China’s Party-State Capitalism and its Impact on Global Markets
In recent years, China’s party-state capitalism has had a distorting impact on global markets, leading to significant economic disruptions and concerns over trade imbalances. This article analyzes the issue and its consequences for global economies.
One of the main drivers of this distortion is China’s overcapacity problem. China’s weak domestic demand has prompted the country to ramp up exports of cheap goods, resulting in a global glut of excess capacity worth trillions of dollars. This has triggered a backlash from several countries, including the United States, which has led to tensions in economic relations between the two countries.
During U.S. Treasury Secretary Janet Yellen’s recent visit to China, she repeatedly urged Chinese authorities to address their overcapacity problems to prevent global spillovers. Her primary focus was on curbing overcapacity in clean energy technologies, such as electric vehicles, solar panels, and lithium-ion batteries, which pose a threat to competing companies in the United States and other countries.
However, Yellen acknowledged that significant policy shifts from the Chinese authorities are unlikely to happen in the near future. This ongoing issue reflects broader concerns about trade imbalances and market disruptions between the United States and China.
A report by research firm Rhodium Group highlights the extent of China’s overcapacity problem. The report states that China’s auto industry has over 100 auto brands, and with the country’s post-pandemic economic recovery faltering, these brands had to look for markets overseas. China’s share of global electric vehicle exports has grown from 4 percent in 2020 to 21 percent in 2022.
In the solar panel industry, China’s exports have also increased significantly. Data from Ember, an independent energy think tank, shows that in the first half of 2023, China’s solar panel exports increased by about one-third year on year, reaching 114 gigawatts, equivalent to the total installed capacity of solar panels in the United States. This surge in exports has led to a price war in Europe, with solar module prices falling by 50 percent within four weeks.
This wave of overcapacity has been dubbed “China Shock 2.0,” reminiscent of the first “China Shock” that occurred two decades ago. The United States granted China permanent normal trade relations (PNTR) status in 2000, leading to increased imports from China. Economists found that between 1997 and 2011, increased imports from China caused the U.S. manufacturing sector to lose about 2 million jobs, including 985,000 manufacturing jobs.
The Chinese Communist Party’s (CCP) party-state capitalism plays a significant role in this distortion of global markets. CCP policymakers reject the classic trade concept of “comparative advantage” and instead seek “absolute advantage” across a range of industries. This has led to aggressive subsidization of targeted industries to dominate global markets.
For example, between 2010 and 2012 alone, the Chinese regime provided at least $42 billion in subsidies to the solar industry. As a result, China’s share of global solar panel exports grew from 5 percent in the mid-2000s to 67 percent in 2018, triggering a global oversupply and a sharp decline in prices.
The CCP is trying to replicate this strategy in other advanced technology industries, such as semiconductors and batteries. The National Integrated Circuit Strategic Plan provides significant government subsidies to create a fully self-sufficient semiconductor industry in China. Chinese companies have also received substantial government subsidies for wafer production.
This party-state capitalism poses a threat to the United States and undermines the regulatory and legal framework that underpins the global economy. The CCP’s strategy involves expanding party branches in private and foreign firms, giving CCP officials senior positions in well-known companies. This creates a robust set of mechanisms that build connectivity between state-owned and private firms, giving Chinese companies an advantage in strategic sectors.
Foreign companies competing against Chinese firms must contend not just with the individual firm but with the entirety of the Chinese government’s balance sheet. This interconnectedness and the ability to buy, build, and finance on a massive scale gives China’s party-state capitalism immense global force.
In conclusion, China’s party-state capitalism and its overcapacity problem have had a distorting impact on global markets. The surge in exports of cheap goods has led to significant economic disruptions, trade imbalances, and tensions between countries. The aggressive subsidization of targeted industries by the CCP threatens global economic and strategic interests and undermines the regulatory framework that underpins the global economy. Addressing these issues will be crucial for maintaining stability and fairness in global markets.
