Sun Liping on Overproduction

Sun Liping, “Overproduction is the Real Problem We Are Facing Now”[1]

Introduction and Translation by David Ownby

Introduction

Sun Liping (b. 1953) is a sociologist recently retired from Tsinghua University, and a frequent blogger much translated on his site.  Sun likes to assume the role of a “truth-teller” in his blog posts, telling obvious but sometimes uncomfortable truths about covid or about the economy that everyone is talking about and about which the government is insisting on a particular story line.  For example, when the omicron variant began to change how countries around the world were dealing with the pandemic, Sun dared ask “what will happen when China is the only country fighting the virus with lockdowns and closed borders?”

The post translated here is similar, although the subject is the Chinese economy which, as everyone knows, has not rebounded as expected since the end of the covid-zero policy at the end of 2022, with serious consequences for China and for the world.  Sun’s message is clear, if depressing:  China’s problem is over-capacity, or over-production.  China became the world’s factory, and now the pandemic, plus deteriorating Sino-American relations, have reduced the markets available to that factory.  In addition, China became the world’s factory without lifting enough of its own population into the bourgeois consumer class, so domestic demand is not sufficient to make up for the missing outside markets.  Furthermore, China’s traditional fix for this problem – more investment – no longer works because it produces more capacity and thus more goods that no one is buying.  Sun calls for “structural reforms,” generally a liberal code word meaning to get rid of state-owned enterprises and limit the state’s role in the marketplace. 

Sun has been saying things like this for some time; his blog posts are usually variations on a theme and thus are somewhat repetitive.  What is interesting about this blog post is that it was taken down after Sun posted it on his WeChat feed, and subsequently posted elsewhere on the Chinese Internet.  This shows that Sun’s post hit a nerve, and not for the first time.

Should anyone happen to look at the Chinese version of the text translated here, they will notice that I have edited it considerably.  Sun’s post is quite short, but either he or the site that reposted Sun’s original text added subtitles, perhaps to make it look longer, but it also made the text seem choppy and repetitive. 

Translation

Economically, we are currently facing many problems, and I have been wondering recently what word we might use to sum them up. My conclusion is that behind all of the problems, the same shadow is looming - the shadow of excess, or of overproduction.  Overproduction may well be the real problem we are facing now.

In the past, we’ve known long periods of shortage. Grain coupons were only discontinued in 1993, after all. On April 1, 1993, in accordance with the spirit of the State Council's "Notice on Accelerating the Reform of the Grain Circulation System," we did away with grain coupons and oil coupons, after which grain and oil were traded on the open market. This can be seen as an official sign of China's farewell to the shortage economy.

But China's transformation from the shortage economy to the surplus economy came very quickly. When the Asian financial crisis occurred in 1997, demand already exceeded supply in China for 95% of industrial products, and capacity utilization for the production of color TVs, refrigerators, washing machines, and other household appliances was at 70%.  Among the 16,000 state-owned industrial enterprises in the country, 39% were losing money. Some people estimated that the rate of non-performing invisible loans by state-owned banks exceeded 40%.

In 2008, the subprime mortgage crisis occurred in the United States and triggered a financial tsunami, and the crisis also spread to China. At the time, a member of the CPPCC who came from the business community used a metaphor to describe what this crisis had done to China, saying that it had “added frost to the snow” [i.e., had made a bad situation worse]. 

I remember saying that this metaphor was really appropriate, because it reminded us not to confuse snow and frost, and above all not to think that everything that is white is frost.   In the United States, the financial crisis occurred due to the failure of financial institutions to operate normally, while what happened in China was a very old-fashioned crisis that we’ve read about countless times in textbooks: an overproduction crisis.

In fact we still have the same problem today. Some economists use “deflation” to describe our current economic problems, but I think that behind deflation and related problems, such as the weak economic rebound and unemployment, is actually the problem of overproduction. 

In reality, when we talk about overproduction, we are usually thinking in relative terms, which of course makes sense. We have houses that can’t be sold, but there are still people who can’t afford to buy houses; we have lots of durable consumer goods, but there are still people who are struggling to buy daily necessities; people have money in the bank, but due to various reasons, they don’t want to spend it. This is often used to remind us that 600 million people have a monthly income of less than 1,000 RMB [approx. 144USD$].  There has been a lot of discussion of this situation, so I won’t go into again here. Here I want to stress something else, the case of absolute overproduction.

