US ‘hyping up’ claims of overcapacity
China being used as ‘scapegoat’ for American decline, official newspaper says
The Communist Party’s official mouthpiece has accused the United States of “hyping up” claims of “overcapacity” in new-energy industries, amid reports that Washington could dramatically raise tariffs on Chinese electric vehicles (EVs) as soon as today.
“The intention to hype up China’s overcapacity is to contain China’s industries that have an edge,” an opinion piece in People’s Daily on Sunday said.
It said the United States was plotting to boost its own industries and use China as a “scapegoat” for the decline of various American sectors, adding that “some other countries” were following the US line.
American officials have been vocal about what they see as the impact of excess Chinese manufacturing capacity, especially in EVs, solar panels, batteries and steel.
They claim that much of that capacity has been achieved through ramped-up state subsidies and by limiting foreign access to Chinese markets – and have warned of retaliation if China does not change its approach.
Multiple US media reports published over the weekend suggested that the administration of US President Joe Biden could raise tariffs on clean-energy goods from China, including quadrupling duties on Chinese electric vehicles.
The White House could also be about to renew tariffs on critical minerals, solar goods and batteries imposed under Donald Trump, Biden’s predecessor and likely opponent for the presidency in November’s election.
American tariffs of 27.5 per cent on China’s EV exports have prevented those producers from gaining a foothold in the US market.
In April, the US also initiated a Section 301 unfair practices inquiry into China’s maritime, logistics and shipbuilding sectors, the first on Biden’s watch.
The European Union is also investigating allegations that China is exporting its excess capacity, launching anti-subsidy investigations into Chinese EV and wind turbine manufacturers late last year.
Both the EU and the US have said China’s overcapacity is impairing their national security and harmful to their economies, saying it squeezes domestic players out of their own markets.
Chinese players dominate the world market in what Beijing calls the “new three” industries: EVs, lithium batteries and solar panels.
China sees these industries as examples of its manufacturing strength and as the foundations of an economic shift away from the mass output of traditional, low-value-added items such as clothing and home appliances, to advanced production and higher growth.
Beijing is well aware of the risks of overcapacity in these industries.
At the annual legislative sessions in March, President Xi Jinping warned against a “headlong rush into new projects” in the drive for new “quality productive forces”.
Nevertheless, it has been a consistent complaint from US officials on their trips to China, including Secretary of State Antony Blinken and Treasury Secretary Janet Yellen.
Just as consistently, Beijing has said the claims are groundless. Meeting EV and lithium battery manufacturers in Europe last month, Chinese commerce chief Wang Wentao said China’s rise in these industries was “driven by innovation and complete supply chain systems”.
And during a visit to France last week, Xi also denied there was a Chinese “overcapacity problem”, while adding that he would welcome more high-level talks on trade frictions.
Fresh sparks are flying as risks associated with an overflow in China’s electric vehicle (EV) industry have turned up the heat between Beijing and the West, amid echoes of past trade rows.
With demand unleashed amid Beijing’s policy blessings to rev up the green transition over the past several years, the EV and other green industries have seen a steady build-up of capacity – widely viewed as the tip of a hi-tech manufacturing iceberg.
Back in 2009, China began pushing its carmakers to develop cutting-edge EV technology, with an eye on leapfrogging the global makers of petrol-powered vehicles.
But the blowback from abroad has ramped up relatively recently, as the fruits of China’s exhaustive EV undertakings truly began to be realised. Having long led the global pack in automobile and hi-tech manufacturing, the United States and European Union now find themselves scrambling to erect roadblocks to safeguard those sectors at risk of being upended by Chinese exports.
At the weekend, reports in the US were rife with speculation of a rise this week in import tariffs on Chinese EVs and a range of other goods related to the new-energy economy. And on Sunday, a Communist Party mouthpiece took aim at Washington’s hard line.
“The intention to hype up China’s overcapacity is to contain China’s industries that have an edge,” said an opinion piece in People’s Daily, adding that the country was being scapegoated for a decline in some American industries.
Meanwhile, some analysts say the country’s EV glut is inherently different from the excess or idle capacity issues that once plagued other industries.
Market mechanisms and Beijing’s strained ties with the West, they say, have also become factors at play as Chinese EVs sit in the cross hairs of American and European politicians.
“A free market or industry is not immune from overcapacity,” said Zhu Tian, a professor of economics at the China Europe International Business School in Shanghai.
“But, thankfully, the almighty market will eventually weed out uncompetitive players or excess capacity.
“The key is keeping politics out of this market mechanism.”
China’s industrial-capacity utilisation rate dropped to a fouryear low of 73.6 per cent in the first quarter, according to the National Bureau of Statistics (NBS).
