In China things are moving in the right direction

Written by YE Fujing, Economic advisor, Mission of the People’s Republic of China to the EU

China’s “overcapacity” is regularly making headlines with reports of China over-exporting, particularly in the steel sector, and allegedly dragging down the global economy.

These reports call for more careful examination.

To start, there should be no illusion regarding the problem: overcapacity, including excessive capacity of the steel sector, is an important global challenge – shared, but particularly acute in China. The Chinese economy is undoubtedly facing difficult times. Demand has shrunk with the decline of the global economy and China, the biggest supplier for the global market, is hit hard. However, overcapacity is not a new problem. Blaming China for a global problem fails to acknowledge how severe the problem is. China is in fact still one of the fastest growing economies in the world, contributing to over 20 percent of global economic growth.

Problems of a global nature require collaborative efforts. This is precisely why the Chinese Government has launched the “One Belt and One Road” (OBOR) initiative, with the aim of revitalizing global growth as well as that of China and its trading partners. This has now become one of China’s development priorities. OBOR is not designed as a new channel for Chinese exports – rather it sets up a broader platform for both North-South and South-South cooperation. At the current stage of industrialization, China’s production and equipment has moved to the higher end of the value chain, turning out high-quality and environmentally friendly products. This will help bring the global economy back on track.

OBOR has provided golden opportunities for China-EU cooperation. The initiative is a perfect match for the EU’s Investment Plan, The Joint Investment Fund and the Connectivity Platform that the two sides agreed to set up will generate products at the higher end of the value curve.

But what about China’s excess capacity? Is it really shipped abroad and dumped on other countries’ markets?

A closer look at the Chinese Government’s policies and practices reveals quite the opposite.

Since the second half of 2015, the Chinese Government has adopted a series of measures to cut overcapacity in a number of industries. The elimination of overcapacity is on the top of the agenda on the five priorities in the reform on the supply side. Last February, the State Council reviewed the effect of overcapacity and urged all authorities across the country to implement the directives and policies on capacity cut.

To be more specific, China has phased out outdated steel production capacity by more than 90 million tons in recent years and cut investment in iron and steel assets by 13% in 2015. Steel production capacity will be reduced by a further 100-150 million tons hence forth. Banks in China are strictly prohibited from providing loans to industries with excessive capacity, making it practically impossible for them to export their excessive products – essentially, the so-called ‘zombie enterprises’ –with redundant capacity–are exiting from the market. The threshold for approval of industries with new capacity is extremely high as well. In parallel, both state-owned enterprises and private sectors are encouraged to merge, not to expand but to consolidate and cut their capacity.

It might take some time before effects become apparent, as the market needs time to adjust to these changes and phase out excess production capacity. However, both the Central Government and local authorities in China have fully recognized the problem of overcapacity, taken it as a national priority and adopted crucial measures to solve it. Industrial expansion doesn’t continue in all sectors, and certainly not in the steel industry. China has surplus, yes, and more may need to be done, but things are moving in the right direction.

Finally, as Edocardo Campanella, a shortlisted author for the 2015 Bracken Bower Prize awarded by the Financial Times and McKinsey, argues in his latest article Misreading China’s Economy on Foreign Affairs, the analytical tools intellectuals now use to assess China’s economic performance have not caught up with the structural changes underway. The rapid growth of service trade, ten percent annual growth of domestic tourism and household income, the booming of the film industry and the digital economy all herald strength and resilience for the Chinese economy. We look forward to seeing more intellectuals challenging the conventional wisdom with an updated toolbox.