China’s economic crisis

After the pandemic, most of the world began its economic recovery. Most of the world expected that China’s economic growth would rapidly reach its former status as one of the world’s leading economies. However, the Chinese recovery never happened.

In July of this year, official Chinese data showed that the country’s economic growth had fallen behind the government’s economic target.

Aside from its weak GDP performance, China showed that there was a drastic fall in consumer confidence and a massive downturn in property prices that has caused some of the largest state companies to default on their loans.

The Chinese government, which really means the Communist Party, has taken drastic steps to reignite its economic growth. Many Western observers have pointed out that the steps taken by Xi Jinping have actually exacerbated the situation. It seems that China’s main solution is to increase its industrialization and investments in more infrastructure. Beijing’s industrial policies have led to over-investment in manufacturing, which has led to huge debt burdens for Chinese local governments and business firms. China is producing far more output than the domestic economy can absorb. As in the past, it has turned to foreign markets to absorb its excess production.

However, in the last few years, foreign nations, especially the relatively rich Western countries, have started countering the overflow of Chinese exports of cheap products, many of them even being sold for below the break-even point.

In December 2023, European Commission President Ursula von der Leyen warned that excess Chinese production was causing unsustainable trade imbalances and accused Beijing of engaging in unfair trade practices by exporting ever greater quantities of Chinese products into the European market at cutthroat prices.

Last April, US Treasury Secretary Janet Yellen warned: “China is now simply too large for the rest of the world to absorb this enormous capacity.” The Chinese government continues to raise production targets for many goods even when current levels already exceed the demand.

One explanation has been that the Communist Party has had a long tradition of centralized economic planning that has given much more emphasis to industrial production and infrastructure development while ignoring household consumption.

It has been explained that the Chinese Communist Party sees household consumption as an individualistic distraction that threatens to divert resources away from China’s core strength, which is its industrial base. This is a longstanding economic vision of the CCP which seems to go back all the way to the days of Mao Zedong.

At the same time, the CCP has allowed cheap financing that allows business firms to survive. Under Xi Jinping, the business sector has become more tightly bound and even subservient to the interests of the Communist Party. While China has tried to solve its overcapacity problem by pushing cheap exports to the Western countries, Xi Jinping has started emphasizing its strategy of making China economically self-sufficient.

The Western economies naturally have reacted by trying to protect its own domestic economies. For example, China’s electric car industry is seriously undercutting the electric car businesses in Europe and the United States. It is understandable that the Western countries have retaliated by imposing extremely high tariffs on Chinese electric cars.

There is a new term that is used by some economists to describe Chinese companies that have become addicted to debt. These are called “zombie companies,” which are essentially insolvent companies but are able to generate just enough cash flow to meet their credit obligations.

Xi Jinping, however, has continued his campaign for China to achieve technological self-sufficiency. It seems that Beijing continues to invest more in its industrial sectors rather than focusing on increasing household consumption. Some observers believe that this is mainly due to its geopolitical competition with the United States and its overriding goal to protect China from economic isolation or potential sanctions by the West.

China’s chronic manufacturing overcapacity is creating a dilemma for the United States and the West. The massive inflow of cheap Chinese manufactured products has already created trade tensions since 2023. Several governments, aside from Western countries, have launched anti-dumping investigations and imposed tariffs on various imports from China. Some of these governments are those of Vietnam, Brazil, Mexico, Turkey, European Union and, of course, the United States.

These have not deterred the Communist Party from its present economic policies. It has accused the United States of exaggerating China’s overcapacity merely as a pretext for introducing harmful trade barriers whose purpose is to limit China’s growth and to suppress the development of China’s strategic industries.

It is time for the Chinese Communist Party to accept that they cannot grow their economy at the expense of other countries. For example, the influx of Chinese imports has led to the closure of several industries here in the Philippines. The footwear industry based in Marikina has practically disappeared, leading to the loss of employment of thousands of Filipino workers, mainly due to the Chinese imports of much cheaper prices.

Sooner or later, the Philippines will be forced to join other countries who need to band together to protect their own economies against China’s predatory trade practices.