Overcapacity as a Chinese Economy’s Challenge

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In the last one decade, the trend of Chinese economic growth has been of interest to global financial observers. There have been various expectations when it comes to China’s economic future. One group of people is of the view that the fast economic development will stop soon, while another group believes that China has the ability to be one of the biggest economies in the world. However, it is evident that economic growth in China is facing more challenges now than it did in the past.

For example, the stock market in China has failed to stabilize in the course of the last two years. Some observers have also speculated that the economy of the country might go through a major depression such as the one that happened in the United States in 1929. Overall, the future of China’s economic growth is facing various major challenges including long-term inflation, slow growth rate, overcapacity, environmental challenges, and declining government revenue among others. This essay focuses on the challenge of overcapacity or overproduction in regards to China’s future economic growth. The paper will also address the possible solutions to the problem of overcapacity.

Over the past few years, the problem of overcapacity has acted as a major impediment to the development of Chinese economy. Overcapacity as it affects China comes from the fact that the country has embraced the economies of scale too much such that there is too much production in industries (Erturk, 2011). Initially, embracing economies of scale propelled China to become the number one manufacturer in the world. Furthermore, this approach was responsible for fast tracking China’s economic development goals. The low demand for Chinese-manufactured products has on the other hand meant that manufacturers are unable to repay their debts. Some factories have ended up closing down their operations because of this problem of overproduction.

Another cause of overcapacity is the fact that because Chinese industries have too large capacities, most traditional industries have not been able to strike a balance in production. Producers of commodities such as glass, iron, cement, steel, power generation equipment, and aluminum have recorded overcapacity levels of more than thirty percent (Erturk, 2011). The effects of oversupply have mostly been manifested in the production of steel whereby the profit from manufacturing one ton of steel is currently negligible.

The situation has been made worse by the high levels of competition between regional authorities. Most regions in China have employed all sorts of tactics to attract manufacturers who would in turn raise their overall levels of Gross Domestic Product (GDP). Therefore, manufacturers in China are often offered incentives such as tax breaks, financial subsidies, cheap loans, and free use of government land. A combination of these incentives works in reducing real estate development and other production costs down to unprecedented levels. This ambivalent scenario means that sustained levels of overcapacity can end up contributing to widespread macroeconomic issues including loan defaulting and closure of factories (Chan, Han, & Zhang, 2016).

Overcapacity in China has a lot of significance when it comes to the country’s current and future economic development. For the last two decades, the problem of overcapacity has posed a major threat to the Chinese economy. This problem has contributed to loss of employment in the country and consequent massive debts (Zhou & Yang, 2016). These facts combine with other prevailing economic challenges to pose a major economic development threat. The problem of overcapacity has also had a significant impact on the real estate industry. Low demand from property buyouts has meant that most industries have to wait for the slowdown in the real estate sector to end. In the past, there have been cases where massive real estate projects were complete but they could not find takers.

This situation had been similar to the incentive-fueled manufacturing industry whereby oversupply was easily realized. On a broader scale, overcapacity also leads to rising cases of unemployment because of delays in job creation. China is the most populous country in the world and rising unemployment has the capacity to slow down or even halt the country’s economic growth. On certain occasions, low rates of unemployment might lead to social unrest and consequently a destabilization of the economy. It is important to note that China lacks the social investments that are present in Japan or the democratic stability that prevails in the United States (Toffler, 2013). Therefore, the country cannot afford to sustain high levels of unemployment.

To address the problem of overcapacity, China should take several measures. These solutions should be aimed at halting this trend or reversing it. First, the central government should ensure that the local governments do not take their competition too far and eventually create oversupply. Therefore, there should be strict laws and guidelines stipulating how local authorities should grant tax breaks. Furthermore, these guidelines should ensure that all the incentives that are offered to the manufacturers are transparent and above board. If the problem of too much competition is addressed at the local government levels, it would be easier for the central government to lay out policies that encourage innovative services. When the customer does not rely too much on goods manufacturing, this might end up giving the country the economic buffer that it needs.

