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China’s overinvestment and international trade conflict


  • Gunther Schnabl


For a long time, China’s impressive growth performance has been driven by investment and high productivity gains. Based on the recent discussion on possible overcapacities and overinvestment in China, the paper investigates the sustainability of China’s investment- and export-driven growth model. It is shown that since the turn of the millennium buoyant capital inflows and low interest rates have been at the roots 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 the Chinese authorities to postpone a restructuring of the Chinese economy by low-interest credit provision. The resulting gradual reemergence of quasi soft budget constraints is seen to undermine China’s long-term growth potential.

Suggested Citation

  • Gunther Schnabl, 2019. "China’s overinvestment and international trade conflict," CESifo Working Paper Series 7642, CESifo.
  • Handle: RePEc:ces:ceswps:_7642

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    2. Schnabl, Gunther & Sonnenberg, Nils, 2020. "Monetary policy, financial regulation and financial stability: A comparison between the Fed and the ECB," Working Papers 166, University of Leipzig, Faculty of Economics and Management Science.

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    More about this item


    China; investment; overinvestment; trade policy; credit growth; rebalancing; soft budget constraints; zombification;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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