Overcapacity and Price Wars

China’s deflationary spiral now entering a dangerous new stage

Overcapacity is everywhere in Chinese industry. Rather than a sign of economic strength and success for Xi Jinping’s industrial policy, this reflects extreme and self-destructive imbalances in the economy, which economists are describing as a form of “neijuan” (involution) or self-harming competition. The number of loss-making Chinese companies has surged by 44 percent in the first half of 2024, according to a study of 500,000 companies by the National Bureau of Statistics. This eclipses the previous recorded peak in 1998, during the so-called Asian Crisis.

These ‘zombie’ companies now account for around 30 percent of all industrial companies in China, up from 7 percent in 2019. This has been accompanied by plant shutdowns and mass layoffs in many sectors including electric vehicles (EVs) and other “new quality productive forces” – sectors incessantly hyped by Xi Jinping as we saw at the CCP’s recent Third Plenum.

“In 2023, just 20 of China’s 77 automakers reported above-60 percent utilisation levels,” reported the South China Morning Post (14 May). Less than half of last year’s car production capacity of 55 million vehicles was used, it said. During the first quarter of this year the situation has gotten worse. NBS data shows that vehicles and green energy equipment manufacturing were among the sectors suffering steep drops in capacity utilisation.

Low capacity-utilisation ratios now bedevil sectors including electronics, pharmaceuticals, building materials and the food and beverage industry. Most extreme is the situation in solar panels, gasoline-driven vehicles, petrochemicals, chips and lithium batteries. The Economist (8 August) reported an ongoing shakeout in China’s semiconductor industry: “In 2023 nearly 11,000 chip-related firms went out of business, roughly 30 a day.”

Another example is the robotics industry, where China now has massive excess capacity in the manufacture of low-end robots, but is still heavily dependent on imported technology and components for more advanced robots.

Under the guiding hand of the CCP-state, Chinese capitalism has swung convulsively from one speculative financial bubble to another. From the world’s biggest property bubble, now a huge black hole that sucks life out of China’s economy, it is inflating a new mega bubble through vast amounts of debt-fuelled investment in manufacturing capacity.

The structure of China’s state-guided capitalism relies on fierce competition between provinces and cities to establish themselves as production hubs to gain from the economic priorities laid down by Beijing. This leads to blind, duplicative and uncoordinated expansion, the opposite of the planned development under public ownership and control that socialists stand for. The result is “a hard-to-reverse overcapacity trap” according to Zongyuan Zoe Liu in Foreign Affairs.

While this is not exactly analogous to the speculative bubbles associated with the West’s financialised capitalism, almost completely divorced from production, investments in the real economy can be hugely speculative under capitalism. The bursting of the US railway-investment bubble in the 1870s caused a financial crisis and industrial depression.

‘Great Leap’

The CCP’s reckless ‘Great Leap’-style industrial policy is driven by economic and geopolitical pressures. It is an attempt to negate the effects of the property collapse and avoid a deeper economic slump. It is also a desperate dash to achieve supply chain and technological self-sufficiency as a counterweight to US-led strategic containment and decoupling.

These policies are massively exacerbating the contradictions of Chinese capitalism – creating deflation, an even bigger debt overhang, and the growing risk of a banking crisis. The most likely breaking point is China’s heavily-indebted local governments, which bore the brunt of the property crash and are now overexposed to the crisis of industrial overcapacity.

China’s domestic market is saturated and cannot absorb the products its factories are making. This forces companies to engage in vicious price wars. Attempts to redirect the excess production into exports are inflaming imperialist tensions and smashing into protectionist walls. At the G7 meeting in Italy in April, the leaders of the de facto Western Cold War bloc took aim at “China’s non-market policies and practises” and “harmful overcapacity”.

This of course weaponizes the issue as part of the imperialist US-China conflict. New trade wars, potentially dwarfing anything seen since the 1930s, are being prepared by governments in America, Europe but even in Asia. Rising protectionism goes hand-in-glove with a big increase in ‘state capitalist’ interventions. Last year, the IMF reported, there were more than 2,500 industrial policy interventions worldwide, mostly in the US, Europe and China. Undergirding this shift is the imperialist bloc conflict.

Rising militarism and preparations for a “war economy”, if not yet for war, spurs the US and other Western governments to try to rebuild their depleted industrial base. The same logic drives Xi’s obsessive quest for self-sufficiency in “new quality productive forces”.

As China’s exports are re-routed from Western markets to the so-called Global South, it faces an upsurge in trade restrictions even from these “friendly” governments. Vietnam, Thailand and Malaysia have recently announced anti-dumping investigations against China, while Indonesia has threatened to impose up to 200 percent tariffs on some goods.

