Overcapacity and Falling Prices: China’s Economy Caught in a Vicious Cycle | China Truths

Welcome to China Truths. In this episode, we will bring you the following stories. Overcapacity and falling prices, China's economy caught in a vicious cycle. Viral resignation letter from a Beijing post-2000s generation sparks nationwide attention. Now, let's dive into the details. It's all covered in today's China Truths. Overcapacity and falling prices, China's economy caught in a vicious cycle. China's economy is grappling with overproduction across various industries, including paper products. According to the Wall Street Journal, one of China's largest paper manufacturers, Shandong Chenming Paper, is taking the same approach as many other companies, slashing prices to clear inventory. However, the company's financial losses are mounting. Last month, the company disclosed that its overdue debts had reached approximately $250 million. Creditors have filed lawsuits, and some of the company's bank accounts have been frozen. As China's economy remains sluggish, factories are struggling to cope with overcapacity and weak demand. The producer price index, PPI, in China has declined year-on-year for 26 consecutive months, with a 2.5% drop in November compared to the same month last year, showing little sign of Meanwhile, China's GDP deflator, a broader measure of overall economic price levels, has remained negative for six consecutive quarters, marking the longest stretch since the late 1990s. This week, Chinese Communist Party, CCP, leaders pledged to implement more measures to stimulate the economy, including cutting interest rates and increasing government borrowing. However, Beijing is under growing pressure. With U.S. President-elect Donald Trump preparing to impose higher tariffs, the CCP faces significant challenges in redirecting surplus industrial capacity to the U.S. market. This will likely result in more unsold goods domestically, further driving prices down. The next potential consequence for businesses is layoffs, which could lead to reduced consumer spending. Others may delay purchases in anticipation of further price drops. This is becoming a vicious cycle, said Penelope Prime, founding director of the China Research Center in Atlanta. Lisa Wang, a salesperson at a textile factory in China's Zhejiang province, explained that her factory has been forced to lower prices to compete with numerous rivals. This has cut profits and led to layoffs, which she fears is In November, China's consumer price index, CPI, rose by just 0.2 percent year-on-year, far below the 2 percent level that most central banks consider conducive to healthy economic growth. In contrast, the U.S. CPI increased by 2.7 percent during the same period. Last month, CCP policymakers approved a $1.4 trillion debt swap plan to bolster local government finances. However, the current policies have not effectively driven up prices. Two key issues contribute to this. These policies primarily aim to mitigate immediate financial risks rather than promote sustained growth in consumer spending. Beijing continues to extend loans and subsidies to Chinese factories. While this has supported production growth, it has also exacerbated the oversupply problem, putting further downward pressure on prices. At Shandong Chenming Paper, management has shut down nearly three-quarters of its production capacity. According to China's National Bureau of Statistics, as of October this year, the country's paper and cardboard production had increased by about 10 percent compared to the same period last year. Since October 2022, the factory prices of paper products in China have declined year after year. Similar trends are evident in other industries. In September, William Li, CEO of Chinese electric vehicle maker NIO, remarked during an earnings call that China's internal combustion engine car manufacturers had entered an unsustainable vicious cycle of price reductions, eroding profits. Yet, automotive production in China continues to grow. Nomura Securities forecasts that China's producer price index will decline by 1.2 percent, while Macquarie predicts a 1 percent drop by 2025. Viral resignation letter from a Beijing post-2000s generation sparks nationwide attention. Recently, a resignation letter written by a member of Beijing's post-2000 generation has been circulating online, garnering widespread attention. Bloggers across platforms have produced short videos promoting the letter, sparking heated discussions. The letter vividly encapsulates the struggles faced by today's youth in China, highlighting the severe economic challenges and the significant disparity between the lives of those within the Chinese Communist Party, CCP, system and ordinary citizens. In the letter, the young Beijing resident states, My grandfather is retired, earning over 10,000 yuan a month in pension. My grandmother is retired, earning more than 8,000 yuan a month. My maternal grandfather is retired, receiving over 9,000 yuan monthly, and my maternal grandmother receives more than 7,000 yuan. My grandmother's family owns two apartments in Haidian district, my maternal grandfather's family has three apartments in Chaoyang district's Huangjing area, and my family owns two apartments in Zhongguan. We also have a villa in Tongzhou. Both my parents are only children and work within the CCP system. They don't have the time to take care of the elderly. I am the only young person in my family, and despite working tirelessly, I only earn 5,000 yuan a month. Therefore, I formally submit my resignation to the company, intending to return home and take care of my four elderly family members. Money is not important, ensuring the health and longevity of my grandparents is what truly matters. This resignation letter has attracted widespread attention, with various bloggers and influencers eagerly creating short videos to discuss and promote it. A woman from Jiangsu province expressed her dismay. Not only do we have to support these retired high-income individuals in the CCP system, but we also have to support their grandchildren. Meanwhile, our own pensions are being delayed. Another netizen commented, I've never understood how the system works. How can retirement pensions be higher than salaries for those still working? It makes no sense. A migrant worker speculated, I feel like the 400 yuan I pay for medical insurance is probably being used to fund their pensions. Some noted the privileges enjoyed by government workers, stating, When civil servants retire and pass away, the state even gives their families 40 months' worth of salary. It's a pity for the workers and farmers. The resignation letter has been described as heart-wrenching by some commentators, who see it as a stark reflection of societal realities. Others have called it a profound satire on the current state of society. It underscores the growing disparities in income and quality of life between those within the CCP's bureaucratic system and the rest of the population. While a small group enjoys stability and privileges, the majority struggles with stagnant wages, delayed pensions, and an increasingly unaffordable cost of living.