My take on China’s "Marshall Plan"

An abridged and combined translation of the two-part series by He Qinglian published in VoA on Nov 15 and 18 respectively. -- translator note.

Overcapacity: “nuclear threat’ of the Chinese economy

The majority of industries in China faces severe overcapacity that seriously threatens the smooth function of the Chinese economy.
Despite China’s high hope for it, “the Road Map for the Asian Investment Bank” remained only a plan in the APEC summit in 2014. In addition, the Mexican government decided to cancel a Chinese company’s $3.7 billion bid for a hi-speed railway project. China’s "Marshall Plan", which aims chiefly to “export the country’s overcapacity”, is off to a bad start; Beijing would still need to find ways to deal with the “nuclear threat” of the Chinese economy.

Why would China want to implement a Marshall Plan?

Most of the comments made inside China regarding the country’s "Marshall Plan" focus on the investment to be made overseas. While some might point out “export of capacity” is an intent, they deliberately omit the key modifier for the word capacity: over.

China seeks to establish an Asian Infrastructure Investment Bank and, with that bank as the core, materialize its planning of “one belt and one road”—“the Silk Road Economic Belt” and “the Maritime Silk Road of the 21st century”. Through this “one belt and one road”, China can export capacity it doesn’t need. Commentators dubbed this as China’s Marshall Plan.

What I want to discuss here is the reason why China needs to implement its "Marshall Plan": The majority of industries in China faces severe overcapacity that seriously threatens the smooth function of the Chinese economy.

Why is overcapacity deemed as “nuclear threat” to the Chinese economy?

Overcapacity means the sum of productivity is greater than the sum of consumption demand. Unlike the US Marshall Plan that exported predominantly manufacturing apparatuses, the Chinese version seeks to export its infrastructure (such as railways and motorways) and the up- and downstream industries of the real property, where overcapacity is most noticeable.

China’s overcapacity came almost hand-in-hand with the country’s economic growth and its roots can be summarized as follows: investment made in the socialist manner and demand came following the capitalist fashion.

By “investment made in the socialist manner” I mean borrowers—state-owned-enterprises bosses (exempt from shouldering responsibility as unwritten rules dictate) and private companies owners (they would flee if they become bankrupt) alike—do not have to shoulder real risks as investment funds came mainly from the government or commercial banks and the investment risks are transferred to banks as bad debts.

By “demand came following the capitalist fashion” I mean that there has to be market demand for capacity. If effective demand is insufficient, excess, or in the case of the Chinese economy, over capacity would result.

Based on the aforementioned summary, we could see that China’s overcapacity has the following two characteristics:

First, overcapacity is the inevitable product of government interference with the economy.

Chinese economic growth is often linked to government stimulus policies. Whenever the central government launches stimulus policies, local authorities would without a doubt initiate as they please projects that are very similar in nature and result in severe overcapacity. Although the central government seeks to arrest excessive growth in some industries through macroeconomic regulation and control, their efforts have often been futile, with new overcapacity emerging while the existing ones have not yet been cleared.

In 2009, the NPC Financial and Economic Committee revealed in a survey and research report that starting from 2005, varying levels of overcapacity could be seen in 19 industries. At that time, the State Council Standing Committee set about a special plan to tackle the issue; however, with the local authorities seeing GDP growth as their achievement, overcapacity could not be controlled. By 2013, overcapacity became, as the respective industries acknowledged, a widely seen phenomenon that appeared in aluminum production, steel manufacturing, photovoltaics, wind power, ship building and the like.

Second, the macroeconomic regulation and control policy of the central government results, more often than not, in overcapacity becoming even more serious. Take for example the steel industry in China, despite going through several attempts to suppress its overcapacity in the last decade or so, the industry managed to circumvent those measures in one place or another somehow.

For instance, government policy stipulated that furnaces smaller than 200 cubic meters would be phased out. The intention of the policy was to eliminate smaller mills. However, many of those mills replaced their furnaces with ones sized 300, 500 cubic meters or even bigger. The phased out standard was raised to 300 cubic meters later on, and the mills made changes accordingly. This resulted in the actual capacity of China’s steel manufacture growing larger and larger.

Right now, the steel manufacturing industry has been in a state of overcapacity for several years and yet enterprises are still very eager to increase their capacity. In 2013, the overcapacity of the steel industry in China was 300 million tons, roughly two times the EU capacity. And in 2014, according to China United Steel Net (CUSteel), 24 new furnaces were put into operation; their combined annual capacity was 35 million tons. Although this was half of the 70 million tons increase in capacity in 2013, it’s still adding to the overcapacity issue when the demand is not strong.

According to a document from the National Development and Reform Commission, overcapacity could also be seen in a wide range of other industries and analysts were quoted as saying that there are but a handful of industries that do not have the overcapacity issue. Thus, overcapacity became the “nuclear threat” of the Chinese economy.

Why is it so difficult to bring overcapacity under control? The reasons, apart from the systemic issues of investment mentioned above, are that local authorities have two things to consider. First, phasing out excess capacity would result in huge layoffs, which would destabilize society and contradict the government objective of stability maintenance. And the second thing is debt risk. At present, the debt ratio of member companies of CUSteel is as high as 70%, with the total amount of loans reaching 1.3 trillion dollars. If the debt of non-CUSteel-member companies is also included, the sum of debt of the entire steel industry may exceed 2 trillion dollars. Phasing out companies would leave behind a massive credit black hole.

