What's Happening?
China's industrial policy has led to significant overcapacity in various sectors, including electric vehicles, high-speed rail, and housing. This overproduction results in price cutting, large losses, and trade conflicts due to surging low-cost exports. Domestically, it causes profit destruction, debt management issues, and deflation. Internationally, it leads to trade defense measures from countries like Brazil and India, threatening local jobs and industries.
Why It's Important?
The overcapacity issue poses a threat to global economic stability, as it affects trade relations and local economies worldwide. China's focus on industrial policy and self-reliance exacerbates these problems, impacting sectors like clean technology and infrastructure. The situation calls for a shift towards a consumer-based model to improve economic performance and reduce global tensions.
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Beyond the Headlines
China's commitment to industrial policy tools for geopolitical goals has drawbacks, including rising instability. A shift to a consumer-based model could improve economic flexibility and defuse global tensions, but this contradicts China's current industrial policy approach. The ongoing overcapacity issue highlights the need for policy changes to address systemic problems.
