China overcapacity, why the fuss now?

In a recent statement Janet Yellen US Treasury Secretary upbraided China for her over capacity and her efforts to export the surplus to the global markets including America. But there are lot of things, than that meets the eye. Read for more:

The following forceful statements only tell part of the story. Janet Yellen was reported to have said:

One, "I am concerned about global spill-overs from the excess capacity that we are seeing in China"

Two, "China's overcapacity distorts global prices and production patterns and hurts American firms and workers, as well as firms and workers around the world."

Let me explain little bit of tautological error of her equating overcapacity with excess capacity. Overcapacity is a long term issue where ‘too much of a product chasing after too few buyers’. Excess capacity on the other hand is a short term issue where demand for a product is less than the quantum of the product in a given market in a given time.

Be that as it may, the bone of contention is neither over capacity nor excess capacity. It bogs down to the real fact of China geoeconomics play by not increasing her investment in US Treasuries.  The last year alone about US$ 21 Trillion has been issued as treasury bills. The debt financing is for America is the key instrument to keep the country running. China must be prodded to swallow more of it. Besides, there is something else that hurts US badly. Before I talked about it here is a digression:

Chinese manufactured items totalled US$ 4,975 Billion in 2022 out of which only US$ 327 Billion was exported globally. The total US imports from China for 2022 is just US$ 536 Billion including manufactured items, rare earth etc. Therefore America is not that much affected by this China export drive.

Secondly, America cannot lodge criticism regarding China subsidizing preferred or priority sectors such as EVs, Solar panels and battery manufacture thereby seeking world domination as often trotted out because America herself does the same thing for her domestic industry. Chips Acts is an apt example where generous grants are allowed for promoting chip manufacture within USA.

Daunting statistics make US leery about the way China getting on her business of encouraging green technology domestically and abroad. About more than 60% of solar panels used in Europe is sourced from China. Exports of EVs rose to US$ 34 Billion in last year compared to US$ 20 billion in 2022, a whopping 70% growth. By the way EU share hovers around 40% of total China exports of EVs. Battery exports that stands at US$ 3 Billion in 2022 is expected to have an uptick in 2023, there again EU takes the big chunk.

In geoeconomics, America cannot let EU slip away from the American embrace. So demolishing green manufacture and related export is the whipping horse, because that is where China strength lies as an alternative to fuel energy.  China using green energy products can kill two birds with one stone in geoeconomics: American export of gas & fuel to EU market and the budding green energy industry of the USA.

 

Cheers!

 

Muthu Ashraff Rajulu

Business Strategist

Mobile: + 94 777 265677

E-mail: cosmicgems@gmail.com

Blog:   Business Strategist