Is Chinese Production Too Efficient for Global Economy?

China’s economy grew on the back of its impressive manufacturing capabilities. Just over a decade ago, as China sought ways to expand its economy, it turned to manufacturing and exporting, and the investment paid off. For years, Chinese economic growth has been among the best in the world, and China now has one of the most influential economies on the Planet thanks to its highly efficient production facilities, abundant human capital, and low price points for its finished goods.

China’s economy grew on the back of its impressive manufacturing capabilities. Just over a decade ago, as China sought ways to expand its economy, it turned to manufacturing and exporting, and the investment paid off. For years, Chinese economic growth has been among the best in the world, and China now has one of the most influential economies on the Planet thanks to its highly efficient production facilities, abundant human capital, and low price points for its finished goods.

Yet, did all of that success come too quickly? As global demand dropped after the Global Recession in 2008, Chinese production continued on at largely unchanged levels of output. China, who has been accused of doctoring its own numbers to present a rosier impression of its economy than warranted, may have fueled this ongoing growth in output of export goods despite the fact that the world market had stopped buying them. Inaccurate numbers may have led policy makers and business owners to the conclusion that exports had not begun to sag, thus few took the necessary steps to remedy the situation and prevent over-supply and price deflation.

Now, China’s great successes may cause problems for not only the Chinese economy, but also the world’s. According to a report by the Wall Street Journal, Chinese manufacturers have flooded the export markets with finished goods despite flagging demand. This has driven down prices around the world, hampering recovery and creating deflation in China and abroad.

For example, the Wall Street Journal tracked the price of tires. Due to a glut of Chinese tires on the export market, tire prices in the United States have fallen by 6.5 percent in less than three years. Moreover, all goods imported to the US directly from China have fallen by 2.2 percent in the last 38 months, according to the US Labor Department.

While this may seem good news for consumers, declining prices present a real problem for businesses around the world. Declining prices cut profitability, making raises for employees impossible and deterring investors. While most sectors of the US economy have improved since beginning to recover from the recession, goods (which are susceptible to outside influence) have failed to grow as predicted, and even experienced periods of deflation.

In China, this excess production has created weak price growth. This, in turn, prompted the People’s Bank of China to ease credit restrictions in order to facilitate consumer borrowing in hopes of spurring greater domestic consumption. Some analysts fear, however, that this could cause further problems as Chinese businesses attempt to use freely available funds to increase production further, attempting to return to profitability by selling larger volumes at lower prices.