Chinese Overcapacity and it Global Impact
U.S. Treasury Under Secretary Jay Shambaugh Warns of China's Growing Overcapacity Crisis and Its Global Economic Impacts
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Under Secretary Jay Shambaugh Warns of China's Growing Overcapacity and its Global Economic Impacts
What happened: On July 10, US Treasury Under Secretary for International Affairs Jay Shambaugh gave a speech at the Council on Foreign Relations on China's Overcapacity and the Global Economy. Shambaugh defined overcapacity as "production capacity in excess of domestic demand and untethered from global demand." He described China’s overcapacity as a product of China's economic structure and industrial subsidies. Regarding China's economic structure, Shambaugh pointed to China's high saving rate at twice the historical OECD average and low level of domestic consumption as leading to systemic overreliance on investment and exports to drive growth. Shambaugh also outlined the range and scale of China's subsidies across strategic sectors, which combined with China’s macroeconomic imbalances drives industrial overcapacity. As Shambaugh noted, the size of China's economy today means that it cannot expect to export its subsidized production globally, which would require other countries share of global manufacturing to shrink in response. In addition to the impact on manufacturing and jobs, Shambaugh noted that surging Chinese exports leads to a concentration of supply chains that reduces economic resilience. Shambaugh them outlined a test for identifying the sectors where overcapacity exists:
1. Supply rising faster than any plausible level of global demand
2. More lossmaking and inefficient firms
3. Low or declining capacity utilization
Shambaugh made it clear that China's overcapacity is a global issue affecting developed and developing countries. He noted that China recognizes the issue but has failed to address the problem and that overcapacity in China is increasing. Noting that restrictions on Chinese imports is one response to China’s overcapacity issue including anti-dumping and countervailing duties, but acknowledged that additional action might also be needed to protect firms and workers.
Why this matters: This was the first full explanation by a senior US government officials as to what the USG means by overcapacity and why Chinese overcapacity is a matter of US and global concern. Chinese officials have been pushing back recently against the notion that China has overcapacity. For instance, Deputy Finance Minister Lao Min following a meeting with US Treasury Secretary Janet Yellen said that so-called overcapacity is the result of the market mechanism, that overcapacity has appeared in the US and other countries in the past, and that looking at global demand for products such as EVs, there is no overcapacity. The remarks by Shambaugh therefore need to be seen as a US response to these Chinese remarks as well as an effort to explain to other governments why dealing with Chinese overcapacity is not just a US issue, but also a global issue. Indeed, overcapacity is already on the G7 agenda, where the G7 Finance Ministers in May this year agreed to “enhance cooperation to address non-market policies and practices and distortive policies including those leading to overcapacity”. The question still to be answered by either Shambaugh or the G7 is how best to respond to this challenge.
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