Yu Yongding

Opinion | China must not repeat its mistakes in tackling overcapacity

Overtightening hurt China’s economy in the past. Faced with new overcapacities, China should adopt a more expansionary fiscal and monetary policy

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If policymakers had pursued moderate fiscal and monetary expansion while encouraging the market to play a decisive role in eliminating sectoral overcapacity in 2012, China may well have achieved higher GDP growth rates in the ensuing years. Photo: AP

Yu Yongding

Published: 8:30pm, 31 Jul 2024Updated: 11:43pm, 31 Jul 2024

In recent months, Chinese overcapacity has been a major topic of discussion – and a source of controversy – among economists and policymakers around the world. While these concerns are not entirely off base, they are excessive and resolvable.

Over the past four decades, as China has shifted from a planned economy characterised by shortages to a market economy oscillating between insufficient demand and overheating, its government has often sought to eliminate overcapacity whenever it arose. In 2003, for example, a crackdown on overcapacity in the steel industry led to the shutdown of many steel mills.

Following the 2008 global financial crisis, China’s exports plummeted, leading to a significant economic slowdown. In the first quarter of 2009, Chinese gross domestic product grew by just 6.1 per cent, the lowest rate in more than a decade. To counteract this shock, China’s government introduced a 4 trillion yuan (US$586 billion) stimulus plan.

Fuelled by massive investments – fixed-asset investment grew by 30.1 per cent in 2009 and 23.8 per cent in 2010 (year on year) – China’s economy rebounded sharply, achieving 10.6 per cent growth in 2010.

Although demand also rose quickly, supply failed to keep pace, as it takes time for new investment to translate into increased production capacity. (The duration of the lag depends on the type of investment.) This mismatch contributed to an uptick in inflation, with the consumer price index (CPI) rising by 3 per cent in 2010.

By the time CPI growth peaked at 5.4 per cent in March 2011, the Chinese government had announced that its top policy priority for the year would be to clamp down on inflation. And clamp down it did: from 2009 to 2011, China’s budget deficit-to-GDP ratio fell from 2.8 per cent to 1.1 per cent, and new credit declined from 9.6 trillion yuan to 7.5 trillion yuan.

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