IMF warns of overcapacity in China’s manufacturing sector

The International Monetary Fund (IMF) has expressed concern about China’s manufacturing sector, highlighting the problem of overcapacity despite an overall improving economic outlook.

China last struggled with significant excess capacity between 2014 and 2016, following the massive stimulus packages introduced by Beijing and local governments during the global financial crisis of 2008-2009. The excess capacity was particularly pronounced in heavy industries such as iron, steel and aluminum.

In recent years, this problem has resurfaced due to the supply-demand imbalance exacerbated by the COVID-19 pandemic. Post-pandemic stimulus measures have failed to spur a sustained recovery in domestic demand, which has been exacerbated by challenges in the real estate sector.

Chinese companies are now producing far more than domestic consumption can absorb, resulting in surpluses and low factory utilization rates in industries such as machinery, food, textiles, chemicals, and pharmaceuticals. The housing crisis has also reduced demand for downstream products such as furniture, iron and steel products, plastics, and nonmetallic minerals.

Emerging industries, including electric vehicles (EVs) and clean technologies, also contributed to the country’s surplus. For example, capacity utilization rates for silicon wafers fell from 78% in 2019 to 57% in 2022. Similarly, China’s lithium-ion battery production in 2022 was 1.9 times the volume of batteries installed in the country. Reports indicate that China’s solar cell exports in 2023 were five times higher than in 2018 and 40% higher than in 2022. In 2023, China’s EV exports were seven times higher than in 2019 and 1.7 times higher year-on-year.

Protectionist measures against Chinese goods, typically seen in developed economies, are now spreading to some Asian countries. The United States has increased tariffs on strategic sectors such as steel, aluminum, semiconductors, batteries and solar cells, citing unfair trade practices by China. The European Commission has imposed temporary tariffs on Chinese electric cars to counter what it sees as unfair subsidies.

The influx of Chinese goods is also affecting ASEAN trading partners. For example, the Federation of Small and Medium-Sized Enterprises of Thailand has called on the Ministry of Commerce to review import tax rates and impose a value-added tax on Chinese products to protect local producers. Indonesia plans to impose import tariffs of between 100% and 200% on Chinese goods to mitigate the effects of the US-China trade war. Malaysian SMEs have raised concerns about the impact of Chinese companies on sectors such as low-value and technology goods, retail, trade services and construction.

China has been Malaysia’s largest trading partner since 2009. However, Malaysia has seen a widening trade deficit with China, which has increased more than twenty-fold from RM3.1 billion in 2012 to RM66.4 billion in 2023. While Malaysia’s exports to China increased by 6.1% per annum between 2011 and 2023, imports from China increased by 8.3% per annum, leading to a significant increase in the share of imports from 13.2% in 2011 to 21.3% in 2023.

Chinese investment in Malaysia’s manufacturing sector stood at RM74.2 billion as of December 2023, with Chinese companies operating across sectors such as manufacturing, IT, construction and food services. The impact of this investment on local businesses, particularly SMEs, has been a contentious issue, with debates over whether the benefits outweigh the competitive challenges.

Despite these challenges, China’s investment has brought benefits in terms of employment, technology transfer and infrastructure development. However, concerns about the net impact on domestic industries, particularly in low-tech, low-priced consumer goods via e-commerce platforms, persist.

To address the effects of overcapacity and domestic surpluses in China, several policy options have been proposed:

Trade defence instruments: Implement tariff barriers on Chinese products, although this may lead to retaliation and is not consistent with free trade practices under agreements such as the ASEAN-China Free Trade Agreement and the Regional Comprehensive Economic Partnership.
Local Content Requirements (LCR): promoting domestic industry and employment through mandatory measures that enforce the use of domestic products.
Balancing economic and geopolitical priorities: Policymakers must balance the need to invest in high-tech China with discouraging entry into low-tech industries that domestic SMEs can handle.
Negative list for foreign investment: Review and potential restriction of certain industries for foreign investment, including setting limits on the ability of foreign companies to sell goods on the domestic market.
Import substitution policy: reducing dependence on imports from China through fiscal incentives and promoting domestically produced goods.
Smart Partnerships: Encourage cooperation between domestic and Chinese enterprises to ensure win-win outcomes.

Lee Heng Guie, Executive Director of the Centre for Social and Economic Research, emphasises the importance of strategic policymaking in coping with the complexities of Chinese economic influence while supporting the country’s economic growth and resilience.

GDP (nominal)	Capital	Head of State	Prime Minister	GDP (nominal) per capita	GDP (PPP)	GDP (PPP)	GDP (PPP) per capita
China	Beijing	Xi Jinping	Li Qiang	17,700,899	12,541	35,004,000	23.309

Have you read it?
Countries most indebted to the International Monetary Fund (IMF).
The most successful unicorn startups.
The $100 Billion Club: The Richest People with Net Worth in 12 Figures.
The world’s largest electricity consumers, by country (in terawatt-hours).
Countries exporting the most goods and services.

Add CEOWORLD magazine to your Google News feed.

Follow CEOWORLD magazine’s headlines on: Google News, LinkedIn, Twitterand on Facebook.

Copyright 2024 The CEOWORLD magazine. All rights reserved. This material (or any portion thereof) may not be copied, distributed or posted on any website without the prior written consent of CEOWORLD magazine. For media inquiries, please contact: [email protected]