How Markets Missed China’s Worsening Overcapacity

In 2023, many investors panicked about China’s manufacturing collapse. Yet just a few months into 2024, markets did a full 180, worrying instead about a new trade war in reaction to rampant Chinese overcapacity. China Beige Book’s in-depth tracking showed clients in real-time that fears of a collapse were always disconnected from reality.

Situation

China’s 2023 official manufacturing PMI contracted 8 out of 12 months, leading many investors to panic about a collapse. Yet just a few months into 2024, the consensus rapidly shifted—to worries over surging production, rampant overcapacity, and fears that Beijing will attempt to export its way to a recovery by dumping its heavily-subsidized goods overseas.

CBB View

The narrative of collapsing manufacturing was always a false read of true conditions on the ground. CBB data throughout 2023—later confirmed by China’s industrial production numbers for the year—showed manufacturing did just fine. In most metrics, the sector geared up not down, with factories notably boosting both capacity and production (Chart 1). (See our full series of notes on the subject at the end.)

Chart 1: Manufacturing Output and Net Capacity (Diffusion Indices)

Closely watched Autos saw a straight-line acceleration, while IT & Electronics manufacturing also jumped (Chart 2).

Chart 2: Automotives & IT Electronics Output (Diffusion Index)

Moreover, Manufacturers out-borrowed every other major sector (Chart 3), a significant early sign of Beijing’s policy support. Crucially, this support was confirmed at the National People’s Congress in March 2024, which adopted President Xi’s new mantra on “new productive forces” and promised whole-of-government support for helping key industrial sectors globalize.

Chart 3: Corporate Borrowing Across Sectors (% of Firms)

The same was true of China’s commodities sector. Chinese steel production expanded in 2023, as mills kept adding capacity—a trend revealed in CBB data throughout 2023 in real-time (Chart 4)—leading to record iron ore imports. Yes, even amidst a “property crisis”! Contrast this with the much-misunderstood Steel PMI, which led investors astray as it remained in contraction all year long.

Chart 4: Steel Output and Net Capacity (Diffusion Indices)

Production also accelerated across copper, aluminum, and coal plants—trends also reflected in real-time CBB data (Chart 5).

Chart 5: Output Across Aluminum, Coal, Copper (Diffusion Index)

Bottom Line

Markets are only belatedly grappling with the true strength of Chinese industrial activity throughout 2023, as well as the increasingly serious implications of overproduction in 2024. The true story was always hiding in plain sight.