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REMARKS BY UNDER SECRETARY FOR INTERNATIONAL AFFAIRS JAY SHAMBAUGH ON CHINESE
OVERCAPACITY AND THE GLOBAL ECONOMY

U.S. Department of the Treasury sent this bulletin at 07/10/2024 12:30 PM EDT



U.S. Department of the Treasury

Office of Public Affairs

 

Press Release:             FOR IMMEDIATE RELEASE

July 10, 2024

 

Contact:                      Treasury Public Affairs; Press@Treasury.gov       
     

Remarks by Under Secretary for International Affairs Jay Shambaugh on Chinese
Overcapacity and the Global Economy

As Prepared for Delivery

Thank you, Rush, for the kind introduction.  And thank you to Mike Froman and
the Council on Foreign Relations for hosting me.

Few topics are a greater priority today – for the Biden administration in
general and the U.S. Treasury in particular – than our economic engagement with
China.  Underlying our responsible management of the economic relationship and
our goal of a healthy economic competition is the belief that we needed to
enhance communication, especially in areas where we disagree – something
President Biden made clear after his meeting with President Xi in late 2022.  In
a speech last year at SAIS, Secretary Yellen laid out three principal objectives
for our economic approach to China: first, securing U.S. national security
interests and protecting human rights; second, seeking a healthy economic
relationship with a level playing field; and third, cooperating in areas where
we can and must, such as climate change.  As U.S. lead for the Economic Working
Group between the U.S. and China, I have spent many hours in discussions with
Chinese counterparts toward achieving these three objectives.

Today, I will focus on the second of these objectives: our pursuit of a healthy
economic relationship between the U.S. and China with a level playing field for
American workers and firms.  Such a relationship could be beneficial to both
sides.  But we are growing concerned that China’s enduring macroeconomic
imbalances and non-market policies and practices pose a significant risk to
workers and business in the United States and rest of the world.  We are worried
these features of China’s economy can lead to industrial overcapacity that has
significant spillovers around the world and can compromise our collective supply
chain resilience given the resulting over-concentration in some manufacturing
sectors.   

Let me be clear – we remain fully supportive of trade, which obviously includes
countries exporting goods they produce.  But overcapacity is something
different: it is not just production in excess of domestic demand, it is
production capacity untethered from global demand. 

Overcapacity concerns and interventions are not new – but we are seeing a
resurgence of risks in new sectors.  Earlier rounds of overcapacity led to job
losses in the United States and shuttered American firms.  Given China’s size
today, spillovers from its economy will be even more consequential. 

That is why today I want to discuss what overcapacity is, what Chinese policies
cause it, where are we seeing it, the potential global spillovers, and how we
should respond.


CHINA’S MACROECONOMIC IMBALANCES AND GLOBAL SPILLOVERS

As an international macroeconomist, I have studied the economic relationship
between the United States and China for decades – both as an academic and as a
policy official.  And throughout this time, perhaps the defining characteristic
of this relationship has been macroeconomic imbalances and their effects.

Take, for example, China’s savings rate.  China has maintained an exceptionally
high savings rate for decades and over the past 20 years it has been roughly 45
to 50 percent of GDP.  That is more than twice the historical OECD average and
about 10-20 percentage points above comparator East Asian economies.  China
comprises 28 percent of total global savings, while only 18 percent of global
GDP.  The corollary of high savings is low levels of household consumption.  At
less than 40 percent of GDP, China’s consumption is low relative to other
countries at similar levels of income.  

It is textbook economics that these savings must be channeled somewhere, which
leaves the Chinese economy reliant on a combination of domestic investment and
foreign demand to drive growth.  The mix between these two factors has
fluctuated over time.  Twenty years ago, China relied on foreign demand and had
large growing current account surpluses.  In the last decade, Chinese investment
in infrastructure and real estate has absorbed much of the savings.  But the
recent downturn in China’s property sector and the underperformance of its
domestic economy raises questions about the drivers of future growth – and, in
particular, China’s likely reliance on foreign demand to sustain its growth
going forward. 

