China’s industrial overcapacity is a problem that is “here to stay” and foreign companies and trading partners will have to adapt as the world’s second-largest economy seeks to overcome a property sector slowdown to stimulate growth, according to the American Chamber of Commerce in China.
The chamber’s annual survey of US businesses in China, which was released on Thursday, showed some improvement in optimism over the economy in 2023 compared with the previous year, but AmCham said companies were still worried about geopolitical tensions and new data laws.
Overcapacity was also emerging as an issue for some sectors, the business lobby group said, as Chinese policymakers increase state bank lending and industrial subsidies in an attempt to improve lacklustre growth.
“The Chinese government is looking for new sources of growth outside of real estate and related sectors,” said Sean Stein, chair of AmCham China. Unless China’s domestic market could grow to absorb the additional production in industry and manufacturing, there would be overcapacity, he added.
“It’s a problem that’s here to stay. And it’s one that businesses are going to have to adapt to and, frankly, so are countries,” Stein said.
China’s trading partners are concerned that Beijing is directing state credit once devoted to property, an economically critical sector that has suffered a years-long slowdown, into manufacturing and industry, particularly electric vehicles.
But with domestic consumption and investor confidence still lagging — reflected in deflationary pressure that economists say is the most severe since the Asian financial crisis — they are worried this will lead to dumping of low-priced goods on foreign markets.
The EU has launched an anti-subsidy investigation into Chinese EVs and is exploring other trade measures to counter the lower cost of Chinese imports.
“Chinese industry . . . can scale fast, it can scale big and at a pace that other countries and regions would have a very difficult time emulating,” said Stein. He added that overcapacity could spread into areas such as consumer and electronic goods, technology, chemicals and industrial supplies.
More US companies said they were “profitable” or “very profitable” in 2023, at 49 per cent, compared with 44 per cent in 2022, when coronavirus lockdowns stifled activity in major Chinese cities.
But a slight majority — 51 per cent — said they were still only breaking even or making a loss.
Profitability also varied across industries. The resources and industrial sectors were the most heavily hit by slowing growth and rising labour costs, with only 45 per cent of companies reporting they were “profitable” or “very profitable”.
“This is a wake-up call for the Chinese government,” said AmCham president Michael Hart. “Companies will not stay in the market long term if they’re not making profits.”
China’s ranking as an investment destination for US companies improved from last year, and a majority of surveyed companies said they had no plans to move manufacturing and sourcing out of the country, although there was a slight uptick in the minority contemplating doing so.
The majority of companies said positive relations between Washington and Beijing were important for their business growth in China, citing bilateral tensions as a top concern in 2024 for a fourth year running.
A majority also said they had faced some political pressure to make or refrain from making statements in the past year, mostly from the Chinese government and media but also from US government officials and US and international media.
