Temu, Schein and the madness of planned economy

On Chinese platforms, Western consumers encounter goods from communist-dominated economies.

Niklaus von Tobel/ch media

Prices for Chinese goods are unbelievably low. Online platforms such as Temu, Shein or Alibaba sell sneakers for 5.93 francs, party dresses for 6.99 francs, slippers for 7.51 francs and autumn coats for 21 francs. These are just crazy prices for consumer goods. Solar panels and electric cars from China are also very cheap. Why are these prices so low?

This is the result of China's communist planned economy. This is the conclusion reached in an analysis written by Liu Zongyuan, a researcher at the American think tank “Council on Foreign Relations”, for “Foreign Affairs” magazine. In the book, Liu explains why China's system was on the verge of failure but not replaced, and why it had huge side effects.

Beijing puts industry first. Prime Minister Xi Jinping wants to produce, produce, produce. People care less about whether the goods flowing out of the factory are actually consumed. For Beijing, consumption is a waste of resources and an “individualistic distraction.”

The government takes money from private households and gives it to industry to build more factories. Beijing achieves this redistribution by keeping wages artificially low. It also lowered interest rates on People's Bank of China accounts, creating cheap money and funneling it to favored industries. Eventually, more goods rolled off the assembly line.

Consumption must serve industry

If there must be consumption, according to Beijing's wishes, it must serve industry. Beijing included it in a paragraph of its five-year plan, which contains detailed targets for patents or economic growth. Therefore, consumption should shift to those goods that are in line with Beijing's industrial goals, such as cars, electronic products or smart devices.

Liu said that so far, China's entire retail industry has been “largely determined by the country's industrial goals rather than people's personal preferences.” This also applies to online platforms like Shein, which Temu belongs to, Alibaba and Pinduoduo: there is just the illusion of a huge amount of choice. In fact, these retailers compete fiercely to sell the same interchangeable standard products.

With Temu, you only get the illusion of having multiple options.Image source: IMAGO

All this steering and control has an obvious consequence, described by the Wall Street Journal: “China makes too much stuff.” Too much for itself and, sometimes, too much for the world at large.

China has too much glass, too much coal, too much cement and too much aluminum. Its factories can already produce as many electric cars as the world uses in a year, and twice as many solar panels.

Part of the problem is that private households in Beijing are cash-strapped and therefore don't have the money to buy everything that goes off China's assembly lines. Foreign countries will inevitably become the dumping ground for China's overproduction, with prices playing a subordinate role. The main thing is that you still get money for all goods.

Crazy competition among bureaucrats

The United States has long seen through this twisted logic, as has Lael Brainard, the chief economic adviser to Joe Biden’s administration. She warned in a speech that China was pursuing policies that “unfairly drive down capital, labor and energy costs.” This will enable Chinese companies to sell “at or below cost.” In other words: Beijing is driving down private incomes — which is why it can flood the world with cheap goods.

So China's richness comes from orders from above, from Beijing. But there was another reason for the glut: the massive inhibitory effect of communist political institutions.

Beijing is putting intense pressure on local leaders in provinces and cities with top-down industrial plans or campaigns such as “Shared Prosperity.” People who achieve their goals climb the career ladder; anyone who doesn't will be left on the same rung or pushed down. So bosses are watching closely, trying to funnel savings and subsidies into favored industries — regardless of whether there are buyers for them or whether other regions are doing the same.

This was the beginning of the magnificent race between the provinces of China from west to east and from north to south. Everyone — or almost everyone — wants more factories built faster in the same industries favored by Beijing.

China produces twice as many photovoltaic panels as it needs

Photovoltaic power generation is like this. In 2010, Beijing made it a priority: 31 of 34 provinces followed suit, half of the cities invested, and soon there were scores of solar panels. Dumping abroad began. In 2013, the United States struck back and imposed tariffs, which helped — but only temporarily.

In 2023, the United States noticed that Chinese manufacturers bypassed Thailand or Vietnam to enter the U.S. market duty-free. Currently, China can produce twice as many panels as the world needs. Still, its production capacity will increase by 50% by 2025.

Backlash in the West is growing. For example, the European Commission is investigating whether online retailer Temu is doing enough to crack down on goods that violate European rules. New US President Donald Trump has threatened to impose 60% tariffs on Chinese goods.

But Beijing won't abandon its system so quickly, in part because it keeps private companies in compliance. Many of them had to sell goods at extremely low prices, leaving their financial situation extremely unstable. They would collapse without Beijing's cheap loans – which Beijing can cut off at any time. (aargauerzeitung.ch)