When China relies on foreign demand for growth, and especially when sectoral
trade surpluses grow rapidly, the resultant loss of jobs and reduced wages can
create lasting and significant damage to individuals and communities around the
world, particularly those with low incomes.  We are all familiar with the
so-called “China shock” that has hit workers and businesses not only in America
but across the globe.  For example, from 2008 to 2013, China’s push in solar
panel manufacturing contributed to an 80 percent decline in international prices
and led to bankruptcies and firm closures in the United States and Europe, while
Chinese solar output continued to expand on the back of $18 billion in
below-market loans.[1]  In the steel sector, from 2000 to 2015, China added over
eight hundred million tons of steelmaking capacity, and Chinese production
volume eclipsed the total volume produced by the rest of the world.[2]  When
Chinese consumption stalled but production did not, this depressed prices to
record lows, reduced utilization rates of foreign steel producers, and
contributed to the loss of nearly 100,000 jobs in the U.S alone.[3]

Now, China’s economic size exacerbates this challenge.  A 3 percent current
account surplus for China today would be almost the same share of global GDP as
a 10 percent surplus back in 2007.  China cannot rely on global growth the way
it did from 1990 to 2010; it is simply too big an economy today.  China’s share
of global manufacturing is already 30 percent.  As seen in Figure 1, China’s
manufacturing trade surplus as a share of world GDP is large and has risen
rapidly, at almost 2 percent.  That is more than the combined share of Japan and
Germany’s manufacturing surpluses at their peaks. 

Chinese policymakers’ clear preference today is to push manufacturing even
further as China’s growth driver, which means taking on an increasingly outsized
share of global production – with other countries’ manufacturing sectors needing
to shrink to compensate.

China’s size means that its imbalances pose an even greater risk to the global
economy.  A small economy exports at the world price, but a large one –
especially with a dominant market position – can shift global prices and leave
the rest of the world to deal with the consequences.  When Chinese production is
growing faster than its own demand or that of the global economy, the rest of
the world cannot absorb China’s increase in manufacturing production without
being forced to adjust.  These conditions would not appear in a normal, market
economy.  What we are seeing is a fundamental distortion, driven by government
policy.


IMBALANCES AND OVERCAPACITY

China’s large imbalances have spillovers on their own, but China’s non-market
policies and practices amplify this effect by distorting markets, undercutting
fair competition, and concentrating the spillovers into certain sectors.  In
particular, the combination of China’s enduring macroeconomic imbalances and
large-scale government support to specific industrial sectors drive industrial
overcapacity. 

The scale of this support is striking: China’s industrial subsidies are simply
much larger than those of other countries.  The Center for Strategic and
International Studies concludes that China spends roughly 5 percent of GDP on
industrial subsidies, 10 times as much as the United States, Brazil, Germany,
and Japan.[4]  In sectors like semiconductors, steel, and aluminum, China alone
accounts for between 80 and 90 percent of global subsidies provided to those
industries.[5]   China’s subsidies are opaque but emerging patterns suggest the
size of subsidies in China is only increasing, especially at local and
provincial levels.  State-supported investment is surging to strategically
important industries and companies, and there are new tools to steer commercial
activities, including the use of structural monetary policy tools to advance
industrial policy objectives.  The central government, local governments,
state-owned firms, and the private sector all play a key role in furthering the
government’s industrial policy agenda.  

Notably, "Government Guidance Funds" or "Government Investment Funds" continue
to use public resources to make equity investments in industries and activities
that the Government considers important, with very limited transparency.
 Academic studies estimate these funds have provided more than $1 trillion in
capital and guarantees to over 28,000 mostly private companies from 2000 to
2018.[6]  One of these government guidance funds – of which there are over 2,000
at the national and subnational levels – specifically targets the semiconductor
sector and is larger than the entire CHIPS & Science Act.  Other large-scale
initiatives, including the “Little Giants” and “Single Champion”, demonstrate
that China’s private sector does not solely operate through market forces – but
rather benefit from the network of government guidance funds, state-owned banks,
and SOEs who serve as financiers and customers to private firms.

These practices channel China’s vast savings into certain sectors, as directed
by Beijing.  China’s “Made in China 2025” was launched in 2015 to promote
certain strategic sectors.  As seen in

Figure 2, China has successfully promoted the exports of and discouraged imports
of “strategic sectors” as defined by the 2015 policy, with notable results.
 Imports have been falling as a share of China’s economy, but even more in
strategic sectors.  And, while non-strategic sector exports fell as a share of
China’s economy, exports in strategic sectors grew.

