China's Overcapacity Calls for "Creative Approaches": Treasury Official

“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,” the Treasury official stated.

“The best outcome, though, would be for China to acknowledge the growing concerns among its major trading partners and work with us to address them. We will take defensive action if needed, but we would prefer for China to take action itself to address the macroeconomic and structural forces that are generating the potential for a second “China shock” for its major trading partners,” he continued.

China could boost consumption by strengthening its safety net, increasing household incomes and reforming its internal migration rules, Mr. Shambaugh suggested. “It could better support services, not just manufacturing. It could reduce harmful and wasteful subsidies. These would all be in China’s interest and reduce tensions.”

The Administration continues to raise its concerns about overcapacity at every opportunity, he said. “First, overcapacity concerns are not new, and China is not blind to them. In the past, China has acknowledged excess capacity in several industries, including steel, cement, and glass. And more recently, Chinese officials have publicly acknowledged overcapacity as a risk to sustained economic recovery during their Congress’s annual meetings in March and their Central Economic Work Conference last December.

Continued production beyond what a market can bear is an inefficient waste of resources. Reigning in overcapacity could be good for China, boosting productivity and efficiency. However, their efforts from prior years to address overcapacity in a small number of sectors are being reversed, and overcapacity is clearly growing.”