In November in Brussels, officials and experts from the EU and the United States were locked in a technical debate over a cryptic bit of economic jargon: global non-market overcapacity. The conference, organized by the European Commission, was designed to thrash out solutions to the problem of overcapacity in China’s economy and the second-order effects Europe fears. Decades of over-investment and state subsidies in China, weak domestic consumption, an addiction to manufacturing, crashing corporate profits, zombie companies that the state does not let die, and a superpower trade war have, the EU believes, created a perfect storm. China’s industrial overflows must go somewhere, probably at a discount, and the only logical destination is Europe, according to the EU Commission. European governments fear companies that make everything from industrial machinery and chemicals to hydrogen electrolysers and wind turbines will be eaten alive, industries decimated and jobs lost forever. They worry about a wave that could sweep populist parties to power in Europe’s hollowed-out manufacturing heartlands. They insist that Beijing should worry too, or face a European anti-China backlash similar to the one that has coursed through the United States over the last decade.
“We are seeing a new ‘China shock’ – as China’s economy slows down, Beijing floods global markets with subsidized overcapacity that its own market cannot absorb,” European Commission President Ursula von der Leyen said at the G7 meeting in Canada last week. Back at the Brussels forum on global non-market overcapacity last year, the discussion was becoming bogged down in terminology – “decreasing profit margins”, “returns on capital”, “underutilized assets” – when an arm shot up in the middle of the room. “I have to make some remarks, because China is the elephant in the room, and everything is about China on the agenda,” a Chinese diplomat said. The diplomat angrily disputed speakers’ remarks that there was deflation in China – despite official government data showing a 31st successive monthly fall in producer prices in May – and flatly denied that China’s industrial success was due to subsidies. The Chinese diplomat rejected the argument that overcapacity in China could be a problem for anyone, particularly in cleantech industries at a time of climate emergency. “There is no country which produces as they consume, otherwise, there will be no need for global trade, the challenge we’re facing in new energy sectors is not overcapacity, but undercapacity,” he said.
The word “overcapacity” has become a battleground in China’s rivalry with the West, and the episode in Brussels shows that the two sides have started airing their dirty laundry in public. After years of complaints, Europe has grown frustrated by Beijing’s lack of response. Chinese officials brush off EU grievances, pointing out that Germany exports more cars than Germans can drive, while Belgians could not possibly eat all the chocolate made there. A running joke in Brussels is that the official Chinese term for the trend is “so-called overcapacity”. “Western politicians and press have repeatedly hyped up the so-called Chinese ‘overcapacity’,” wrote Peng Gang of China’s Mission to the EU in an article for Euractiv, a Brussels media outlet. “Some Western countries, in order to protect their vested market shares and dominant positions hype up the ‘Chinese economic threat’ or Chinese ‘overcapacity’ by all means.”
In a highly polarized world, a seemingly innocuous economic term has become, in itself, a geopolitical tinderbox. Any mention of “overcapacity” is enough to get eyes rolling in some quarters, and not just in Beijing. Prominent Western critics insist it is an ideological stick with which to beat China. “We’re seeing the emergence, from the standpoint of the West, at least, of a country that is from outside the West, from the South, an economic threat. I definitely think there’s an ideological element behind these accusations of overcapacity,” said Jostein Hauge, an expert in development economics at Cambridge University, on a recent episode of the Sinica Podcast. Adam Tooze, a noted economic historian, told the South China Morning Post late last year it was “significant that the debate has come up at this moment, because it provides a kind of justification for industrial policy in the West”. He asked: “Why would you not simply take advantage of the subsidy that Chinese taxpayers effectively have provided to give us all really cheap vehicles?”
Part of the problem could lie with the imprecise nature of the term “overcapacity”. In Western discourse, the phrase has become a Frankenstein monster, a catch-all criticism for many of the structural issues critics do not like in China. Trey McArver, co-founder of the Trivium China consultancy, said it “has become a byword for either angst or anger regarding the Chinese economy”. “It’s applied in a lot of different instances, and it’s not applicable in every context in which it’s used. It is such a broad and abused term that it doesn’t help further productive discussions from a policy perspective about what the EU wants to achieve,” he said. Those gripes include opaque subsidies, zombie companies kept alive by local governments, an unwillingness to turbo-boost consumption, a proliferation of industrial policies throughout the country and, latterly, a group of highly competitive companies, many of which struggle to turn a profit in China.
“The way China does industrial policy leads to overcapacity,” said Bert Hofman, Adjunct Professor at the East Asian Institute at the National University of Singapore. “More importantly, it leads to inefficiencies – just look at profitability. Even BYD, the greatest success in electric vehicles, can barely make ends meet amid strong price competition. In the automotive industry, one-third of companies is making a loss,” said Hofman, who was previously World Bank Country Director in China. “There’s no formal definition for overcapacity and so that’s what makes it such a fraught, complicated term to use,” said Agatha Kratz, a China specialist at Rhodium Group, a research house whose work on the topic has been cited widely by Western officials pushing for China to change, and for Europe to act. Kratz pushed back strongly against the idea that an endless supply of Chinese cleantech products would be good for the world, even during a climate emergency, since it would kill European industries, the South China Morning Post reports.