Another tactic that would help in addressing the problem of oversupply is to ensure that failed industries are not overly protected. In the last few years, a trend has emerged whereby local governments protect failed firms by offering them further incentives or bailouts (Zhang, Zheng, & Li, 2016). This trend has contributed to the problem of oversupply in a major way because it is in opposition to basic economic principles. The policy makers should stand in opposition against the local government authorities that protect failed industries. For instance, firms that become bankrupt should be liquidated. This trend will eventually ensure that industries in China are managed efficiently and healthy competition thrives across various industries.

The other solution to the problem of overcapacity is to ensure that the country works towards reforming financial markets. The financial reforms in China are overdue because the markets do not conform to sound economic principles (Das, 2008). For example, the financial markets are mostly dominated by large state-owned institutions. These institutions are often concerned with growing in size thereby ignoring the principles of innovativeness. This general oversight has greatly contributed to the problem of overcapacity. An example of the effects of this policy is the fact that most banks have a preference for lending money to only enormous projects that are backed by relevant authorities because major projects are protected (Morrison, 2012).

This simplistic policy fails to promote the innovativeness that small players bring to the industry. Some of the areas where financial policymakers in China should focus their attention include encouraging private equity, promoting equity crowd-funding and offering bonds to small and medium firms. It would also help if the financial markets created an environment whereby community development and rural banking services can easily be rolled out. Some of these innovative economic policies have ensured the survival of other great economies such as those of the United States and the European Union.

Policymakers should find ways of alleviating the feared effects of job cuts that can deal with overcapacity. For instance, in 2014 it was expected that there would be approximately six million job cuts to deal with overcapacity (Yuan, Wang, & Dong, 2016). To protect citizens from these job cuts, China should initiate social programs such as the proposed Workers Fund. Furthermore, it would be helpful for China to create bilateral investment-projects in other countries across the world (Garnaut & Song, 2006, p. 67). This move will add on to China’s domestic capacity although it opens up the country to international competition. Finally, China needs to improve access to information for both its citizens and outsiders. Sometimes limitations to information access means that the situation on the ground is not reflected by media reporting among other avenues. Lack of secrecy in information handling might ensure that signs of overcapacity are known in advance.

In future, the Chinese economy might either suffer or gain from the problem of overcapacity. Eventually, the problem of overcapacity has become a lingering challenge to China’s economic welfare. However, it is up to the policy makers to make adjustments that specifically address this issue once and for all.

References

Chan, S., Han, G., & Zhang, W. (2016). How strong are the linkages between real estate and other sectors in China? Research in International Business and Finance, 36(2), 52-72.

Das, D. K. (2008). The Chinese economic renaissance. New York: Palgrave Macmillan.

Erturk, K. A. (2011). Overcapacity and the East Asian crisis. Journal of Post Keynesian Economics, 24(2), 253-275.

Garnaut, R., & Song, L. (2006). The turning point in China’s economic development. New York: ANU E Press.

Morrison, W. M. (2012). China’s economic conditions. Current Politics and Economics of Northern and Western Asia, 21(4), 289-290.

Toffler, A. (2013). Revolutionary wealth. New Perspectives Quarterly, 30(4), 122-130.

Yuan, J., Wang, Y., & Dong, L. (2016). Coal power overcapacity and investment bubble in China during 2015–2020. Energy Policy, 97(1), 136-144.

Zhang, H., Zheng, Y., & Li, S. (2016). The impact of subsidies on overcapacity: A comparison of wind and solar energy companies in China. Energy, 94(1), 821-827.

Zhou, K., & Yang, S. (2016). Emission reduction of China׳ s steel industry: Progress and challenges. Renewable and Sustainable Energy Reviews, 61(1), 319-327.

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Overcapacity as a Chinese Economy’s Challenge

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