China's Economic Lifeline: Overcapacity and Global Sanctions Signal Imminent Crumble

hi welcome to D to China I'm Don Shan China's economy is clearly struggling and this is obvious to everyone even the most dedicated supporters of the Communist party can't deny the economic difficulties or argue that things are going well at the best they might deflect by highlighting that the US economy is also facing problems using a comparison of failures to shift the focus while it's clear that China's economy is in trouble it hasn't completely collapsed yet what is keeping it from falling apart and how long can this situation last in this video I'll delve into these questions let me ask you a question when do you think China's economy started to falter I believe it began around 2020 at that time a key sign was that housing prices in China ceased to rise despite the previous economic crisis and policies aimed at cooling the market real estate had continued to show resilience however by 2020 the sector began to face significant issues the fact that Chinese people stopped buying and speculating in real estate is a clear indicator that they were running out of money this already pointed to economic issues in China however many people might have only started to feel the economic difficulties in 2022 this is understandable because some events after 2020 temporarily masked the downward Trend in economy what events temporarily prevented the Chinese economy from declining first the covid-19 pandemic had an unexpected impact while many blame the pandemic for China's economic decline this isn't entirely accurate the zero covid policy initially helped stabilize China's economy in April 2020 as the pandemic caused us business to operate at just 5% capacity China's strict measures enabled its industrial Enterprise is to operate at a 98.6% capacity and a small and mediumsized business at a 76% meanwhile the US continue to experience extended shutdowns if we use unemployment figures to gauge us business activity it wasn't until January 2022 that the US factories fully returned to normal operations many other countries faced similar issues during this period China's strict zero covid policy provided an economic advantage while production stored in other countries China continued manufacturing resulting in a substantial increase in its export starting in June 2020 China's export growth surged significantly providing a crucial boost to the economy however as other countries resumed the normal operations the benefits of this extreme zero covid policy began to wian by the end of 2022 most countries had achieved her immunity and lifted their lockdowns while China continued with strict controls as a result zero Co policies advantages faded leading to a slow down in export growth and a diminishing the lifeline it once provided soon a second Lifeline for China's economy appeared export growth fueled by government supported low price dumping this strategy was mainly applied to products like electric vehicles solar panels and the steel goods for instance consider the xiaomi su7 electric vehicle which recently released its financial report it showed a loss over 60,000 Yen per vehicle with an average price of 234,000 Yen resulting in a staggering loss ratio of 25% this issue extends beyond the xiaomi the entire Chinese electric vehicle industry is operating with very slim profit margins since 2022 gross profit margins in China's automotive industry have been sharply declining nevertheless we still observe rapid growth in the production capacity of Chinese electric vehicles this is puzzling because generally businesses are motivated by profit so why are these manufacturers investing heavily in production even when they are losing 60,000 un which is about $8,500 per vehicle Beyond aspiration to dominate and re the benefit of becoming a monopoly there are other hidden advantages to producing these products for instance contemporary emper technology AKA cattle reported receiving approximately $790 million in direct government subsidies in 2023 which is double the amount they received in 2022 in fact Chinese subsidies often go beyond the direct cash payments and include various forms of indirect support the European Union's investigation into Chinese subsidies not only highlighted Direct Cash subsidies but also identified four other types of support the first type is tax incentives for instance if your business operates in an industry that meets the Chinese Communist part's criteria you can benefit from tax reductions the second type is a below Market loans mainly provided through state-owned Enterprises and policy Banks the third type is government investment funds for example the her City investment fund has invested in Neo electric vehicles in addition to Neo this fund supports various Industries primarily those categorized as new productivity sectors it is evident that businesses outside these new productivity sectors face significant challenges in securing such Investments the fourth type is discounted land a prominent example is T which obtain land in Shanghai at roughly oneth of the market price this essentially serves as an indirect subsidy I think the four types of subsidies identified by the EU investigation are somewhat limited there is likely a fifth type political subsidies for an instance if the head of the ministry of industry and information technology tells xiaomi's present Le Jun that producing electric vehicles is essential for National strategy L Jun would have little choice but to comply failure to do so could result in severe tax audits by complying and achieving results these companies are likely to receive additional benefits through other channels from officials this constitutes an implicit form of subsidy such support gives electric vehicle manufacturers the confidence to absorb production losses although the focus here is on electric vehicles Chinese subsidies