China’s leaders are directing funds towards high-tech manufacturing sectors, such as semiconductors and electric vehicles (EVs), in an effort to upgrade the country’s manufacturing capabilities. However, there are concerns that this investment could lead to overcapacity and an increase in cheap exports. Data from China’s central bank shows that lending to the manufacturing sector has increased by 38.2% year-on-year, while loans to the troubled property sector have decreased by 0.2%. Economists warn that this wave of investment is different from previous episodes of overcapacity, as it focuses on high-tech industries. This trend has raised alarm among some trading partners, particularly in Europe, where an investigation into Chinese EV subsidies is underway. The president of the European Chamber of Commerce in Beijing, Jens Eskelund, warns of a potential collision between Europe and China in terms of trade. China’s industrial policy will be discussed at the upcoming Asia Pacific Economic Cooperation (APEC) forum, where Chinese President Xi Jinping is expected to meet with U.S. President Joe Biden. Under Xi’s leadership, China aims to become a global manufacturing powerhouse for high-end goods, including EVs, wind turbines, aerospace components, and advanced semiconductors. However, critics argue that this focus on manufacturing comes at the expense of increasing domestic consumption and reducing exports, which is seen as crucial for sustaining high levels of economic growth. Policymakers in China have previously struggled with overcapacity, but this time the government’s focus is on high-tech and advanced manufacturing, as outlined in the 14th five-year plan. The government aims to shift investment spending from the real estate sector to manufacturing, driving up capacity in goods-producing industries. However, some economists warn that global markets may not be able to absorb the additional capacity. Despite this, investment in high-tech manufacturing continues to outpace the rest of the sector, with a growth rate of 11.3% compared to 6.3% for overall manufacturing investment. Provincial and municipal governments in China are increasing the proportion of government loans directed towards green development, advanced manufacturing, and strategic industries. For example, Guangdong province has increased lending to high-tech and advanced manufacturing by about 45%. Signs of excess capacity are already emerging, with forecasts indicating that China will soon be able to meet global demand for lithium-ion batteries. Similarly, Chinese automakers, including EV producers, have the capacity to produce 43 million cars per year, but plants are operating at just 54.5% capacity. Sluggish economic growth and limited domestic consumption further restrict the ability to absorb excess production. China’s household consumption accounted for only 38% of GDP in 2021, compared to 68% for the U.S. and 55% for the world average. While the race to invest in advanced sectors may benefit China’s long-term development and drive technological advancements, it may also contribute to global disinflationary pressures and help curb inflation. However, these points are unlikely to alleviate trade tensions, especially as many countries are implementing policies to support their domestic high-tech industries. In the long term, there may be a need for an adjustment process and allowing market forces to eliminate some firms.
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