China & World Economy / 37–62, Vol. 27, No. 5, 2019

China’s Overinvestment and International Trade Conflicts

Gunther Schnabl

Abstract

For a long time, China’s impressive growth performance has been driven by investment and high productivity gains. Based on a discussion of possible overcapacities and overinvestment in China, this paper investigates the sustainability of China’s investment and export-driven growth model. Since the turn of the millennium, buoyant capital inflows and low interest rates have been at the root of overinvestment and misallocation of capital, which necessitated export subsidies to clear markets. The overinvestment boom is argued to have ended around 2014. Since then, the overcapacities have weakened China’s bargaining position in the US–Chinese trade conflict and have tempted Chinese authorities to postpone the restructuring of the Chinese economy by providing low-interest credit. The gradual reemergence of quasi-soft budget constraints is seen to undermine China’s long-term growth potential.