Economics Daily: Overcapacity angst

A little more than a year ago, Group of Seven finance ministers and central bank chiefs gathered in the scenic coastal city of Niigata, Japan. There, officials from the world's biggest developed economies agreed on a new partnership to "build resilient supply chains." While China wasn't mentioned by name in the concluding statement, it was clear to all that the push for "diversification of supply chains" was all about cutting reliance on the Asian manufacturing behemoth. A year on — and with trade tensions deteriorating by the day and only likely to get worse as the European Union probes Chinese electronic vehicle subsidies — the G-7 has now swung behind a new buzzword to wield in its confrontation with China: "Overcapacity." And they ditched the pretense of not mentioning China too, adding to the pointed nature of its weekend communique.  "We express concerns about China's comprehensive use of non-market policies and practices that undermines our workers, industries, and economic resilience. We will continue to monitor the potential negative impacts of overcapacity and will consider taking steps to ensure a level playing field," the ministers agreed at the Italian lakeside town of Stresa. In an interview with Bloomberg Television, France's Finance Minister Bruno Le Maire went further, saying the entire world economy is at risk from a glut of cheap Chinese exports. He and others seem to be rallying behind Treasury Secretary Janet Yellen's calls for a united front. China, having pulled its punches in a bid to avoid antagonizing its biggest trading partners even further, is taking the gloves off and hinting it's ready to unleash tariffs of as high as 25% on imported cars with large engines. It also seems to be trying to prise some advanced economies away from the fold. At their first formal three-way summit since 2019, Chinese Premier Li Qiang tried to persuade the leaders of Japan and South Korea of the benefits of working with Beijing on keeping supply chains stable. And at face value, at least, China got an agreement, although Japanese and Korean companies appear to be already diversifying their customer lists. "We agreed to create a transparent and predictable trade and investment environment and establish a safe supply chain," South Korean President Yoon Suk Yeol said Monday. In a joint statement, the three pledged to strengthen cooperation on supply chains and accelerate talks toward a free trade agreement, which have sputtered for years. Meantime, China's propaganda machine is revving up too, decrying America's "hysterical push" against its green industries.  "Global demand for clean energy capacity far exceeds supply. What threatens global efforts to tackle climate change is not too much but too little high-quality clean energy capacity. The US attempt to suppress China's clean energy industry essentially undermines the future of the earth and its inhabitants," according to a commentary in the People's Daily on Monday.  As the confrontation deepens with President Joe Biden and his challenger Donald Trump vying to appear tough on China, get used to hearing the word "overcapacity." As for diversifying supply chains — that's so 2023. Need-to-Know Research China's "two-speed" growth path since the pandemic — where officials took advantage of booming exports to crackdown on the property sector — is set to shift course, according to Macquarie Securities' Larry Hu.  "As long as exports remain robust, Beijing will stick to the current growth model despite talk of 'overcapacity.' But the model will become unsustainable once exports lose steam. The exact timing depends on the health of the US economy and the evolvement of trade protectionism." And when the two-speed model stumbles, officials will boost stimulus to put domestic demand in the economy's driver seat once more, Hu says.