By Jason Douglas and Rebecca Feng
SINGAPORE -- As Western companies quake at the latest onslaught of cheap Chinese goods, a similar drama is playing out in China, where manufacturers are struggling as Beijing boosts industrial capacity without stimulating new demand.
Consider Jiangsu Lopal Tech, a company that supplies lithium iron phosphate to make batteries. The company lost $169 million in 2023, wiping out nearly three years of profit, according to its most recent annual statement. It blamed the red ink on overcapacity in China's lithium iron phosphate market and a slowdown in demand from domestic battery makers.
A similarly plaintive song is heard throughout China's corporate landscape. Rampant overcapacity combined with weak consumer demand is pushing many Chinese companies to the brink, forcing them to slash prices and crushing profits.
With the property bubble that powered growth for years deflating, Beijing has been funneling investment into manufacturing, yet taking few significant steps to boost consumption that would soak up the resulting supply -- mainly because Chinese leader Xi Jinping sees U.S.-style consumption as wasteful and contrary to his goal of making China an industrial and technological powerhouse.
The ruling party reiterated that agenda at its twice-in-a-decade conclave this past week. To combat the property slowdown, Beijing will accelerate development of "emerging and future industries," such as electric vehicles and solar, a senior official said in a Friday press briefing.
Overcapacity drives down prices
The resulting overcapacity means that prices that producers charge at the factory gate have been in free fall for almost two years. That is dragging the overall economy closer to outright deflation, and eating into earnings. Around a quarter of the companies listed in mainland China are now unprofitable, compared with 7% a decade ago, according to a Wall Street Journal analysis of listed companies' financial statements.
Longi Green Energy Technology, which makes solar modules, warned earlier in July that it expected a first-half loss of more than $661 million, citing oversupply in China's photovoltaic industry.
But such pressures go beyond targeted new industries, to machinery, electronics and software. Angang Steel told shareholders in a filing that its loss for January through June would be around $370 million, almost twice the loss for the same period last year. It said the whole industry was under pressure from tumbling prices and weak demand.
To compensate for weak domestic sales, Chinese companies have turned to exports, which were up 8.6% in June from a year earlier. But those exports have put pressure on jobs and industries in other countries, reminiscent of the so-called China Shock a quarter-century ago, when China's entry into the global trading system squeezed manufacturers of toys, clothing, furniture and other labor-intensive products in the U.S. and beyond. As a result, trade barriers to China are growing.
Other countries resist buying China's excess
Former President Donald Trump has raised the idea of 60% tariffs on all imports from China, while the European Union recently said it was increasing tariffs on Chinese electric vehicles. India, Brazil and Turkey are pushing back against Chinese imports with restrictions and antidumping probes.
"An investment-led growth model can only go so far because ultimately there has to be demand somewhere," said Logan Wright, a partner at Rhodium Group who leads the firm's China markets research. "There will be a reckoning within China."
China's leaders have said the world benefits from lower-priced Chinese products and criticized foreign governments for using complaints about overcapacity to justify protection for their own industries.
Overcapacity is a predictable result of China's economic system, according to many economists. Beijing routinely directs capital through subsidies, tax breaks and state-controlled banks and investment funds to favored sectors. That gives companies an incentive to pile into those sectors and increase production. China's auto sector, for instance, is in the midst of a brutal price war as more than 100 companies churn out almost twice as many electric vehicles as domestic drivers buy each year.
Compared with the beginning of 2022, Chinese banks' real-estate loan books are flat. Loans to industry have swelled more than 60%.
For Xi, some overcapacity is acceptable in return for other goals: propping up short-term growth; boosting productivity to offset a shrinking workforce; taking the lead in industries such as clean energy, electric cars and advanced computing; and reducing reliance on Western technology that can be restricted by hostile governments.
The endgame for money-losing companies
Overcapacity in China eventually leads to default and insolvency, just as in the U.S. The difference is that in China, the state plays a lead role in deciding which companies survive and which fail. In the past, when losses mounted in bloated sectors such as steel and solar, China has withdrawn subsidies, ordered companies to cut capacity, and merged a multitude of minor players into a smaller group of bigger, more competitive firms able to turn a profit.
Many others limp on, however, sustained by credit from state-controlled lenders or capital from state-backed investment funds. The carmaker Zhido went bust in 2019. This year, after receiving such an infusion, it is bringing out a new car and has more than a dozen new models in the pipeline.
To stay in the game, Chinese companies are scouring the world for markets, investing in overseas production, or swallowing even greater losses to keep selling in places where they face tariffs. That will limit their ability to invest in new products, raise wages or hire new staff at home.
Ultimately, by boosting supply more than demand, China is generating growth today but at the cost of growth tomorrow, said Louise Loo, lead economist for China at Oxford Economics. "Whatever you are producing now, you will not produce in the future."
Write to Jason Douglas at jason.douglas@wsj.com and Rebecca Feng at rebecca.feng@wsj.com
(END) Dow Jones Newswires
July 20, 2024 23:00 ET (03:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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