extend well beyond this sector in recent years government subsidies in China have been applied across the board according to research from the German Think Tank key year Institute for the world economy 99% of Chinese listed companies now reported receiving some form of subsidy up from less than 70% before the pandemic while the electric vehicle industry being a priority for Xi Jinping receives more substantial subsidies other less prioritized sectors receive less overall the central approach of the Chinese government in the past two years has been to subsidize production support lowcost sales stimulate export and ensure economic growth calculating the precise amount spent on these subsidies is difficult due to their often hidden nature however estimates from the center for strategic and International Studies indicate that in 2022 the Chinese government allocated about 4.9% of GDP P to subsidize Enterprises this is substantially higher than the subsidy levels in other major economies France supports business at 0.55% of GDP Germany at 0.41% and the United States at 0.39% to put the 4.9% figure into perspective in 2020 China's GDP was approximately 100 trillion yen therefore 4.9% equates to nearly 5 trillion yen per capita this works out to about 3,500 Yen per person annually which is around $500 this can help explain why the second Lifeline of subsidies feel less effective than the first and why many people now find their situation harder compared to during the pandemic during the pandemic the surge in exports was due to other countries inability to produce Goods allowing Chinese products to sell well without the price reductions this this time however the export boost comes from low price dumping companies involved in low price dumping make little to no profit which means wages for workers do not increase Additionally the large scale subsidies provided to these companies are funded by taxpayers in other words it is the citizens who are subsidizing these Enterprises however China should make the most of the current situation as the benefits of this second Lifeline are likely to wian soon and its side effects are expected to appear in the near future I believe this will likely happen by next year the first imminent challenge is the problem of overc capacity this issue arises because production is driven by unchecked government intervention rather than market demand many companies are producing Goods not based on Market needs but to obtain subsidies resulting in significant overcapacity in China for example in electric vehicle and solar sectors vigorous government support has led to a rapid surge in the number of electric vehicle Brands and manufacturers in China over the past two years with various cities setting ambitious production targets it is estimated that by 2025 China's electric vehicle production will exceed 22 million units in contrast the United States the world's second largest car producer is projected to to produce only around 10 million Vehicles both gasoline and electric this year many might see this data and think wow China is impressive it's rising fast with electric vehicle production alone being twice that of the US China is clearly the world's leading car manufacturer however the critical issue is market demand for electric vehicles China's total sales in the first half of this year were only 4.9 million units with an addition of six 100,000 units exported totaling 5.5 million units this suggests an annual maximum of around 12 million units creating a 10 million unit Gap compared to the production Target for next year even if China were to dominate the global EV Market the total worldwide electric vehicle sales for the first half of this year were only 6.6 million units annual Global sales are estimated to reach a maximum of 14 million units this leaves an 8 million unit shortfall compared to the projected 22 million units what will happen to this access 8 million units in the best case scenario these cities might abandon their production targets by 2025 as a result the car manufacturers would stop production and the factories would become idle with exess capacity the subsidies provided would be considered wasted essentially given away without any return in a worst case scenario these cities might continue to subsidize and pressure car manufacturers to meet central government targets and win favor with shiin ping this could result in the glut of electric vehicles on the market leading to severe oversupply and Associated issues which scenario do you think China will face I believe it's more likely that China will end up in the worst case scenario the problem of overcapacity in China's electric vehicle sector isn't very noticeable this year as the large scale construction of new electric vehicle factories has only just started many Automotive manufacturers have yet to fully ramp up their production capacity so this year can still be seen as a period where the benefits of overc capacity are being realized with subsidized the products achieving relatively High sales however next year will be different as several of the planned factories are set to be completed a similar issue is affecting the solar photov voltaic industry and it's even more severe than in electric vehicle sector due to the PV industry's earlier development China's PV production capacity is already very high with an estimated 750 GW for this year while domestic demand is only 220 GW Global demand is also limited to about 474 GW meaning China's annual production could Supply the entire world for 2 years additionally China's production capacity is expected to exceed 1,000 gaw next year how will this access capacity be managed companies might have to stop production given the severity of over capacity in the PV sector the industry is likely to face a crisis more quickly since July 5th several major Chinese PV companies including long G green energy and toneway Corporation