THE International Monetary Fund (IMF) has warned of China’s overcapacity in its manufacturing sector amid improved economic outlook.
Ever have that feeling of deja vu? China’s previous episode of overcapacity was last seen in 2014-2016, years after the Beijing authority and local governments ramped up massive stimulus packages during the 2008-2009 Global Financial Crisis.
Overcapacities were evident in heavy industries such as iron and steel as well as aluminium.
The reoccurrence of the overcapacity problem in recent years was due to the imbalances in supply and demand, aggravated by the Covid-19 global pandemic.
This time around, post-pandemic stimulus has failed to resuscitate a sustained revival in domestic demand, which was further heightened by the troubled property sector (see chart).
Chinese companies are producing far more than the domestic consumption can absorb, resulting in domestic surplus with low factory utilisation rates. Low-capacity utilisation rates were observed in machinery, food, textiles, chemicals and pharmaceuticals.
The downturn in the property sector also impacted the demand of downstream products such as furniture, iron and steel products, and plastic as well as non-metallic minerals.
Massive investment and production in emerging industries such as electric vehicles (EVs) and clean technology also resulted in domestic surplus. For example, capacity utilisation rates for silicon wafers have dropped from 78% in 2019 to 57% in 2022.
China’s production of lithium-ion batteries reached 1.9 times the volume of domestically installed batteries in 2022. It was reported that China’s exports of solar cells in 2023 were five times larger than in 2018, and 40% above 2022 levels. In 2023, China’s exports of EVs were already seven times greater than in 2019 and 1.7 times larger on an annual basis.
Protectionism against Chinese goods, which is usually the trade affairs of advanced economies, is now spreading to some countries in Asia.
Citing China’s unfair trade practices regarding technology transfer, intellectual property and innovation, the United States has increased tariffs ranging between 25% and 100% across strategic sectors such as steel and aluminium, semiconductors, batteries, battery components and parts, critical minerals, solar cells, ship-to-shore cranes and medical products such as personal protective equipment, rubber medical and surgical gloves.
The European Commission has imposed provisional duties on Chinese electric cars up to 37.6%, to counteract what it called unfair subsidies received by Chinese EV makers.
Surging Chinese goods are also exerting impact on its Asean trading partners as some of them have balked at the flooding of Chinese goods imports.
The Federation of Thai Small and Medium Enterprises wants the Commerce Ministry to review import tax rates and also impose a value-added tax on imported Chinese products to protect Thai manufacturers from the flooding of cheap Chinese goods.
It also requests the Board of Investment to review the privileges granted to Chinese companies, whose investments do not really benefit Thailand and Thai small and medium enterprises (SMEs).
Indonesia will soon impose import tariffs ranging between 100% and 200% on Chinese goods to mitigate the effects of the ongoing trade war between China and the United States. The regulation is being drafted to address concerns raised by stakeholders about the inadequacies of earlier regulations regarding protecting local industries from the influx of Chinese-made products.
Malaysian domestic businesses, especially SMEs, have expressed concerns about the impact of Chinese businesses in low-value and tech goods, retail, trading services and restaurants as well as sub-contracting of construction and property development.
Since 2009, China has been the largest trading partner of Malaysia for 15 consecutive years in 2023, with a total share of 17.1% of Malaysia’s total external trade.
Since 2012, Malaysia has incurred a widening trade deficit with China for 12 consecutive years (an average of RM33.1bil per year; which saw the deficit enlarged more than 20 times from RM3.1bil in 2012 to RM66.4bil in 2023).
Malaysia’s exports to China grew by 6.1% per annum between 2011 and 2023 relative to higher imports growth from China, growing by 8.3% per annum. Malaysia’s exports share to China has hardly moved from 13.1% in 2011 to 13.5% in 2023 while imports share from China had expanded substantially to 21.3% in 2023 from 13.2% in 2011.
Since 1980, China’s accumulated investments in the manufacturing sector amounted to RM74.2bil as of December 2023. China enterprises and businesses (either wholly-owned or joint-ventures with Malaysians) are investing and doing business in a variety of sectors such as manufacturing, information technology, construction, education, restaurants, eateries, cafes, and milk tea shops.