“A utilisation rate of 76 to 80 per cent is considered normal for most industries,” Zhong Zhengsheng, chief economist at Shenzhen-based Ping An Securities, said in a recent report.
NBS data also revealed that automobile and new-energy equipment manufacturing were among the sectors grappling with deep drops in capacity utilisation during the quarter.
In 2023, just 20 of China’s 77 carmakers reported the above-60 per cent utilisation levels deemed normal, a report by Shanghaibased consultancy Gasgoo revealed. Less than half of last year’s car-production capacity of 55 million was used.
“There are warning signs if we assume overcapacity means China is producing more than its domestic economy can consume,” Alicia Garcia-Herrero, French investment bank Natixis’ chief economist for the AsiaPacific region, said in an April report, citing asset-turnover and inventory-to-sales ratios.
Guangxi-based Sealand Securities warned in an April research note that EV production was just one of many sectors bogged down by overcapacity.
“Declines in prices and capacity utilisation, relative to their recent highs, suggest that the current round of overcapacity covers many industries,” the report said.
Using 2019 and 2021 capacity-utilisation ratios as benchmarks, Nanjing-based Huatai Securities also flagged electronics, pharmaceuticals, building materials and food and drink as sectors bedevilled by low utilisation.
Lu Feng, a professor with Peking University’s National School of Development, said at a recent seminar that overcapacity was more pronounced among producers of petrol vehicles, petrochemical goods, chips and lithium batteries.
Notwithstanding the speed and scale of China’s EV adoption and the tech self-sufficiency crusade fuelled by geopolitics and tech disputes, Lu raised concerns about some initial “signs of structural excess output” in the chip sector, and lurking risks in the EV bonanza.
China’s chip-production capacity will grow by 13 per cent with 18 new projects in 2024, despite the capacity-utilisation ratio of the computer and electronic-equipment sectors hitting a historical low of 75.6 per cent last year, according to estimates by American semiconductor industry group SEMI.
China is no stranger to overcapacity – not since opening up its manufacturing sector to private and foreign investors in the 1990s.
Still, the government and state-owned enterprises (SOEs) continue to be the main culprits.
For instance, a 4 trillion yuan stimulus package Beijing wheeled out in 2008 to offset export losses, coupled with monetary and credit loosening, ignited frenzied production expansions for steel, cement, aluminium and plate glass, mostly among SOEs.
By 2013, when Xi Jinping became president, overcapacity started to bite in the photovoltaics (PV) sector, then spread to building materials and other sectors.
But analysts see a different problem this time around.
“Today, overcapacity is concentrated in equipment manufacturing and downstream consumer industries, involving more private producers than SOEs,” said Zhong of Ping An Securities.
China’s EV sector is championed by private players such as BYD, which dethroned Tesla last year as the world’s largest producer. Similarly, the lithium battery sector is dominated by private firm Contemporary Amperex Technology, known as CATL.
“It’s different from a decade ago, when SOE makers of steel, cement and non-ferrous metals were churning out more than needed,” Zhong added.
And, unlike how China’s leaders relentlessly reined in those sunset industries back then, Beijing now hails EVs, PVs and lithium batteries as bright spots of its economy – the new darling industries. The combined export value of these “new three” trade pillars hit 1 trillion yuan (HK$1.1 trillion) last year, and reflecting a shift from China’s “old three” export foundations: clothing, home appliances and furniture.
Zhong also pointed out how the transition of the Chinese economy had a profound impact across all industries.
“The population is ageing, potential growth declining and property demand peaking … This means tougher competition among businesses for a bigger slice of a pie, when the pie itself may not become too much bigger,” he said.
Occurring in tandem, a widespread global shift towards deglobalisation and protectionism has seen policy shift to “de-risking” and supply-chain security.
Zhong thus spotlighted the role of industrial policies in creating overcapacity in industries that specialised in computers, telecommunication equipment, electronics, electrical machinery and pharmaceuticals.
In supply-side reforms initiated by former vice-premier Liu He in 2015 to defuse the overcapacity crisis, Beijing had identified six of the hardest-hit sectors: iron and steel; cement; coal; aluminium; plate glass and shipbuilding.
In subsequent years, Beijing issued quotas to reduce output in the coal, steel and cement industries, while striving to shut down “zombie” SOEs.
Today, there are questions as to whether such intervention might still be warranted in sectors like EVs, as the market is already driving out uncompetitive players, with a string of closures since last year amid a price war.
For example, WM Motor, one of China’s earliest EV start-ups, filed for bankruptcy in October. And Shanghai-based Human Horizons killed its luxury HiPhi brand in February.
Zhu Jiangming, founder of Zhejiang-based Leapmotor, one of the top-10 EV sellers last year, was quoted by the state-backed Zhejiang Daily in April as saying that more consolidation was expected by 2025.
