The flawed logic behind the so-called 'overcapacity' of China’s new energy sector

Recently, some in the EU and the US believe that there is “overcapacity” in China's new energy sector and the European Commission also initiated an anti-subsidy investigation into Chinese electric vehicles on the grounds of “overcapacity”.

Upon closer examination, however, this argument lacks credibility and is more like a pretext for the EU and the US to enforce trade protectionist policies.

Firstly, overcapacity is a comparative concept.

It shouldn't be measured solely by production capacity itself or the supply, but rather by the actual demand. In the context of economic globalisation, differences in resource endowments among different countries or regions have given rise to the international division of labour and trade. It is the result of countries leveraging their comparative advantages and carrying out mutually beneficial cooperation.

If one believes that a country should only produce goods that meet its own domestic needs and use indicators such as a country’s output share in the global market or its export volume to judge whether there is overcapacity, it contravenes the fundamental principles of international trade and deviates from the general consensus of the public.

For instance, Germany produced 3.48m cars locally in 2022, of which 2.65m were exported, accounting for nearly 80 percent of its total production. While this may appear as a surplus for Germany, for the global market it is just a normal practice of international trade. Surely one cannot simply conclude that Germany has overcapacity in automobile production.

EU automakers have always maintained a dominant position in the Chinese market, with the current market share still over 20 percent. If Chinese companies’ exploration of overseas markets is labelled as overcapacity, then how should we define the substantial presence of European products and investments in China?

Secondly, overcapacity should be assessed by the capacity utilisation rate of an industry to see if there is a significant amount of idle capacity.

China's new energy sector is on the track of rapid growth with sustained strong demand. There is no such so-called overcapacity at all. New energy-related output is mainly sold in China without large-scale export. For instance, in 2023, the production and sales of new energy vehicles in China reached 9.587m and 9.495m units respectively, basically striking a balance between production and sales, of which domestic sales account for 87.3 percent and foreign exports only account for 12.7 percent.

At present, China's new energy vehicles continue to become more intelligent and innovative. Popular products equipped with various cutting-edge technologies have been released frequently, attracting the eyes of business communities from Europe and the rest of the world and receiving positive feedback from more and more users. New energy capacity cannot be built in one day. Leading Chinese automotive brands such as BYD often face short supply before fully geared. Indeed, the primary issue they need to address is often under-capacity rather than overcapacity.

Thirdly, blaming China’s new energy industry for the so-called overcapacity is wrong and unfair. China's new energy competitiveness is not obtained by subsidies, but achieved by enterprises’ long-term technological innovation, hard work and market competition.

Not low-price dumping

China's new energy vehicles are popular with both European and global consumers, which is hard-won by high quality and brand reputation, rather than so-called low-price dumping. The price of Chinese new energy vehicles sold in the European market is much higher than their domestic price in China, and also comparable to EVs of other brands sold in the European market. It is hoped that the EU could look at the so-called overcapacity in an objective and fair way, and not blame China for the lack of impetus for the EU’s industry, let alone take protectionist measures on the pretext of overcapacity.

I have read from one of the latest articles the viewpoint on this matter of Peter A. Fischer, head of the Economics Department of Neue Zürcher Zeitung. He states that the data so far shows no sign of the widely criticised flooding of Chinese products into the European markets, and the fear of the so-called Chinese threat and calls for a protectionist response to it are “probably misguided.” “Industrial policy is expensive and usually ineffective.” “If innovative Chinese electric cars force European manufacturers to improve, consumers should be happy,” he added. “The best course of action for Western countries is to face up to the competition.” 

New energy is the common future for mankind. At present, the global new energy capacity is far from enough and still needs to be significantly improved. There is no such overcapacity at all. International organisations such as the United Nations Conference on Trade and Development and the International Energy Agency have reported that in order to achieve global carbon neutrality, investment in new energy must be further accelerated. Whether it is the global response to climate change or the EU's green transition, more new energy capacity and products are needed. 

China is willing to work with all parties to adhere to the basic norms of the market economy, continue to promote new energy technology and product innovation, advance healthy competition in international industries through fair competition, improve global productivity and economic efficiency through open cooperation, and actively maintain global industrial and supply chains stability, so as to make more contributions to global efforts to climate change and green development.