As China’s real estate bubble continues to implode, the government has directed Chinese banks to shift lending from real estate to Chinese industry, including manufacturing firms.
At the same time, 99% of publicly listed Chinese companies now disclose some form of government subsidy, according to the Kiel Institute, a German think tank.
China is spending an estimated 4.9% of its gross domestic product on nurturing industries—several times higher than the U.S., Germany and Japan.
Excess production is deflationary while threatening the viability of competitors as well as employment in other economies. A few examples:
- China has added capacity to produce some 40 million vehicles a year, even though it sells only around 22 million at home.
- It’s on track to make around 750 gigawatts of solar cells this year, despite only needing 220 gigawatts domestically in 2023.
- It’s expected to account for 80% of the world’s new supply this year in basic chemicals such as ethylene and propylene, used to make garbage bags, toys and cosmetics—even though prices in China have been falling for 19 months, a sign of oversupply.
- Output of steel, one of China’s “old” industries, increased last year despite waning domestic demand due to the continuing property crisis. See Why China is Starting a New Trade War:
Two principles have guided Xi’s thinking, Chinese policy advisers say. The first is that China must build an all-encompassing industrial supply chain that can keep the domestic economy running in the event of severe sanctions by the U.S. and other Western countries. In the top leader’s views, advisers say, industrial security sits at the core of China’s stability as tensions with the developed world rise.
The second is a deep-rooted philosophical objection to U.S.-style consumption, which Xi sees as wasteful.
That leaves China with few options other than investing in exports to stabilize its weakened economy and create jobs to make up for losses in domestic construction.
The upshot: Rather than Chinese workers losing their jobs, steelworkers in Brazil, chemical engineers in Europe, and solar panel makers in the U.S. may lose theirs.
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