MNI: Stimulus Seen Boosting China Manufacturing, Overcapacity

China’s manufacturing investment is set to maintain strong growth throughout the year thanks to policy stimulus, but weak demand means overcapacity will grow as well, depressing corporate profits and adding to the potential for trade friction, advisors and analysts told MNI.

Government pledges to support large-scale equipment upgrades and trade-in schemes to boost demand for cars and home appliances should ensure rapid growth in manufacturing investment, helping offset declines in real-estate investment, said Huang Hanquan, dean of the Academy of Macroeconomic Research, after factory investment quickened by 2.9 percentage points to grow 9.4% y/y in the first two months of 2024. Investment should rise by 5.3% throughout the year, according to analysts from Guotai Junnan Futures.

But industrial profits, usually a leading indicator of manufacturing investment about a year later, declined by 2.3% y/y in 2023, the Guotai Junnan analysts noted. Profits from computer, communications and other electronic equipment, which account for the largest proportion of manufacturing investment, slumped by 8.6%, with the sector moving into “mild overcapacity” in the third quarter last year though its utilisation rate rose to 76.5% from 73.7% six months earlier, they added.

As China prioritises the development of “new quality productive forces” this year, authorities are aiming to spur growth through massive investment in manufacturing, particularly in high-tech, as well as spending on research and development.

While overcapacity poses challenges and has prompted some within China’s policy establishment to recommend that industrial policy be dialled back, others argue that the country has lagged in high-end manufacturing and still has ample room to expand its production to meet demand for energy-saving, environmentally friendly, and intelligent equipment.

“Once demand rebounds and markets in Belt and Road countries further open, it will no longer be a problem,” said Huang, adding that 80% capacity utilisation would be an appropriate level.

EXPORT CAPACITY

But, while external demand is proving a key support for accelerating manufacturing investment, Zhu He, deputy director of the Research Department at prominent think tank China Finance 40 Forum, noted that average export prices have declined steeply since June.

“Exporters are lowering prices in exchange for bigger sales, indicating the imbalance between investment and consumption is underestimated,” he said, adding that trade frictions will become more acute in the second half of this year.

U.S. Treasury Secretary Yellen last week flagged concerns over overcapacity, especially in new energy areas, in her visit to China. (See: MNI INTERVIEW: China EM Trade To Rise, Despite Western De-risking)

A large proportion of new Chinese production capacity added in the past four years has been concentrated in electrical machinery and equipment manufacturing, mainly capital goods like photovoltaic cells and lithium batteries, said Zhu. Meanwhile, weak domestic demand and a shift in supply chains to Southeast Asia have prevented expansion in the finished consumer goods sector, and left some existing production capacity idle, he added.

China's exports increased by 7.1% y/y from January to February, a rise of 4.8 percentage points from end-2023, with mechanical and electrical products such as integrated circuits and chips, as well as labour-intensive products including clothing and textiles the main drivers.

Authorities need to cut interest rates to boost demand, said Zhu, noting that core inflation has been below 2% for most of the past decade.