China Overcapacity ‘Overrated’, Say China Researchers

Ju Jiandong, Director of the Center for International Finance and Economic Research at PBC School of Finance at Tsinghua University and Feng Lu, Assistant Researcher with the Center for International Finance and Economic Research at PBC School of Finance at Tsinghua University make the case that overcapacity in the green energy sector is a temporary phenomenon. Writing for China Watch, a think tank powered by China Daily, the two made the case that the overcapacity should be viewed from a global, dynamic perspective, and not the ‘short term’ actions like those taken by the US and other markets which have imposed tariffs on Chinese goods, especially in the energy sector, particularly Solar, and now, EVs.

The two based on their contention on a study of 20 years of carbon intensity data (carbon emissions per unit of export volume) and China’s export data from 2002 to 2021 to examine the relationship between the carbon intensity of Chinese products and China’s export structure.  They arrived at three conclusions based on the study.

Lower Carbon Intensity=Longer Success In Exports

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First, the share of China’s product exports in China’s total exports and destination markets shows an inverted U-shaped curve of first increasing and then decreasing. Second, the products with higher carbon intensity reach their export peaks earlier than those with lower carbon intensity. Third, this non-linear relationship is mainly caused by changes in the comparative advantages of industries due to an increase in the cost of carbon emissions in China.

If an industry is on an upward trajectory, the future demand will continue to expand and the new market demand will absorb more production capacity. Under this circumstance, even if the supply exceeds demand in the short run, the industry shouldn’t be deemed as having excess capacity from a dynamic perspective that includes the whole life cycle of the industry, as long as the industry can continuously improve its production technology and enhance production efficiency.

Specifically, due to the low-carbon nature of green industries, most of them have not yet reached the peak in their life cycle and are on an upward trajectory, so the judgment of whether there is excess capacity in these industries should factor in future demand. Thus, they cite the expanding demand for green products both domestically and globally to call existing ‘overcapacities’ short term in nature.

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Driving their point further, they cite IEA figures that say electric car sales reached 14.65 million units in 2023, about 42 times the sales figure in 2014. To accomplish the goal of carbon neutrality, the global EV sales will need to reach 45 million units by 2030, which is more than three times that of 2023.It is expected that by 2030, the global demand for power batteries will reach 3,500 GWh, four times the global shipments in 2023.

Taking the argument forward to the PV or solar manufacturing sector where China has been blamed for massive overcapacity, the authors say that it is expected that annual solar PV additions will expand more than fourfold to 650 GW by 2030. Therefore, in the face of the carbon peaking and carbon neutrality goals and the hefty global demand, the “new three” (solar cells, lithium-ion batteries and electric vehicles) production are far from experiencing overcapacity, but rather in serious under capacity.

They end by saying that “In a nutshell, the issue of overcapacity should be viewed from a dynamic and global perspective. China’s green industries are still on an upward trajectory, with great market potential. Supply exceeding demand is a short-term phenomenon. Policy governance should focus on improving efficiency rather than only limiting capacity”.

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The Counter View 

While the Professor makes some good points, the problem is that structurally, the industrial cycle, or specific industry cycles seem to have shrunk over the past few decades, driven by a combination of technology, liquidity and productivity changes. That has exaggerated the impact of government subsidies of the kind seen to have been used in China to prop up their green industries. Not just that, with a cycle of just 3-5 years for a technology type in solar cells and modules for instance, governments worry that their domestic industry will never quite get the opportunity to have a fair contest vis a vis the Chinese.

Then there is the permanent issue of limited transparency on manufacturing capacities when it comes to China, which makes it very tough for government’s outside to take a nuanced view on protection. For instance, in just solar, many sources have spoken about Chinese domestic capacity heading towards 1 TW, even as the professor himself cites 650 GW (DC)of peak demand by 2030.

Finally there is the small matter of energy security, cited by many countries to seek ‘independence’ from dependence on Chinese imports. It is for China to demonstrate that it places commerce at the forefront of its global credibility as a partner, and assuage doubts that it will use it as a way to bend other viewpoints to its will.