have reported their financial results for the first half of the Year showing losses one company reported a loss of 5.5 billion unen and the combined losses of the nine companies around to 18.8 billion yen another pressing challenge for China alongside the issue of overc capacity is the wave of international sanctions triggered by its stumping practice while many are aware of the sanctions from the US and the EU several other countries have also taken action the EU has introduced punitive tar on Chinese electric vehicles and the US has imposed an even more severe measure a 100% punitive tariff on these vehicles Canada has also followed this path implementing a similar punitive measures China often portrays sanctions from other countries as a coordinated effort to stifle its rise however the reality shows that many of these nations are not the typical adversary suggested by Chinese propaganda in fact traditionally neutral countries and even some of China's close allies are taking action against the Chinese products for example India is investigating Chinese pigments and chemicals Argentina and Vietnam are scrutinizing Chinese microwaves and wind turbines respectively and Chile has increased tariffs on Chinese steel products turkey has also raised tariffs on Chinese electric vehicles and even Pakistan considered a close Ally has imposed higher tar on Chinese stationary and Rubber products among others why have these countries suddenly started collectively targeting China to get a clear view we need to step away from the Chinese Communist party's narrative stories of grand national strategies or powerful interest groups and focused on the simplest Factor business let's look at Chile as an example Chile a South American country that joined the belt and the road initiatives isn't particularly Pro no China nor anti-china it's more of a neutral player so why has Chile recently imposed sanctions on China the reason is straightforward China's dumping practices have made it difficult for Chilean business to survive Chile's sanctions are aimed at the Chinese steel over the past few years China's real estate market has cooled causing domestic steel demand to plummet from 1.1 billion tons in 2020 to 875 million tons this year however China's steel production has remained High still surpassing 1 billion tons annually the excess steel is then dumped abroad at low prices undercutting local Industries like Chile's Pacific Steel company which is now struggling to stay afloat earlier this year China's steel dumping severely impact Chile's Pacific Steel company leading to massive Financial losses and forcing the company to Halt operations the announcement triggered a large scale protest by workers facing job losses in response the Chilean government quickly increased the import tariffs on Chinese Steel in an attempt to keep the company afloat despite this intervention the company managed to stay open for only one quarter in early August Pacific Steel was once again forced to close its doors due to ongoing substantial losses given the circumstances it seems inevitable that the Chilean government will be compelled to raise tariffs on Chinese steel even further this scenario reflects a broader Global issue as China's overcapacity and aggressive dumping of products impact other countries they face two primary options either join China in subsidizing their Industries or impose tariffs on Chinese Imports to Shield their domestic markets opting to subsidize is Impractical for most Nations for example if the Chilean government were to allocate 5% of its GDP to support local production it would face strong public opposition in Democratic countries citizens prioritize government spending on essential services like Health Care pensions and education rather than industrial subsidies hence these countries are unlikely to follow suit with similar subsidy measures increasing tariffs is the more feasible option it protects domestic industries from unfair competition without the complication of additional subsidies however this move could lead to a global trade War intensifying economic pressures and worsening the competitive landscape for everyone involved given this context we can anticipate the following development one Rising tariffs small countries are likely to collaborate in imposing punitive tariffs on Chinese Goods as this trend grows China's exports will face increasing difficulties the low prices resulting from government sub subsidies will soon be offset by these tariffs reducing their impact two emergence of over capacity issues China's overcapacity issues will rapidly come to the Forefront this the Surplus production capacity will pose significant risks and challenges exacerbating the difficulties caused by declining export opportunities in my opinion by this time next year the effectiveness of the ccp's current strategy of subsidizing and dumping products will likely win and the negative repercussions will become evident whether the CCP will devise a new strategy remains to be seen I think it's likely they will not due to shiin Ping's exceptional governance or economic expertise but because of the ccp's autocratic rule this system allows them to wield resources more extensively and Implement unconventional measures that most countries and economists might avoid or find too risky for for instance if faced with severe punitive tariffs they might respond by using up to 10% of GDP in subsidies they could spend extensively to offset the negative impacts of tariffs capturing market share and keep their products moving if such a scenario infolds I will keep you posted and provide insights based on the ccp's policies and actions thank you so much for watching if you find this video helpful please like it drop a comment below and hit the Subscribe button right here it really helps YouTube suggest my video to others I'll be back with more content soon until then stay well