Where does this come from? There are two important factors.

First, as I have been emphasizing recently, the two decade-long era of large-scale concentrated consumption in China is coming to an end. Real estate is already in a state of saturation or even excess, especially in third-, fourth-, and fifth-tier cities; the production and sales of automobiles in 2022 will be 27.021 million and 26.864 million, which is already close to the ceiling of 30 million, while the current production capacity is more than 60 million.  People now replace the “three big items” [needed to propose marriage – now these are generally taken to be a house, a car, and cash money - for travel, or insurance, or children’s education] rather than buying them new.   The current reality is that although low-income groups have great potential for consumption, mainstream consumer groups are already saturated.

Second, and perhaps more realistically and more importantly, when we absorb excess capacity now, we do it is as the world’s factory.  A great deal of what is produced in China is destined for the world market, but a portion of this market has been lost to the Great Dismantling, affecting a fair number of products that China’s domestic demand cannot absorb.   This is same logic as in a restaurant:  a restaurant cooks meals for outside customers and cannot expect the “domestic demand” of family members to fill the gap when the customers don’t come.   This is the unique feature of the overproduction problem we are facing now, and it is also the real reason for the emergence of absolute overproduction.

Therefore, we must now understand that the real problem we are facing now is overproduction, and overproduction under the dual pressure of the end of the era of internal large-scale consumption in China and the Great Dismantling happening outside. 

So now people are calling for big gestures, for a package to stimulate the economy. Some are calling for interest rate cuts, and others call on the government to issue bonds to increase investment. The question is, will these ideas really work?

Almost all scenarios for stimulus measures point to injecting money, because according to this logic, injecting liquidity will increase economic activity. But the problem is how to convert this increased liquidity into credit expansion, and especially, who to loan the money to? Businesses, governments, or individuals? Businesses are the most important here, because only when money enters a business does it create investment and income. But how many companies are motived to increase investment in the face of almost absolute surplus?

Some people say, “Let's stimulate consumption.” As mentioned earlier, the consumption potential of low-income groups is limitless, while the mainstream consumer groups are already saturated. Domestic demand cannot be stimulated at will.

People often compare the problems we have now to Japan's balance sheet during the recession [i.e., the problem that government stimulus money went to pay off corporate debt, which simply returned the money to the banks], but the two situations are actually very different. In China, although it cannot be said that this factor does not exist at the level of the economy as a whole, this is not the main problem that businesses have. In China, it’s not that loans are not used to repair the balance sheet, but that loans expand production capacity for things that can’t be sold. Especially exports.

In fact, the economic development of any country is cyclical and goes through stages. Japan had three decades of stagnation after its housing bubble burst, and the United States and much of Europe had more than a decade of slump after the financial crisis. This is a necessary process of repair. Now people are talking about China’s getting past the middle-income trap, but this is not something where you can talk yourself past the finish line.  Often you have to take a rest and start again, so you need reserves of strength. Taking consumption as an example, I remember a metaphor that somebody once used:  when the ox that is plowing the field is tired, do you let him catch his breath, or do you keep whipping him? 

The experience and lessons of other countries and history tell us that in the face of the transition from an era of shortage to an era of surplus, there is no one-shot stimulus measure, and the result of forced stimulus may be counterproductive.  What is really needed at this point is structural reform. These reforms include the creation of a friendly international environment and the preservation of as much of the external market as possible; the upgrading of industries, the elimination of excess capacity, and even the elimination of certain low-quality enterprises; the empowerment of small- and medium-sized enterprises through the market mechanism and the preservation of as much employment as possible; and the adjustment of interest relationships, so that profits stay with the people and with companies, increasing the proportion of wealth in the citizens’ hands and in the private sector. Only in this way can the conditions be created to avoid the middle-income trap.
 
Notes

[1]孙立平, “过剩，这才是我们现在面对的真正问题,” published online on July 21, 2023.