“By then, companies that survive the competition can carve out bigger market shares,” he said.
“In a very dynamic market, there is new capacity coming online, but competition is also knocking out some producers.”
Beijing’s policymakers have signalled that central authorities would remain hands-off in such a market-led restructuring, deeming it a necessary step to competitiveness among manufacturers.
“Supply-demand imbalance is often the norm. It can occur in any country, including the US, where a market economy prevails,” vice-minister of finance Liao Min said in early April, shrugging off overcapacity concerns raised by US Secretary of the Treasury Janet Yellen during her China visit last month.
Beijing has also emphasised that the rapid rise of domestic new-energy industries was in line with economic laws and market principles.
“The competitiveness of new-energy products like EVs traces its source to early planning, years of R&D investment, strong industrial support and the sheer size of the domestic market,” foreign ministry spokesman Wang Wenbin said in April.
Adding that the advantages were shaped by market competition, Wang said the West’s characterisation of these industries’ dynamism as “overcapacity” smacked of trade protectionism.
His comments came after Beijing conceded at its annual tone-setting central economic work conference last December that “overcapacity in some industries” was one of the major challenges to tackle in 2024.
The EU formally launched an anti-subsidy inquiry into Chinese EVs in October, and this year US President Joe Biden vowed “unprecedented action to ensure that cars on US roads from countries of concern like China do not undermine our national security”.
In response, Beijing has urged Washington not to politicise the issue or seek to contain China.
Lance Liangping Gore, a senior researcher with the National University of Singapore’s East Asian Institute, said “overcapacity” could be construed as a fuzzy or misleading term.
“EVs are just starting to replace petrol vehicles, and the capacity is far from enough. It’s quite conceivable that global emission reductions will come faster – and cheaper for consumers – if China keeps producing at an optimal scale,” Gore said.
“The West’s concerns boil down to profits versus fighting climate change. In neither case is overcapacity the real issue,” he added.
But Jean-Pierre Cabestan, a senior researcher with France’s National Centre for Scientific Research, said the motivation behind the West’s moves was more complex than just protecting uncompetitive producers.
“The stakes are high: saving the European car industry, and jobs and supply chains along with it,” said Cabestan, who is also a professor of international studies at Baptist University.
“There is consensus in the EU that transcends election rhetoric and populism. European buyers may even prefer to pay more [for local EVs].”
In the first two months of 2024, China’s EV exports to the EU fell by 20 per cent, year on year, to 75,626 units.
The domestic proliferation of EVs has been ballyhooed by state media as the culmination of Beijing’s years-long pledge to “overtake on the bend”.
Beijing has also insisted that state subsidies were designed to expedite the adoption of newenergy technologies, while pointing out that such subsidies are also used in the West.
The stakes are high: saving the European car industry, and jobs and supply chains JEAN-PIERRE CABESTAN, BAPTIST UNIVERSITY
US manufacturing has never been competitive. [It] blamed Japan first, and now China CHRISTOPHER TANG, UCLA ACADEMIC
The International Monetary Fund noted more than 2,500 industrial-policy interventions worldwide last year, and it said the surge had been largely driven by big economies, with China, the EU and US accounting for almost half of them.
“In China, one pair of hands looks after the economy – the ‘visible’ hand of government policies and macro-management – and an ‘invisible’ hand looks after the market and competition … Two hands are better than just one,” said Hu Angang, dean of Tsinghua University’s Institute for Contemporary China Studies.
For China’s EV sector, industrial policies also served as the initial catalyst, combined with subsidies and the right bet on battery technologies during the industry’s infancy.
And after ushering in a boom that began in 2020, Beijing stepped back and let the market take the reins. But subsequent price wars and market saturation have drawn the ire of the West, prompting aggressive responses as Chinese manufacturers increasingly seek to go global.
Christopher Tang, a University of California, Los Angeles professor specialising in global supply-chain management, said the relative US shortfall in competitiveness could end up hitting its drivers in their wallets.
“Washington fails to acknowledge that China has developed efficient supply-chain solutions – from raw materials to end products – to mass produce at low prices,” he said. “Raising barriers will rob Americans of their access to good, cheap products.
“US manufacturing has never been competitive. Washington blamed Japan first, and now China.”
But moving forward, Chinese carmakers cannot resolve the US-market-access issue the way Japanese carmakers did in the 1980s, according to Tomoo Marukawa, an economics professor with the University of Tokyo.
“The issue was resolved by Toyota and Honda investing in the US to have US workers assemble cars,” he said. “But Washington will deny Chinese investments, even from non-SOEs.
“Perhaps Mexico may allow the Chinese to make EVs there and sell them to the US. But Washington may still block those imports by any means.”