| I'm Ben Holland, a senior editor in Hong Kong. Today we're looking at China's overcapacity and what to do about it. Send us feedback and tips to ecodaily@bloomberg.net or get in touch on X via @economics. And if you aren't yet signed up to receive this newsletter, you can do so here. - China's exports rose more than expected in a boost for the economy.
- Belgium is on track to run western Europe's worst deficits for years.
- COMING UP: The Bank of England is set to keep rates on hold, as is Poland's central bank.
A growing number of countries are complaining that China produces too much cheap stuff in its powerhouse factories, and should do something about it soon. They'd better not hold their breath. European Union chief Ursula von der Leyen was the latest to air the grievance, which she shared this week with visiting Chinese President Xi Jinping. But just a few days earlier, China's economic planning agency had released a detailed rebuttal of claims about "overcapacity," arguing that Chinese electric cars and solar panels are cheap because their producers are efficient, not because they're subsidized. That's become Beijing's standard response when its high-tech industries are criticized. Given their crucial role in supporting economic growth — households at home are tightening their belts after a housing slump, and will likely offer limited help toward meeting this year's 5% target — Beijing is not inclined to change course. In fact, it's not just in these cutting-edge industries that China is getting slammed for having too much capacity, and it's not just advanced economies that are doing the slamming. Emerging nations from Brazil to Turkey have protested about floods of cheap steel, for example. Read More: China Moves to Cool Battery Boom Amid Overcapacity Concerns Those problems often arise as a result of the housing slump weighing down China's domestic economy. Put simply, all kinds of materials and machines that might once have been used for construction at home are now getting diverted to overseas markets. There's no quick fix for this, because balance will only be restored when China can stabilize its housing market — which it's struggled to do — and reorient its policies so that consumers play a bigger role in driving growth. Read More: Suspicions of Fake China Cooking Oil Alarm US Biofuel Industry The latter is a big ask, as even some of China's vocal capacity critics admit. US Treasury Secretary Janet Yellen did more than anyone to put the issue on global agendas during her visit to China last month. But during one stop, she acknowledged that it would require Chinese leaders reviewing "their entire macroeconomic and industrial strategy," and concluded: "It's not going to be solved in an afternoon or a month." - Boston Fed President Susan Collins signaled rates will likely need to be held at a two-decade high for longer than previously thought.
- Brazil's central bank cut its interest rate by a quarter-point, slowing its easing pace in a split vote that exposed rifts between members nominated by President Luiz Inacio Lula da Silva and more hawkish directors.
- Japan's latest wage figures showed pay gains have now lagged inflation every month for two years even as a measure of the deeper trend points to steady growth.
- Turkey's central bank raised its year-end inflation forecast, a surprise move that underscores the challenge it faces in slowing price growth from its current level of almost 70%.
- Malaysia kept its benchmark interest unchanged, saving its policy ammunition for later amid looming risks to inflation and ongoing measures to defend the ringgit.
- In Indonesia, there are signs the private sector is increasingly concerned about the government's trade policy.
- The Philippine economy sustained its momentum in the first quarter, keeping it among the region's fastest-growing although strains are showing from high borrowing costs and persistent inflation.
Federal Reserve Chair Jerome Powell might have taken interest-rate hikes off the table, and the European Central Bank seems poised to cut rates next month. But in one regard, both are still tightening and set to keep doing so. The two central banks are continuing to run down their balance sheets, offloading assets that they accumulated during Covid. At its new, slower pace of so-called quantitative tightening, the Fed is on course to hit its pre-pandemic size in early 2027, Oxford Economics calculates, with the ECB reaching that point after that. "The US and the eurozone financial systems are still inundated with liquidity, promising that the withdrawals are likely to persist undisturbed," Tamara Basic Vasiljev at Oxford Economics wrote in a note Wednesday. While the QT pace may not be quick, there's still an impact, she says. A $1 trillion cut in the balance sheet hast the impact of 50 basis points of rate hikes, according to estimates she cited. It also hits the equity market — which feeds through to a wealth-effect spending impact. Qatar Economic Forum: On May 14-16, join heads of state, global business leaders and technology innovators in Doha to identify solutions to the major issues driving global boardroom conversations. Learn more here. | 
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