China is producing surplus at a level unseen since WWII, Plus China says it cracked Apple's encoded AirDrop user logs -- China Boss News 1.12.24

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What happened

China’s manufacturers are producing a surplus at "a level probably unseen since the US after World War II,” Bloomberg Intelligence analysts said.

The reason: Beijing has been infusing the country’s manufacturing sector with state-backed loans to offset massive losses in the property market in a strategy that "threatens to further raise trade tensions with the US and Europe and others.”

BI estimated “that about 45% of China’s manufacturing output is being exported as the nation’s 1.4 billion people can’t buy enough goods like EVs, ships and household appliances to meet the increased supply.”

Reuters revealed more shocking evidence of the state’s push.

“Lending data from China's central bank offers a glimpse of government priorities: as of the end of September, outstanding loans to the troubled property sector fell 0.2% year-on-year but lending to the manufacturing sector jumped 38.2%, it said. Note that most banks in China are state-owned or state-controlled.

According to the Wall Street Journal, Chinese officials have also been “subsidizing trips abroad for companies to sell more overseas, including chartering flights for them,” in addition to “urging banks to lend to companies that want to expand in countries participating in China’s Belt and Road program.”

Why it matters

More strained relations ahead

Beijing's focus on the “‘new three’” economic growth drivers - electric vehicles, batteries and renewable energy - is already straining relations with advanced economies.

US officials have recently warned about Chinese dumping in solar panels, and the EU announced last year that it had opened an investigation into Chinese subsidies of electrical vehicles.

Jens Eskelund, president of the European Chamber of Commerce in Beijing, told Reuters that the "lower consumption in China,” combined with “massive overcapacity that is being pushed out to the world, including in batteries, solar and chemicals,” is harmful to European businesses.

"Europe and China are like two trains that are going to collide," he said.

But policymakers in developing and emerging markets are also struggling to cope.

“While China's strategy can lower the cost of capital goods, its efforts to retain lower-end industries narrows the space for nations like Vietnam and Indonesia that would otherwise benefit from China’s move up the value chain. Other countries seeking to attract more sophisticated industries, including Turkey and India, are increasing protectionism aimed at China,” Bloomberg analysts wrote.

But that hasn't stopped Beijing from doling out new “industrial upgrade” plans.

According to state media tabloid Global Times, the Shanghai government released a massive action plan last summer after a State Council executive meeting on the adoption of guidelines to accelerate “the development of advanced manufacturing clusters.”

“Specifically, the plan states that Shanghai aims to establish world-class industry clusters for the three pioneer industries and four clusters worth 1 trillion yuan each for electronic information, health, automobile, and high-end equipment. Additionally, the plan targets two industry clusters worth 500 billion yuan each for advanced materials and fast-moving consumer goods,” GT staff noted.

Deflation spiral

On a recent trip to China, Damien Ma of the US thinktank Macropolo, discussed China’s new economic policies with senior officials.

“China wants to be the Amazon of countries — Amazon is the everything store, China wants to be the ‘make everything’ country. The vision is to bring a complete supply chain to China.”

But China’s policies are quickly fueling lop-sided credit demand “from the manufacturing and the infrastructure sectors, whose overcapacity issues are exacerbating deflationary forces in the economy,” Reuters said.

Tommy Xie, head of Greater China research at OCBC Bank, told news staff “that more liquidity injections could increase deflationary pressures in the current mix of monetary, fiscal and other policies.”

"The focus of stimulus measures appears predominantly on the supply side. By bolstering production, these policies have played a crucial role in maintaining job stability. However, this increase in production has encountered a sluggish demand environment, heightening the risk of disinflation,” Xi said.

Ultimately, Chinese jobs will also be eliminated as producers lower their prices.

A price war "triggered by TESLA" last summer "sucked in more than 40 brands, shifted demand away from older models and forced some automakers to curb production of both EVs and combustion-engine cars, or shut factories altogether,” according to a separate Reuters report in September.

“The problem is that while there has been huge investment in production capacity, helped by large state subsidies, domestic demand for cars has stagnated and household incomes remain under pressure,” news staff said.

The South China Morning Post last week reported that Chinese workers are now seeing “the biggest drop in hiring salaries on record.”

“Average salaries offered by companies to new hires in 38 key Chinese cities fell 1.3 per cent to 10,420 yuan (US$1,458) in the fourth quarter of 2023 from a year ago. That was the worst drop since at least 2016 . . . It was also the third straight quarter of decline, the longest run since data on yearly changes were first available in 2016. In Beijing, the wages decreased 2.7 per cent from a year ago in the fourth consecutive quarter of contraction. Salaries in the southern metropolis of Guangzhou fell 4.5 per cent,” SCMP news staff wrote.

George Magnus, research associate at Oxford University's China Centre, told Reuters last September that "[t]he focus on production and supply is lopsided," and China’s “inadequate attention to demand ultimately leads to inventory overhang, price cuts and financial stress.”

"China really has to learn to walk on two legs," he added.

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