Jason Douglas and Rebecca Feng of The Wall Street Journal report that China’s huge overinvestment, weak domestic sales, and trade barriers abroad have depressed companies’ profits and pushed many to the brink, and Beijing decides which companies survive and fail. They write:
As Western companies quake at the latest onslaught of cheap Chinese goods, a similar drama is playing out in China, where manufacturers are struggling as Beijing boosts industrial capacity without stimulating new demand.
Consider Jiangsu Lopal Tech, a company that supplies lithium iron phosphate to make batteries. The company lost $169 million in 2023, wiping out nearly three years of profit, according to its most recent annual statement. It blamed the red ink on overcapacity in China’s lithium iron phosphate market and a slowdown in demand from domestic battery makers.
A similarly plaintive song is heard throughout China’s corporate landscape. Rampant overcapacity combined with weak consumer demand is pushing many Chinese companies to the brink, forcing them to slash prices and crushing profits. […]
The endgame for money-losing companies
Overcapacity in China eventually leads to default and insolvency, just as in the U.S. The difference is that in China, the state plays a lead role in deciding which companies survive and which fail. In the past, when losses mounted in bloated sectors such as steel and solar, China has withdrawn subsidies, ordered companies to cut capacity, and merged a multitude of minor players into a smaller group of bigger, more competitive firms able to turn a profit. […]
Ultimately, by boosting supply more than demand, China is generating growth today but at the cost of growth tomorrow, said Louise Loo, lead economist for China at Oxford Economics. “Whatever you are producing now, you will not produce in the future.”
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