China’s ‘new productive forces’ risk overcapacity bubble

China’s Two Sessions – the National People’s Congress (NPC) and the National Committee of the Chinese People’s Political Consultative Conference (CPPCC) – took place from March 4-11 in Beijing.

This year, the Two Sessions have been particularly important for understanding where the Chinese economy is heading, as new Premier Li Qiang delivered his first “Work Report,” which marked the beginning of a new economic era.

The Work Report signifies a departure from the previous decade under Premier Li Keqiang’s leadership and puts more emphasis on the supply side rather than demand side of the economy. The focus on “new productive forces” points to Chinese leaders’ new understanding of the country’s economic transition.

From the Work Report, we see that China aims to double down on basic and advanced manufacturing while demand-oriented stimulus measures seem to be less relevant.

Foreign investors had been expecting China to announce fiscal and/or monetary stimuli to support its struggling domestic economy. But they are now confronted with the country’s further push towards becoming the factory of the world – and, this time around, for any kind of product, including the most advanced.

Investor disappointment was felt right after the Work Report was delivered in a 2% drop in the Hang Seng Index, China’s most relevant offshore barometer of foreign sentiment.

Whether the focus on manufacturing production instead of consumption will be successful depends on the quantity of Chinese products the rest of the world will accept.

By investing more in manufacturing, China will build additional capacity – adding to already existing overcapacity, which can be seen from the pervasive and persistent deflationary pressures in China’s