The myth of Chinese "overcapacity"

why the US has lost its economic competitiveness against China

Signs are proliferating that the US is losing the major power struggle against China - its trade and tech wars are failing (the fact they are doubling down is the best indicator of desperation and ineffectiveness), its currency is losing ground as a reserve currency, its treasury/state/commerce secretaries came out gun-blazing about China's industrial "overcapacity" hurting US businesses (pathetic to beg a rival to go easy on oneself). Of course, they regularly complain about how many Chinese businesses are state-owned rather than privately owned.

Why has this happened? Didn't the Nobel laureate liberal economists from the Chicago school preach that private enterprise system is the most competitive and efficient economic system in the world?

There are probably inexhaustible number of reasons for this. Here I venture to present one hypothesis - economy is stronger when a nation has a competitive marketplace for its industries and businesses regardless of their ownership structure. By the same token, economy is less strong when its industries and businesses operate in a less competitive environment even when they are privately owned.

There are numerous industries that bear out this hypothesis - automobiles, mobile phones, online businesses, telecom services, healthcare, banking, retail, even real estate. In all these sectors, there are many more market players and thus more intense competition in China than in the US.

While there is a mix of different types of ownerships (including fully foreign-owned like Tesla) in China, major players in these industries in the US are entirely privately owned.

In all these fields, China is pulling ahead or improving faster than the US for a critical reason - the marketplaces are simply more competitive in China. Ownership simply has no effect on enterprise/industry competitiveness.

In the electric automative sector, the US has one big player Tesla while China has BYD, Cherry, Great Wall, Nio, Xpeng, Li, Huawei, Xiaomi, and dozens more as well as Tesla.

In mobile phones, the US has one single player Apple while China has Huawei, Xiaomi, Honor, Vivo, Oppo, and also Apple and Samsung.

In ecommerce, the US has Amazon (with eBay at a distant No 2 with a fraction of Amazon's market share) while China has Alibaba, JD, PDD, Douyin/TikTok Shopping and also Amazon and eBay (before they pulled out after losing the competition). Same is true for almost all other critical industries.

The secret of economic success is NOT ownership but rather the presence of competition (i.e. market). Competition leads to intense pressure to innovate, improve quality, and reduce costs. It leads to an expansion of capacity and scale as businesses try to compete and win. It leads to true meritocracy - i.e. may the best player win.

On the other hand, lack of competition leads to monopoly and stagnation as the players underinvest, pursue barriers against competition, and raise margins/prices. You can do an industry by industry analysis for US businesses and find out the level of concentration (thus lack of competition) very easily.

I would argue China is a far more market-oriented economy than the US in most industries. This is the underlying reason for China's competitiveness and the so-called "overcapacity". The US attempts to undermine China's competitiveness will get nowhere because the Chinese do not buy into its self-serving "neoliberal" economic policies.

One interesting manifestation of the US problem with its monopolistic private sector is its inability to keep up weapons production to support the Ukraine war. Its military industrial complex is plagued with undercapacity, high cost, and low efficiency despite having the world's largest military budget (by an enormous margin). The consolidation of the vaulted military-industrial complex into 5 giants has led to a lack of competition and accountability in most parts of the defence acquisition system. It has led to undercapacity and extreme high costs (of course high margins).

Today while these private defence contractors boast the highest revenue and market cap globally, the US cannot even produce sufficient basic ammunitions such as 155' artillery shells let alone missiles, warships, fighters and other sophisticated weapons at scale. If the US cannot outcompete production against Russia, what is its chance against China, the world's largest industrial powerhouse? China's "overcapacity" issue is indeed a nightmare for the US.