The overcapacity argument risks being an excuse for protectionism, said Nicholas Lardy, a senior fellow at Washington D.C.-based think tank the Peterson Institute for International Economics (PIIE), calling the idea of excess capacity “potentially dangerous.”

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“This overcapacity idea is that you shouldn’t produce more than you can sell domestically. If that was carried to an extreme, that would mean no trade globally. Everybody would just produce what they consume at home,” he Lardy said.

“This would be a complete and utter disaster for every economy. So I think this whole idea of excess capacity is potentially dangerous,” Lardy added.

He cited the example of BYD, a leading Chinese electric vehicle maker, noting that the company has demonstrated a comparative advantage in the production of electric vehicles, and is building facilities in several countries.

“They’re very globally oriented, and I don’t think they’re going to voluntarily reduce their attempt to sell their vehicles in the global market. Why should they?” he said, adding that the idea of excess capacity seems to imply that no country should produce more of a product than could be sold domestically, and that is not the case for the United States.

“So Boeing should cut its production? U.S. soybean farmers should limit their production to what can be sold within the United States? The U.S. appears to have a comparative advantage in these products so why shouldn’t Boeing and U.S. farmers produce more than can be absorbed domestically, with the ‘excess’ being exported?” he said.

CHINA’S CONSUMPTION INCREASING

China’s gross domestic product (GDP) grew 5.3 percent year-on-year in the first quarter of 2024, data from the National Bureau of Statistics (NBS) showed earlier this week.

In response to skepticism over China’s domestic consumption, the veteran China watcher noted that disposable income and household consumption continued to grow faster than GDP in the first quarter.

“So starting last year, and then continuing this quarter we have consumption growing more rapidly than GDP,” he said, adding that consumption contributed to a large share of GDP growth and could play a greater role in generating growth over the medium term than people expect.

Commenting on the argument that China’s property sector crisis is a drag on consumption, he said that home prices have been going down, but “it doesn’t seem to have put a big dent in consumption last year.” It is challenging to determine the extent to which people will decrease their consumption when their wealth shrinks, he said.

NO EVIDENCE FOR BALANCE SHEET RECESSION

Lardy also dismissed a deflation risk for the Chinese economy. In a recent article published in Foreign Affairs, he argued that one of the misconceptions is that price deflation has become entrenched in China, putting the country on course toward recession.

Consumer prices rose only 0.2 percent last year, but core consumer prices — those excluding food and energy — increased by 0.7 percent, he noted.

“Many people are saying that the deflation is becoming entrenched, and China risks having a so-called balance sheet recession like Japan. I don’t see the evidence for that,” Lardy said.

On the corporate side, Chinese corporations ramped up borrowing, both in absolute terms and as a share of GDP. Moreover, investment in manufacturing, mining, utilities and services increased.

In recent years, almost all the decline in the private share of total investment has resulted from the necessary correction in the property market that is dominated by private companies, and when real estate is excluded, private investment rose by almost 10 percent in 2023.

5-PERCENT GROWTH “WITHIN REACH”

Aside from domestic problems in the property sector, China faces external challenges for its economic growth, such as higher interest rates in other economies, weak global growth, as well as economic and trade tensions with the United States, Lardy noted.

On the monetary side, Chinese policymakers are very constrained, as the exchange rate has depreciated vis-a-vis the U.S. dollar quite a bit after the Federal Reserve started raising interest rates in March 2022.

“If the Fed gets going on cutting rates, that may create a little bit more space for China to have more stimulative monetary policy,” he said, nothing that, on the fiscal side, the fiscal policy that has been set forth this year is marginally more stimulative than last year.

Observing the main driver of China’s growth has been consumption, Lardy said he thinks consumption growth “is likely to continue to run ahead of GDP growth and contribute quite a bit to the expansion of the economy. I think that 5 percent growth target is within reach.”

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