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Why Chinese overcapacity is seen as a geopolitical threat
Why Chinese overcapacity is seen as a geopolitical threat

Yahoo

time5 days ago

  • Business
  • Yahoo

Why Chinese overcapacity is seen as a geopolitical threat

-- China's industrial overcapacity is now viewed not just as a source of global disinflation, but as a growing geopolitical threat, according to Capital Economics. While recent U.S. inflation data show tariffs under President Trump are starting to lift prices (Capital Economics expects core goods inflation to reach 4.4% by year-end), the far more significant development is unfolding in China, said the firm. 'The real action in global goods inflation – or, more precisely, disinflation – is unfolding not in America, but in China,' the analysts wrote. Capital Economics explained that China's export prices have plunged over 20% since their pandemic-era peak, reducing goods prices in advanced economies by around 0.4 percentage points. They added that factory gate prices for consumer durables are falling at their fastest pace since the 2009 financial crisis. But this isn't due to productivity gains. 'Vicious price wars are raging across Chinese industry as firms fight to maintain market share and offload excess capacity,' Capital Economics explained. The analysts believe Beijing is trying to end what it calls 'disorderly competition,' but the problem is said to be structural. Capital Economics says China's investment-heavy growth model, where investment still accounts for roughly 40% of GDP, is leading to 'chronic overcapacity, wafer-thin margins and ever-diminishing returns.' With consumption weak and real estate in decline, excess capacity is reportedly flooding global markets. 'One estimate suggests as many as 30% of China's manufacturers are now losing money,' sustained only by local government support and soft loans, commented Capital Economics. This has triggered alarm not just in Washington, but in Brussels, Tokyo and emerging markets, stated the firm. 'What was once an engine of global growth is fast becoming a source of geopolitical friction,' Capital Economics concluded, warning that China's current model now threatens global economic stability and order. Related articles Why Chinese overcapacity is seen as a geopolitical threat Apollo economist warns: AI bubble now bigger than 1990s tech mania If Powell goes, does Fed trust go with him? Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data

China Communist Party magazine calls for crackdown on price wars
China Communist Party magazine calls for crackdown on price wars

Reuters

time02-07-2025

  • Business
  • Reuters

China Communist Party magazine calls for crackdown on price wars

HONG KONG, July 2 (Reuters) - A prominent Chinese Communist Party publication called for a crackdown on forms of competition that fuel price wars and squeeze profits in various industries, criticising big firms and local governments for unfair practices. In the most strongly-worded Communist Party warning yet on the risks of industrial overcapacity, the Qiushi article on Tuesday said the phenomenon brings "enormous waste of social resources," and unsustainable debt that could endanger long-term growth. The article, written under a pseudonym, focused on "involutionary competition" in which it said firms and local governments invest vast amounts of capital to chase market share in an environment of limited demand, while failing to achieve revenue growth. It singled out industries such as photovoltaics, lithium batteries, electric vehicles, and e-commerce platforms. To cut costs, some companies compromise on product quality, Qiushi said, disincentivising innovation and investment in research and development and harming consumer interests as "bad money drives out good money." Other firms are using resources to expand capacity, while delaying payments to suppliers and contractors, squeezing the entire industrial chain. E-commerce platforms compete on prices by using their advantageous position to transfer pressure on the merchants using them to get through to customers, Qiushi said. The magazine also offered some rare criticism of local officials, accusing them of both "absence and overreach." Officials should step in more as regulations have not kept up with the development of new industries and business models, it said. Bankruptcy mechanisms are also "imperfect," preventing curbs to excessive supply. On the other hand, some local governments, focused on short-term growth, attract investment by "artificially creating policy havens" with preferential taxes, fees, subsidies and land use, as well as protectionist measures. Many economists have warned Beijing for years that high levels of state-guided investment and subdued domestic demand - caused in part by a feeble social safety net and deep rural-urban inequalities - leave China overly dependent on exports for growth, and pose debt and deflation risks similar to what Japan experienced in the 1990s. Qiushi did not mention deflation, but warned that China might suffer from "development model path dependence" and needed supply-side reforms that reduce excess industrial capacity and a strategy to expand domestic demand. It warned, however, that this would take time. "Rectifying 'involutionary' competition is a complex systematic engineering project that cannot be accomplished overnight or with a single decisive move," the magazine wrote.

China Communist Party magazine calls for crackdown on price wars
China Communist Party magazine calls for crackdown on price wars

Yahoo

time02-07-2025

  • Business
  • Yahoo

China Communist Party magazine calls for crackdown on price wars

HONG KONG (Reuters) -A prominent Chinese Communist Party publication called for a crackdown on forms of competition that fuel price wars and squeeze profits in various industries, criticising big firms and local governments for unfair practices. In the most strongly-worded Communist Party warning yet on the risks of industrial overcapacity, the Qiushi article on Tuesday said the phenomenon brings "enormous waste of social resources," and unsustainable debt that could endanger long-term growth. The article, written under a pseudonym, focused on "involutionary competition" in which it said firms and local governments invest vast amounts of capital to chase market share in an environment of limited demand, while failing to achieve revenue growth. It singled out industries such as photovoltaics, lithium batteries, electric vehicles, and e-commerce platforms. To cut costs, some companies compromise on product quality, Qiushi said, disincentivising innovation and investment in research and development and harming consumer interests as "bad money drives out good money." Other firms are using resources to expand capacity, while delaying payments to suppliers and contractors, squeezing the entire industrial chain. E-commerce platforms compete on prices by using their advantageous position to transfer pressure on the merchants using them to get through to customers, Qiushi said. The magazine also offered some rare criticism of local officials, accusing them of both "absence and overreach." Officials should step in more as regulations have not kept up with the development of new industries and business models, it said. Bankruptcy mechanisms are also "imperfect," preventing curbs to excessive supply. On the other hand, some local governments, focused on short-term growth, attract investment by "artificially creating policy havens" with preferential taxes, fees, subsidies and land use, as well as protectionist measures. Many economists have warned Beijing for years that high levels of state-guided investment and subdued domestic demand - caused in part by a feeble social safety net and deep rural-urban inequalities - leave China overly dependent on exports for growth, and pose debt and deflation risks similar to what Japan experienced in the 1990s. Qiushi did not mention deflation, but warned that China might suffer from "development model path dependence" and needed supply-side reforms that reduce excess industrial capacity and a strategy to expand domestic demand. It warned, however, that this would take time. "Rectifying 'involutionary' competition is a complex systematic engineering project that cannot be accomplished overnight or with a single decisive move," the magazine wrote. (Writing by Marius ZahariaEditing by Shri Navaratnam) Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data

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