The debate over the impact of Chinese investment and companies on domestic businesses and investors is highly contentious, complex and has become politically charged. The investment and business opportunities generated by China come with competition challenges faced by our micro, small and medium enterprises in the domestic market.
In foreign direct investment, Malaysia has benefited from China+1 strategy and the US-China trade war due to the relocation and reconfiguration of supply chains in the semiconductor industry, rubber products, solar panels, liquefied natural gas, plastics, petroleum and palm oil.
Given China’s technological advancement and support to our country’s quest towards high-technology industries and renewable energy for net-zero emission, Malaysia welcomes high-value creation investments from China that can contribute to the development of its high technology, green, artificial intelligence (AI), digitalisation and EVs industries, as well as smart agriculture and food processing for food security.
The debate over the competition inflicted on local firms comes from a “competitive pricing and low unit cost structure” of Chinese traders, wholesalers, retailers, suppliers and contractors as well as builders in sectors they are participating.
Chinese firms’ competitive edge rest on their balance sheet capacity to take on many business ventures and opportunities, and in some cases, Chinese contractors can take on multiple and large projects. Chinese firms have the financial muscle.
Asia’s challenge from Chinese imports, therefore, spans both low-tech and high-tech manufactured products. How Asian policymakers navigate the challenges of protecting their domestic manufacturing and services sectors? Pressures are piling on the governments to create a local level playing field versus China.
There is no doubt that China’s outward investments in regional countries, including shifted production abroad, have generated various benefits such as employment, knowledge and technology transfer as well as industrial and infrastructure development.
However, there is a question about the net impact of these Chinese investments on domestic industries, especially SMEs, in low-tech and low-priced consumer goods via eCommerce platforms and domestic businesses.
Some have claimed that the investments may be driven more by political rather than economic factors. A continued dependence on China’s imported intermediate products will limit domestic value addition and constrain the capacity of domestic manufacturing industries.
If China’s imbalances continue and with the flooding of global and regional markets with its low-priced goods, the emerging market pushback will likely intensify.
Developing economies will be at greatest risk. Hence, reactions from emerging economies to protect their domestic industries, especially SMEs, by encouraging domestic production as well as the utilisation of local raw materials are likely.
Policy options and solutions to brace the impact of China’s imbalances and domestic surpluses:
> Firstly, the adoption of official trade defence instruments such as tariff barriers on imported Chinese products.
This would lead to retaliation, causing inflation on consumers, and not in conformity of free trade practices, as China and Asean member countries are in the multilateral trade agreements such as Asean and China Free Trade Agreement, and the Regional Comprehensive Economic Partnership.
Additionally, it requires costs and efforts to conduct formal anti-dumping investigations, and the use of countervailing duties.
> Secondly, employing local content requirements (LCRs) is a way to promote domestic industry and employment or encourage domestic innovation.
LCRs come in the form of measures that are mandatory, enforceable or compliance for the purchase or use of domestic products. This is a win-win solution to ensure that Chinese firms provide opportunities to local SMEs for manufacturing activities, supply chain integration and downstream services.
> Thirdly, the policymakers in managing the trade and industrial policies have to balance between economic and geopolitical priorities.
While Chinese high-tech industries such as semiconductor, automation, AI and digitalisation as well as EVs are needed to help support some countries’ high-value tech-up industrial development, their involvement in low-tech industries and products that domestic SMEs are capable of manufacturing should be discouraged.
> Fourthly, review a Negative List which “prohibits” or “restricts” certain industries for foreign investment purposes.
Other measures include a review of capital and licensing requirements for foreign firms entering into or expanding in the economic sectors such as trading, retail and selected services.
The government should also limit the percentage of foreign firms’ producing goods that can be sold in the domestic market or they must be 100% exported.
> Fifthly, promoting import substitutions policy to reduce over-reliance on Chinese imported intermediate and final goods through fiscal incentives and local content expenses deductions.
Policymakers can hold “buy made-in-own-country goods” campaign to secure the supply of raw materials and diversify supply chains risk. Switching towards domestic sourcing encourages the growth of domestically produced intermediate and capital goods.
> Finally, continue to forge smart partnerships between domestic and Chinese enterprises to achieve a win-win business cooperation for the sharing of economic prosperity.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