Today, China’s push on manufacturing to drive growth is translating to an
apparent surge in lending to industrial sectors, mirroring a decline in lending
to real estate sectors (Figure 3).  At the same time, growth in China’s export
volumes is rising faster than total export values (calculated in USD), rising
11.5% versus 1.5%, respectively, in the first quarter of 2024 compared to the
previous year.  Increases in export volume were particularly high for electric
vehicles (+20%), solar batteries (+30%), and semiconductors (+25%), while
overall export prices have fallen significantly since the beginning of 2023.  

In today’s interconnected economy, such overcapacity can also lead to the
concentration of supply chains in ways that ultimately reduce economic
resilience.  As evidenced by the personal protective equipment (PPE) supply
chain disruptions during the pandemic, significant concentrations of supply
chains in a single country increases the risks of disruptions.  We see sectors
such as solar panel manufacturing, critical minerals processing, permanent
magnets, that are heavily concentrated in China.  This is not just an issue for
the United States or other advanced economies, emerging markets have seen their
import concentration from China increased in recent years.[7]


DEFINING OVERCAPACITY

But what do we as policymakers mean when we talk about Chinese overcapacity? 
Defined most simply, it is production capacity in excess of domestic demand and
untethered from global demand – and we are concerned about the patterns of
overinvestment and state support driving it.  While periodic surpluses can occur
within natural business cycles, we are concerned about structural overcapacity,
which stems from persistent patterns of overinvestment and is facilitated by
extensive state support.

There is no single test or condition that indicates overcapacity.  We cannot
simply put in a few statistics about a sector and get a thumbs up or down of
whether overcapacity exists.  Instead, I will outline three sets of indicators,
or “warning signs.”  

The first metric is whether expansion in production capacity is growing faster
than even the most ambitious demand projections.

The second is rate of lossmaking and inefficient firms.  The widespread presence
of such firms reflects limited or slow adjustment to changing market conditions
and a deteriorating ability to translate investment into revenue.  Rising
production and investment alongside these indicators would suggest overcapacity.

And third, low or sharply declining capacity utilization rates.  Sustained low
utilization rates strain profitability of firms and imply the existence of
surplus capacity. 

None of these metrics are definitive or dispositive on their own, and
overcapacity can exist without some of these indicators.  For example, with
enough subsidies, capacity utilization might be quite high despite excess
production.  But together they provide an analytical foundation for identifying
overcapacity.  And on each metric, we are seeing persuasive evidence of not only
Chinese overcapacity, but the clear link to the policies driving it. 

In China’s case, sectoral conditions are exacerbated by non-market policies and
practices, which break the link between company behavior and market forces, and
enable these companies to sell goods overseas at prices that are below what
their market-driven competitors are able to offer.  This then enables the
company that has benefited from such government support to grow their market
share, potentially leading to over-concentration on a few suppliers.

 1. Supply rising faster than any plausible level of global demand

First, in certain sectors, Chinese capacity is rising faster than any plausible
level of global demand (Figure 4).  

For example, China’s production capacity in lithium-ion batteries and solar
modules is set to exceed projected global demand by 2 to 3 times over the next
few years compared to what is necessary to achieve a path to net-zero emissions
by 2050.[8]  Similarly, China's planned production capacity for EVs in 2030 is
set to reach over 70 million vehicles, while global EV sales are estimated to
only reach 44 million in that year. [9]  

These figures rely heavily on projections of future supply and demand, which may
change.  We are assuming that demand will not rise more rapidly than needed
under net-zero scenarios.  If global prices were to decline due to falling
Chinese export prices, demand for Chinese goods would rise, but such low prices
would likely eliminate production outside China.

 2. More lossmaking and inefficient firms

Second, though the presence of lossmaking firms and low returns to investment
can be natural in new or transforming industries, the presence of lossmaking
firms in China is found even among mature industries.  Firms losing money should
go out of business, not continue producing and adding to supply.  But, if
subsidies or other support from government (including local governments loathe
to see an industry leave its borders) prop the firm up, it can stay in business
far longer.