Obstacles abroad: oppositions to AIIB

Judging from China’s own situation, export of excess capacity might be a solution. So, during a 2013 visit to Indonesia, Xi Jinping offered to “finance infrastructure projects in developing countries in Asia, including ASEAN members” and proposed to set up an Asian Infrastructure Investment Bank (AIIB).
After representatives from 21 countries including China, India, Kazakhstan and Vietnam signed their signatures on the AIIB memorandum on October 24, the financial institution is expected to complete its charter signing procedures and works to make it become effective in 2015 and come into operation before the end of 2015.

The obstacles AIIB faces include a lack of interest from major economies in the Asia-Pacific region. Representative from four key economies in the region—Japan, Korea, Indonesia and Australia—did not attend the AIIB memorandum signing ceremony. In addition, both the US and Japan oppose it. There were reports that the US asked its allies to take careful considerations before they decide to join the AIIB. Nakao Takehiro, president of the Asian Development Bank (ADB), stated simply that he does not welcome the creation of another regional bank spearheaded by China with objectives similar to the ADB.
Without the China-led AIIB to handle the lending business, it would not be easy for China to implement its plan to export the country’s excess capacity.

Obstacles abroad: investment risks outweigh opportunities

The idea of “one belt and one road” fascinated China, with plenty of articles on its bright prospects. These articles, I have to say, are written by starry-eyed persons who took into account only where to invest, i.e., where they could export excess capacity and did not think about the ways to have their return of investment guaranteed.

China’s so-called “market economy”, interfered with by the administration, concentrated only on how to get approvals from superiors, how to banks to lend the money and spend it; never once was ROI taken into consideration and unfinished projects and debts were deemed simply as “prices for mistakes”.

Take a look at the countries and regions covered by this “one belt and one road”, we could see that ASEAN, Southern Asia, West Asia, North Africa and Europe are all included.

Sure enough, countries like Korea, the Netherlands, France, Germany, Belgium and Russia are not in the initial stage of industrialization and they have in place well-developed infrastructure and so they don’t need to take in massive excess capacity from China.

As for India, it’s a populous country that doesn’t lag far behind China in terms of manufacturing and I.T. industries and has plenty of workers if it really needs to build infrastructure.

Hence, countries that might actually need China’s help would only be Indonesia, Malaysia and Central Asian countries like Tajikistan and Turkmenistan.

Obstacles abroad: troubles and losses

The difference between overseas investment in “one belt and one road” and that China made in the past is that: in the past, China's overseas investment was strategic investment made to resolve its energy and mineral needs; this time, it is to release China's massive overcapacity and it came up with the premise that other countries need infrastructure and yet they lack the fund.

But all investment, whatever the purposes maybe, needs returns. The gains and losses incurred in overseas investment made in the past can provide meaningful insights into how China has been doing.

The Heritage Foundation set up a database called China's Global Reach to keep trace of overseas investment projects of Chinese enterprises that worth 100 million dollars or more. The data showed that China invested in industries like energy, mining, transportation and banking.

Between 2005 and 2012, Chinese enterprises made investment in 492 projects that worth at least 100 million dollars and committed a total of 505.15 billion dollars, around 90% of this money came from State-owned enterprises. And according to the list of “troublesome projects” in the database, 88 projects of the same period were either rejected by supervision agencies in later stages or partly or completely failed, a total of 198.81 billion dollars were involved.
Things are much much worse if according to China's own calculation. Wang Wenli, vice-president of China Economic and Trade Promotion Association, said in August this year that there over 20,000 Chinese companies have investment overseas, more than 90% of those suffered losses because of [faulty] asset valuation, labor disputes, anti-monopoly and national security issues, tax, public relations and so on. What Wang did not include was embezzlement committed by overseas investment management of state-owned enterprises.

These factors of losses would not go away because the investment objective of “one belt and one road” changed to export of excess capacity.

Beneficiaries of China's overseas investment

The massive investment China made in the last decade or so is a phenomenon unlike anything the international community has ever seen. Such a phenomenon could not possibly emerge in capitalist countries, where all investment all from private money; no multinationals would keep making investment with a loss rate as high as 70-90% over a long period; it didn't emerge in any other socialist countries either: before the 1990s, socialist countries only traded among themselves; today, of the remaining socialist countries, China is the only one to have amassed a wealth so massive that it can make large-scale and ineffective overseas investment using its state power.

As a result, China as a socialist authoritarian country became economically intertwined with democratic countries around the world, and adversaries were turned into partners.

But for all the political gains, China's investment overseas has so far incurred only economic losses. And despite this, China is still making investment abroad. According to China's Ministry of Commerce, the country committed 81.9 billion dollars in direct investment overseas. It's hard to see this as normal investment behavior.

A news report in a Guangzhou newspaper on September 2 would perhaps hold the key to the question why China is so persistent in making investment overseas despite the staggering losses: many mid-level officials of the PetroChina and Sinopec cliques sought opportunity to emigrate to Canada, the US, the UAE and elsewhere before they are struck by the anti-corruption drive. It's estimated that 20 to 40 billion dollars would thus be moved out of China.