons.

        Reply
  5. Bazarov

    Marxism emphasizes overproduction in its analysis of capitalist crises. Capitalist societies are shaken by their own wealth, as boom-times result in a commodity glut that in turn precipitates a fall in prices so low that they plunge below prices of production, resulting in widespread bankruptcy–a depression or recession or whatever you want to call it.

    This depression is in effect destruction of capital–alleviating the glut–that precipitates recovery and ultimately a new boom. This is why, in my view, recession has been avoided post-COVID, as the initial pandemic period caused a flash-depression and capital destruction, allowing for the relative “boom times” we see today.

    However, I have a sense that the boom times are winding down. Soon, another round of capital destruction will be necessary. And China is capitalist. What worries me is this: War is an alternative to depression in terms of capital destruction. How will China and the world economy overcome its glut? Will it crash? Or will it turn to conflict to remedy its excesses?

    Reply
    1. Darthbobber

      Paul Sweezy used to emphasize that mature capitalist economies have a strong tendency toward stagnation.
      The American economy, ppre-rearmament, lapsed back into recession as soon as FDR reduced the morphine drip and briefly moved to reduce the deficit. Britain and France remained mired with little sign of growth, and Germany’s armament led growth was based 9n sheer piracy and sucking in forced labor from 1st austria and then czechoslovakia.

      The war itself was what pushed the reset button, though hardly without cost. And war of the necessary magnitude is an even more insanely risky venture today.

      Reply
    2. Jeremy Grimm

      “China is capitalist. What worries me is this: War is an alternative to depression in terms of capital destruction”…..
      But is China “capitalist”? If so, then China could succumb to the same, readily accessible and relatively well-understood problems that afflicted, and continue to afflict, Western “capitalism”. China could give positions to the failed economists who have done so much and so well for the u.s. or their leadership could remember that the State still controls the economy and its players. China is not, NOT a “free” market economy. This overproduction problem could and probably will be handled by State intervention.

      Would that overcapacity were a problem facing the u.s. economy! The only overcapacity afflicting the u.s. is an overcapacity in the number of incompetent managers and politicians and an even greater overcapacity in their pay and the pay of the executives and colossally uber-wealthy 0.01% lording over them and their minions.

      Maybe? Perhaps? China might send back a little of the productive capital the u.s. gifted to them to cripple u.s. labor.

      Reply
  6. ciroc

    Beijing does not consider “overcapacity” to be a problem. They realized that China would never become a developed country if it continued selling low-quality products at low prices. Therefore, they decided to crack down on companies that sacrifice quality to compete on price.

    Reply
  7. Boshko

    This is also a fundamentally political problem. Many observers routinely point out the need for China’s domestic consumption demand to increase to alleviate pressure on an export-driven economy, led there by massive investment directed by the CCP. However, by definition increasing household Chinese consumption in the economy will diminish the size of the government sector, ergo the CCP and politburo power. Chinese consumer and saving habits aside (i.e. the missing social safety net that would also be a great use of excess capital), the CCP is unwilling to make that tradeoff. Recall the billionaires who were cut down to size not so long ago. They too grew their share of GDP to untenable levels for the CCP.

    Reply
  8. clarky90

    “Brer Rabbit, perpetually hungry and mischievous, finds himself regularly at odds with the likes of Brer Fox and Brer Bear. One day, Brer Fox, tired of the rabbit’s antics, hatches a plan to catch him. He sets up a sticky tar doll (a “Tar Baby”) right in Brer Rabbit’s path.

    “Brer Rabbit, (Brer Donald Trump), ever the talker, greets the Tar Baby and is annoyed when it doesn’t respond. Growing angry, he punches and kicks the doll…becoming firmly stuck. Brer Fox pounces, ready to catch his dinner. Thinking quickly, Brer Rabbit begs Brer Fox to do anything but throw him into the thorny briar patch. Of course, Brer Fox sees the chance to inflict more pain and does just that – tossing Brer Rabbit right into the brambles.

    But what’s this? The briar patch is where Brer Rabbit was “born and bred,” and he escapes easily, laughing at the outwitted Brer Fox!”

    The definition of “Brer” is Brother.

    https://englishpluspodcast.com/brer-rabbit-trickster-tales-and-their-enduring-legacy/

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