The share of lossmaking industrial firms in China is at its highest level in
recent years, and the total number of lossmaking industrial firms is at its
highest point since the 1990s, as seen in Figure 5.[10]  Further, indicators of
capital efficiency have declined over the past ten years across all sub-sectors
with available data (Figure 6).

Lossmaking is especially pronounced in China’s auto industry.  The share of
publicly-traded loss-making firms in the auto industry was 28 percent, outpacing
the economy-wide average of 20 percent in 2022.  Within the subset of Chinese EV
manufactures, only a handful are currently profitable, and these few firms are
now facing intense margin pressure.[11]

 3. Low or Declining Capacity Utilization

And the third metric is low or declining rates of capacity utilization.  Of
course, capacity utilization rates can fluctuate with the business cycle, but
that cannot fully explain the consistently low rates seen in many of the Chinese
manufacturing sectors.  Data from the first quarter of 2024 shows China’s
manufacturing capacity utilization rate has fallen to its lowest point since
2016 at 73.8% (Figure 7), while the capacity utilization rate of OECD countries
typically has remained around 80%.[12]  

This decline was particularly pronounced for sectors that Beijing prioritizes,
including in automobiles, solar panels, and semiconductors (Figure 8).
 Utilization rates for finished solar panel production tumbled to 23% in
February 2024, down from more than 60% a year earlier.[13] And the IEA estimates
that last year, China’s battery output was less than 50% of total production
capacity.[14]

For cars, China’s capacity utilization rates have exhibited a consistent
downward trend since its 2017 peak of nearly 85% and fell to 65% in the first
quarter of 2024, even while auto production increased.[15]  While top companies
such as BYD are reportedly operating at above 80%, analyst reporting showed the
average capacity utilization rate for new energy vehicles in 2023 was less than
50%.[16]

China’s Actions and Counter Argument

Some Chinese officials have argued publicly that other economies have production
in excess of domestic demand and this is a normal part of trade.  As I said
earlier, our concern is not about exports or even Chinese firms having a
comparative advantage in some areas.  It is that the breadth of China’s
government support means that production does not respond to global market
demand.  The United States and many other market economies have successful
export sectors, but our firms have incentives to respond to market signals. 
During a global downturn, adjustment falls first and foremost on market
economies.

Chinese firms guided and supported by the government will expand production,
face domestic market saturation, and then resort to exporting excess production
at below-market prices.  Chinese production is also less responsive during a
downturn.  Rather than decreasing production or undergoing industry
consolidation, Chinese industries can often maintain production, pushing excess
supply abroad.  In both cases, the results are similar: overcapacity distorts
global prices, threatens the long-term viability of foreign competitors, and
shifts adjustment onto foreign countries, advanced and developing economies
alike.  Another helpful indicator of overcapacity is how other countries are
responding.  Rising cases of antidumping being brought against firms from a
particular country may suggest that its firms are selling at prices below cost
or normal market conditions.

Chinese government support comes from a broad range of government bodies.  We
have seen time and time again examples of Beijing announcing a new priority, and
then the state actors across the country rushes to support it.  This will mean
central government, provincial, or city-level support, amplified by state owned
banks, for that locality’s specific champion or champions, leading to a rapid
and broad-based expansion of production in that politically important sector.


TOOLS FOR RESPONDING TO OVERCAPACITY CONCERNS

China’s imbalances and their spillovers have not gone unnoticed – Secretary
Yellen has consistently raised China’s unfair economic practices and
overcapacity concerns with her counterparts, from her first visit to Beijing
last year to their recent meetings in April.  The Biden Administration has taken
important steps to level the playing field, using a range of tools to protect
American manufacturers who are subject to unfair and heavily subsidized
competition.  This includes ongoing diplomatic engagement with Chinese
counterparts, including through the Economic Working Group; historic investments
under the CHIPS Act, the Bipartisan Infrastructure Law, and the Inflation
Reduction Act; and trade enforcement, including the revised Section 301 tariffs
or actions involving anti-dumping or countervailing duties.

The results of the Section 301 review outlined strategic and targeted steps that
are needed to respond to specific long-standing unreasonable trade practices
related to forced technology transfer by China.  In crafting the tariff regime
to achieve this objective, President Biden directed USTR to raise tariffs on $18
billion of imports in sectors where we are looking to preserve and increase
supply chain resilience and protect American workers in the face of unfair
Chinese production.  Along with our interagency colleagues, we will continue to
monitor and respond to China’s use of non-market policies and practices and use
the tools at our disposal to secure fair competition.

