Mainland exports rise significantly as Western governments fret about trade imbalances. 

It is all starting to look like a dainty, well-choreographed geopolitical ballet between the US, China, and the EU.

As finews.asia commented in May after the G-7 meeting, the world’s largest economies appear to be in a concerted effort to make the China industrial manufacturing overcapacity label stick. 

It then went quiet for a while until the EU’s tariffs on China electric cars imported from the mainland were announced earlier this month, followed tit-for-tat by trade investigations in China of the bloc's possible unfair trade practices in wind, solar power, and security equipment.

Trade Figure Surprise

This newest round flared up Wednesday when US Treasury Under Secretary Jay Shambaugh publicly tried talking up the detail related to the mainland’s economic imbalances that are ostensibly starting to play havoc with the world’s economies.

That was followed on Friday by mainland customs data showing that China’s exports and trade surplus were up sharply, well above forecasts, while imports had dropped (collated Google search).

Finding It

But it is going to be difficult to make this all stick. As we mentioned in May, unless you are sitting on top of a bunch of dumped goods or cheap invoices, you can’t hear it, feel it, or even know it is going on. You can only blame it in hindsight after the jobs are lost and the factories closed.

Shambaugh said as much in his speech: "There is no single test or condition that indicates overcapacity. We cannot simply put in a few statistics about a sector and get a thumbs up or down of whether overcapacity exists.»

Plausibility Gauge

Instead, the US Treasury looks at three sets of indicators. That includes whether the levels of supply meet plausible levels of demand, the number of loss-making companies, and capacity utilization rates.

Here he had some interesting takeaways. When it comes to supply, Chinese production of lithium batteries and solar modules is seen exceeding global demand by two to three times what is needed for the UN’s climate-based Net Zero target in 2050. It also plans to produce more than 70 million electrical vehicles annually in 2030 even though the international demand is only expected to be 44 million that year.

Distorted Capacity Utilization 

Beyond that, when looking at the second indicator, it appeared that more than a quarter of the carmakers in China lose money while «a handful» of EV manufacturers are profitable.

He also mentioned that capacity utilization is nearing ten-year lows, which is particularly «pronounced for sectors that Beijing prioritizes», i.e. in autos, solar panels, and semiconductors.

Still Vague

The problem with all this is that it is too opaque and vague to interest the public at large given the ongoing war in Ukraine, the conflict in Gaza, and the significant number of recent or future elections in the West. Many voices out are likely to agree that producing those kinds of numbers is warranted given the moderate climate impact of having a larger proportion of EVs, solar power, and lithium batteries circulating in the global economy – no matter how cheap.

Shambaugh seems to acknowledge these kinds of difficulties indirectly: «More creative approaches may be necessary to mitigate the impacts of China’s overcapacity. We should be clear: defense against overcapacity or dumping is not protectionist or anti-trade, it is an attempt to safeguard firms and workers from distortions in another economy».

Implications for Finance

What is going on now also has significant implications for finance, particularly for commercial banking, with residual, but still evident, impacts on retail and wealth management. 

If the world continues to move towards slobalization, as the IMF calls it, or glocalization, as Larry Elliott called it in «The Guardian» in January (registration required), the global bank and banker may soon revert to being the international bank and banker.