New debt record

Deflation is wiping out the Chinese capitalists’ profits and creating ‘zombie’ companies, which struggle to generate enough income to service debt payments. Consequently, China’s debt crisis is climbing to the next level.

In June, debt-to-GDP stood at 307 percent compared to 299 percent at the end of 2023, according to data from the People’s Bank of China and NBS. So much for the CCP’s talk of “deleveraging”. Outwardly, Xi’s regime flatly denies there is a problem with overcapacity. Despite its rebuttals in meetings with foreign officials, the CCP regime knows it has a serious issue of overcapacity. In July, the minutes of the Politburo said the country must avoid “neijuan-style vicious competition”.

These are all signs that China is teetering on the brink of a deflationary trap, which in Japan’s case resulted in decades of economic stagnation. Consumer prices in China are basically flat, while factory gate prices have fallen uninterruptedly for 20 months. The recent Third Plenum of the CCP reaffirmed these policies (more half-speed factories, more ‘zombie’ companies, more debt) signalling no fundamental change of course. Secondary opportunistic retreats and zigzags are inevitable however as we see in the “rehabilitation” of the private tutoring sector and reversal of many controls in the real estate sector.

For capitalism, deflation is a more serious sickness even than inflation. It is harder to get rid of deflation. It becomes a self-reinforcing cycle, reducing the capitalists’ will to invest and consumers’ ability to spend as wages are held down. With deflation, capitalism’s traditional so-called macroeconomic tools are largely ineffective. To purge inflation from the economy, a central bank will push up interest rates, sometimes to extreme levels as in Russia today (18 percent). But interest rates are much less effective against deflation. Source

China’s deflationary spiral now entering dangerous new stage

BEIJING - Deflation stalking China since 2023 is now showing signs of spiralling, threatening to worsen the outlook for the world’s second-largest economy and raising calls for immediate policy action.

“We are definitely in deflation and probably going through the second stage of deflation,” said Mr Robin Xing, chief China economist at Morgan Stanley, citing evidence from wage decreases. “Experience from Japan suggests that the longer deflation drags on, the more stimulus China will eventually need to break the debt-deflation challenge.”

The danger for China is deflation could snowball by encouraging households reeling from falling pay cheques to cut back on spending, or delay purchases because they expect prices to fall further. Corporate revenues will suffer, stifling investment and leading to further salary cuts and layoffs, bankrupting families and firms.

Private surveys show that is already starting to happen. In sectors of the economy favoured by the government – such as electric vehicle manufacturing and renewables – entry level salaries declined by almost 10 per cent in August from a peak in 2022, according to findings by Caixin Insight Group and Business Big Data. Read More

China’s ‘Japanification’ worse than Japan’s

“Perhaps even more difficult” than Japan in the 1990s – that is the verdict of Lu Ting, chief China economist at Japanese bank Nomura. Japan has suffered more than three “lost decades” of low growth, rising debt and falling prices (deflation).

Many of these cities are now shrinking which aggravates the mismatch between excessive housing supply and weak demand. There are 71 tier 3 cities with a combined population of over 300 million. In 2021, these cities suffered a combined population loss of 2 percent (around six million people) in a single year.

Japan’s real estate bubble was mainly concentrated in its six largest metropolitan areas and applied mostly to the commercial property sector. By contrast, as Lu explained, China’s collapsed property bubble is manifested mainly in the residential sector. It is therefore much bigger and more directly impacts the population at large.

Crisis worsens

China’s property crisis has continued to worsen this year, defying predictions from global capitalist agencies and the CCP regime that it would stabilise. New construction starts fell 24 percent year-on-year in the first half of this year, following year-on-year declines of 21 percent in 2023 and 39 percent in 2022, according to the Financial Times. Read More

Hello China Trolls!!! hahaha your country is F789ED!!!

China new home prices fall at fastest pace in over 9 years in Aug

China's new home prices fell at the fastest pace in more than nine years in August, official data showed on Saturday, as supportive measures failed to spur a meaningful recovery in the property sector.

New home prices were down 5.3% from a year earlier, the fastest pace since May 2015, compared with a 4.9% slide in July, according to Reuters calculations based on National Bureau of Statistics (NBS) data.

China new home prices fall at fastest pace in over 9 years in Aug | Reuters

Hopefully The Ultimate Extinction Plan can be completed before China collapses taking down the global economy and sending 8 billion angry, starving humans onto the streets to rip each others faces off.