What to do? What to do? What to do? What to do?

What to do about Overproduction?

by Edythe Huang

Too much of a good thing may not be quite so wonderful.  Since the EU Chamber of Commerce in China released a report in November, economist and financial watchers have been busy throwing in their two cents about "Made in China."  In case you have not been paying attention or did not think that the EU Chamber of Commerce's recommendations to the Chinese government about how China should run its economic affairs were important or were just too busy celebrating the holidays, here's a recap. In late November the EU Chamber of Commerce took it upon itself to highlight the problem overproduction of manufacturing goods was creating both in China and the "rest of the world."  In their report, they made a series of recommendations which included redistributing national income from companies to households, removing subsidies for energy and other outputs, forcing companies to slash capital expenditure, raising interest rates, and reforming the fiscal system to give local governments more power.

                Here are a few of my favorite reactions to the report --

                There's the typical accusation of protectionism:

"The claim is purely to defend their own interests.  These countries welcome Chinese exports when they cannot produce enough goods for their industrial and consumer needs during a good economy, but then these same countries limit Chinese exports amid an economic recession. . .  It's a double standard." -  Zhou Shijian, senior analyst with the Sino-US Relations Research Center of Tsinghua University. (reported by China Daily) 

                There's the typical blow off, this is not a big deal and it is going to go away on its own:

"The problem is just short term. . . It will disappear when the Chinese economy regains momentum." - Li Wei, analyst from Standard Chartered China, stating that overcapacity will be solved when China's domestic demand goes up. (reported by China Daily)

                There's the typical reassurance:

"China's exports in 2010 will grow, and there's no doubt about that," vice-minister of commerce Zhong Shan told a forum at the University of International Business and Economics in Beijing.

                There's the typical overreaction, claiming the problem is even bigger than the public thinks:

Daniel H. Rosen of the Wall Street Journal pointed out that overcapacity is not just a problem in the areas highlighted in the report: iron and steel, cement, electrolytic aluminum, glass, coal chemical, polysilicon and wind power equipment.  The problem is not only that there are too many manufactured goods; there's too much of everything in China, that is, except the important things such as doctors, teachers, and jobs overall. 

                There's the typical focus on ulterior motives (not that this is not notable):

All Roads Lead to China blogger Richard Brubaker noted one reason for the EU Chamber of Commerce's disapproval and note of China's overproduction: "Equally interesting is that while US exports have benefitted from the current situation, the EU has not.  That as the dollar has sunk, the Euro “peg” to the RMB has gone the wrong way for most of the EU making its goods and services more expensive."

                And finally, there's the well thought out acknowledgement of the complexity of the problem:

Michael Pettis, professor of finance at Beijing University, wrote a very good opinion piece in the Financial Times.  In the article, he highlighted the frightening scale of excess capacity occurring in China, and the foreign producers' fears of the impact of China's growing surplus.  He recommended, nay warned, China that if there will be an economic crisis in the trading system if China did not expand its exports in 2010.  On the other hand, he underlines the problem of his own solution, the rest of the world simply cannot absorb the surplus capacity and neither can the ordinary Chinese because ordinary Chinese are not earning enough to absorb the capacity because they are too busy paying for a system that gives the benefits to making products, not consuming them. 

I do not know if Party officials read the Financial Times, but they seemed to be listening to Michael Pettis.  After a month of very little comment on the EU Chamber of Commerce Report, XinHua came out with an exclusive report with Premier Wen Jiabao on the topic.  Surprisingly, or perhaps not, Premier Wen seems to agree with Professor Pettis.  He acknowledged that industrial overcapacity has been a global issue that is caused by both current global trends and long-existing problems with the imbalanced economic structure -  words which seem to come straight from Michel Pettis' article.  

Where does that leave us?  Well, everyone seems to agree that there is a problem.  What that problem is exactly and how to resolve it is a different issue all together.  What is agreed upon?

(1) There exists a complex problem with the fundamental structure of the economy in China that is based upon some "imbalance." 
                 
(2) This problem is an international problem.  

That is all economists, financial analysts, international organizations, bloggers, financial journalists, international diplomats and the Chinese government can agree upon.  After that, it's a free for all.  The Chinese are saying that Western governments, the EU and the US in particular, are enacting protectionist measures during an economic crisis.  Western governments are yelling back that the Chinese governments hands are unclean- they are manipulating currency and creating more than the world can consume, but worst (and my favorite accusation because it always comes out at the end to add an extra punch), the Chinese are not even taking care of their own people who bear the burden of this problem.  

 At least we agree there is a complex problem, well, except for Li Wei.  Now how are we going to fix it? Premier Wen Jiabao has said that the problem is being worked on.  The Chinese government is channeling excess capacity into new fields.  The latest 1.18 trillion RMB stimulus package is being spent on affordable housing projects, construction of infrastructure, and improving people's livelihoods. That sounds nice, especially the part about improving people's livelihoods.  But I fear I'm a bit more cynical than that.  I'm afraid Premier Wen Jiabao proposal is simplistic at best.  I am not criticizing the good intentions of the Chinese government nor am I stating that areas highlighted by Premier Wen are not respectable areas upon which to improve.  I just do not think that the limited strategy described by Premier Wen is enough to satisfy the complexity of the problem.  For example, Premier Wen stated that the Chinese plan to spend stimulus on affordable housing projects.  Sounds great.  However, China is already dealing with an excess of developed real estate.  By building more affordable housing, which is great for common Chinese, the result is more properties left empty and more overcapacity.

I do not have a solution.  I'll leave that to the disagreeing experts.  But one thing is for sure, the devil is in the details and this is a problem where the details are going to make all the difference.