technology

Given the market situation, isn't it a good time to get some consolidation in these industries?

No, the so-called “overcapacity problem” is really just a symptom of a much larger problem that nobody is willing to admit: wealth inequality.

You have an oversupply because… nobody has the money to consume, or, people are being extremely reluctant to consume because of the perceived poor economic outlook, and that they are going to lose their jobs at any given moment due to the uncertainty in the economy.

What the government should immediately be doing are:

1. Provide social welfare so those who are laid off have a safety net
2. Provide free healthcare so people aren’t so burdened by potential healthcare costs if they get sick or in an accident
3. Raise the wages of the working class, especially the bottom 40% (600 million people) who are still living on an average income of 1000 yuan (~$150) per month - raise their income and you won’t have an overcapacity problem

This is a wealth distribution problem, and that wealth is being funneled into the financial sector because local governments had taken out huge loans to finance the infrastructure and housing market over the past decade, and find themselves unable to pay back after Covid decimated the local finances, and as the property market bubble bursts since 2021.

And the local governments had to self-finance because back in 1994, the central government decided that their tax revenues were inadequate to finance the SOEs all across the country (it received only ~20% of the total tax revenues while local/municipal governments, especially the rich coastal provinces with export market, kept the rest). This is because China’s economic model follows the neoclassical theory - that the government is run like a household: it has to earn the tax revenue before it is allowed to spend.

As such, we have the Tax Sharing Reform that further decentralized the economy, with the local governments having to pay much more tax to the central government (~75% goes to the central government) while being burdened with financing the SOEs themselves.

This led the Northeast Three provinces (where China’s heavy industrial SOEs were concentrated) to mass privatize. It is estimated that at least 40 million workers became unemployed during the mass privatization wave from 1996-2002, a trend that would not be reversed until China joined the WTO and turned itself into a “world factory” in the early 2000s.

But the most important legacy of the 1994 Tax Sharing Reform was that local/municipal governments realized that they could no longer rely on the central government funding, so they had to seek their own sources of non-tax revenues (that would not be taken by the central government), and that include private investments and land revenues. The ticking time bomb was already laid back in the 1990s due to how the decentralization of the economy was arranged.

So, it comes back to wealth inequality. The wealth are being used to service the massive amount of debt that the local governments had taken out and save the investors, and did not go to the working class. And this is allowed to happen because the central government believes in the IMF “balance the budget” formula, and is extremely hesitant to run a deficit to give people the money to spend.