Chinese production outweighs consumption, but here Beijing is reluctant to strengthen

The Chinese president and head of the Chinese Communist Party, Xi Jinping, is currently in Europe after five years, where, among other things, a significant part of China’s exports go. Although his trip has primarily a political content – he will visit Serbia and Hungary, for example – business exchange is inevitably among the topics discussed.

China’s unbalanced trade balance is also addressed by representatives of other countries when they visit China, most recently by United States Secretary of State Anthony Blinken.

“China represents one-third of world production, but one-tenth of world demand, so we have a clear disparity here. It’s not just us, I’m hearing about it all over the world, especially from our European partners,” Blinken said on April 26 in Beijing.

In numbers, global consumption will reach $72.5 trillion in 2022, according to the World Bank. Of that, China accounted for $9.5 trillion, while the United States accounted for $21.1 trillion.

As a proportion of the economy, China’s consumption accounted for 39 percent, compared to 68 percent in the United States.

In order to ensure stable and long-term growth, China needs to support domestic consumption, according to a number of economists. However, further reforms of the economy and the local market would contribute to this, which is something that the leadership of the Communist Party led by President Si has so far tried to avoid.

There are apparently two main factors at play. On the one hand, the loosening of economic rules could lead to pressure towards political reforms, which the Communist Party last tried in 1989. The social loosening at that time resulted in mass protests, especially by students and the younger generation, which the regime bloodily suppressed. The massacre at Beijing’s Tiananmen Square became a symbol. Since then, no one in China’s leadership has taken this direction.

The second reason appears to be the effort of the party leadership to strengthen the economic self-sufficiency of the country as much as possible, which should be prepared for a possible confrontation, especially with the West. It is therefore necessary to strengthen industry, work on innovation, and generally invest rather than support consumption.

According to official statements, China’s goal is to achieve “a new quality of production forces through innovation.”

“China should be prepared for war. Conflicts in Europe and now the Middle East have repeatedly demonstrated the importance of maintaining robust production capacity and large inventories,” Liu Zhi-kin of Renmin University told the Financial Times.

However, foreign analysts point out that Chinese production has reached such proportions that it simply cannot be exported all the time, because foreign markets are already oversaturated.

“Ultimately, the way out is through consumption — there’s no point in producing all this stuff if no one is going to buy it,” said Michael Pettis of the Carnegie Foundation’s Beijing office. Sü Kao, chief economist of Bank of China International, also assesses the situation similarly.

“Shrinkage in demand is nothing new, it has been going on since the 1990s. Weak domestic demand, compounded by tepid external demand, causes a lack of aggregate demand, which stifles economic growth. In this sense, China’s economy has long been held back by demand, not supply,” said Sü in a speech at Peking University.

The share of savings in China’s gross domestic product currently exceeds 40 percent, which is twice the world average, he also pointed out.