We are not isolated in seeking to address negative spillovers from China’s
non-market practices.  The EU and Turkey have also recently imposed tariffs on
Chinese EV imports; Mexico, Chile, and Brazil have taken trade actions on
Chinese steel; and India uses tariffs and other trade tools to defend its solar
manufacturers from Chinese dumping.  And while each country had their own
concerns and needs, the underlying reason is undeniable.  As the G7 Leaders and
Finance Ministers have stated – China’s overcapacity “undermines our workers,
industries, and economic resilience and security.”  The United States will act,
and we won’t be alone.


CONCLUSION

Let me conclude with a broader perspective. 

First, overcapacity concerns are not new, and China is not blind to them.  In
the past, China has acknowledged excess capacity in several industries,
including steel, cement, and glass.  And more recently, Chinese officials have
publicly acknowledged overcapacity as a risk to sustained economic recovery
during their Congress’s annual meetings in March and their Central Economic Work
Conference last December. Continued production beyond what a market can bear is
an inefficient waste of resources.  Reigning in overcapacity could be good for
China, boosting productivity and efficiency.  However, their efforts from prior
years to address overcapacity in a small number of sectors are being reversed,
and overcapacity is clearly growing.

Second, this a global issue. The United States, along with our allies and
partners in developing economies and advanced economies alike, share mutual
objectives to address China’s policies that have negative economic spillovers to
our firms, workers, and economic resilience. 

Third, addressing these challenges may warrant our taking defensive action to
protect our firms and workers – and the traditional toolkit of trade actions may
not be sufficient. More creative approaches may be necessary to mitigate the
impacts of China’s overcapacity. We should be clear: defense against
overcapacity or dumping is not protectionist or anti-trade, it is an attempt to
safeguard firms and workers from distortions in another economy.

The best outcome, though, would be for China to acknowledge the growing concerns
among its major trading partners and work with us to address them. We will take
defensive action if needed, but we would prefer for China to take action itself
to address the macroeconomic and structural forces that are generating the
potential for a second “China shock” for its major trading partners. China could
boost consumption by strengthening its safety net, increasing household incomes,
reforming its internal migration rules. It could better support services, not
just manufacturing. It could reduce harmful and wasteful subsidies. These would
all be in China’s interest and reduce tensions.

As I described earlier, the Treasury Department has shared these concerns
through regular engagements with our Chinese counterparts. We have advocated for
specific steps to ensure American workers and firms are treated fairly, and we
will continue to work bilaterally toward a healthy economic relationship that
benefits both countries.

Thank you.


[GRAPHS]

Figure 1. 

 

 

 

Figure 2. 



 

Figure 3.



 

 

Figure 4. 

 



Figure 5.



Figure 6.



Figure 7.



Figure 8.

 



--------------------------------------------------------------------------------

[1] Suntech, Owing Millions, Faces a Takeover.  NYT, March 2013.

[2] World Steel Association.

[3] Bureau of Labor Statistics.

[4] Red Ink: Estimating Chinese Industrial Policy Spending in Comparative
Perspective (csis.org), and Big Spender - The Wire China

[5] Government support in industrial sectors: A synthesis report | en | OECD

[6] Government as an Equity Investor: Evidence from Chinese Government Venture
Capital through Cycles by Jinlin Li :: SSRN

[7] Rhodium Group, How China's Overcapacity Holds Back Emerging Economies

[8] BloombergNEF

[9] China's EV overcapacity spurs global fears of more price cuts - Nikkei Asia

[10] National Bureau of Labor Statistics.

[11] Li Auto Profit Fell on Higher Operating Expenses.  WSJ, May 2024

[12] China National Bureau of Statistics, Trading Economics.

[13] China solar industry faces shakeout, but rock-bottom prices to persist |
Reuters

[14] Global EV Outlook 2024 (iea.blob.core.windows.net), pg.81.

[15] CEIC via Haver

[16] China's underutilized factories fan export dump fears in U.S. and Europe -
Nikkei Asia.

###

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