Date: Wednesday, November 15th, 2023
Source: The Wall Street Journal
Some Chinese factories, saddled with overcapacity in a struggling economy, are trying to export their way out of trouble and stoking new trade tensions in the process.
Makers of electric vehicles, solar panels and other products are cutting prices and trying harder to muscle into overseas markets as they face weakened demand at home, upsetting competitors who see threats to their bottom lines.
The tensions are most acute in Europe, where European Union regulators in September unveiled an antisubsidy probe, reflecting concern that China is flooding the region with low-cost electric vehicles.
The U.S. recently announced levies on tin-plate metal products from China and two other countries, after determining that their steelmakers were selling at unfairly low prices.
India is investigating whether China dumped a range of goods, from chemicals to furniture parts, into the country at unfair prices. Vietnam in September started examining whether wind towers imported from China have hurt domestic manufacturers.
Chinese officials have said that the country’s manufacturers are competing fairly and that their products are gaining market share overseas because they are attractive to foreign buyers. Beijing denounced the EU’s EV investigation as a “naked protectionist act” that will disrupt the global car supply chain.
China’s Ministry of Commerce, the Ministry of Industry and Information Technology and the National Development and Reform Commission—the country’s top economic planner—didn’t respond to questions from The Wall Street Journal.
Prices of goods shipped from China have fallen around 20% this year, according to ABN AMRO. While some of that drop reflects easing supply-chain bottlenecks, it is also a sign that Chinese sellers are discounting to preserve or expand market share during a period of weaker global demand, according to economists.
Local governments in China have been subsidizing trips abroad for companies to sell more overseas, including chartering flights for them. They are urging banks to lend to companies that want to expand in countries participating in China’s Belt and Road program.
Beijing has also called on financial institutions to direct credit to the manufacturing sector.
Chinese manufacturers are reaping an extra advantage from a declining currency, with the Chinese yuan at its weakest level against the U.S. dollar in more than 15 years, making their goods less expensive overseas.
In an August report, Goldman Sachs singled out several products that are oversupplied in China, including batteries, excavators and some chemicals.
Weltmeister, a Chinese electric-car brand owned by Shanghai-based WM Motor Technology, was operating at a loss for years and at one point stopped production at one of its factories. That plant restarted in June after the local government provided financial support, the company said.
The factory was aimed at “expediting the delivery of overseas orders so as to expand their global market share,” said Kang Yun, a company representative. The company in October said that its restructuring plan was accepted by a Shanghai court and that it intends to add new investors to achieve its “rebirth.”
“With a weakening economy, China naturally looks for exports,” said Brad Setser, a scholar at the Council on Foreign Relations. “But any meaningful expansion of Chinese exports beyond current levels will crush production elsewhere.”
Excess Chinese production also has upsides, including the potential to help lower inflation.
JPMorgan estimates that falling producer prices in China will lower global core goods inflation outside the country by 0.7 percentage point over the second half of 2023.
Many of China’s excess goods are being snapped up eagerly. Cheaper EVs, batteries and solar panels from China can help the U.S. and other countries achieve their greenhouse emission reduction goals.
Echoes of past problems with oversupply
China’s history of trying to export its way out of excess capacity has created strains in the past.
In the 2000s, cheap Chinese photovoltaic products—used in solar panels—flooded into Europe and the U.S. and put some local manufacturers out of business. That development triggered yearslong probes over whether China’s state subsidies helped Chinese companies compete unfairly. Excess output at steel mills led to consolidation and waves of closures in Western nations.
This time, according to economists, tensions could get worse because of the sheer size of China’s economy, now representing around one-fifth of total global output, and because trust between China and Western nations is so low.
Also, China’s economic prospects are worse, with an aging population, massive debt and expectations that real estate—essential to growth—is unlikely to rebound strongly.
Many economists have called on Beijing to do more to encourage consumer spending, which could help mop up excess production. Officials have instead focused on pouring more credit into the industrial sector and doing whatever they can to stimulate exports.
“China’s policy makers seem to have decided that it’s better to double down on the manufacturing- and investment-heavy growth model that delivered rapid growth in the past,” said Adam Wolfe, emerging-markets economist at Absolute Strategy Research, a London-based firm.
“The rest of the world may not be able to absorb more Chinese exports,” he added.
Autos are a battleground
With more than 100 car brands, many unprofitable, and slowing sales growth at home, China’s auto industry has a powerful incentive to look for more-lucrative markets overseas, according to a recent report by Rhodium Group, a research company.
China’s share of global EV exports grew from 4% in 2020 to 21% in 2022, it said.
While many of those exports are foreign brands that produce in China, especially Tesla, Chinese brands, with their lower sticker prices, are becoming a bigger part of the picture. Their share of total EU EV sales grew from 0.5% in 2019 to over 8% so far in 2023, according to Schmidt Automotive Research.
Some analysts are skeptical of European regulators’ pushback and question whether they are just trying to stymie competition.
“There’s a pattern that trade tensions tend to rise whenever and wherever China emerges as a major global player in any sector,” said Bruce Pang, chief China economist at Jones Lang LaSalle.
Either way, China needs to find more markets for its conventional gasoline-powered autos, as domestic consumers shift toward EVs, said Andrew Batson, a China-focused analyst at Gavekal. China’s exports of gas cars have risen sixfold over the past three years, according to Batson.
China’s carmakers have huge capacity to produce internal combustion engine cars that risk sitting idle, Batson said.
“Their incentive to keep that capacity active by pushing vehicles into export markets at low prices is only getting stronger,” he said.
Renewed tension in renewable energy
Western producers are sounding alarms over cheap renewable-energy products, including wind turbines and solar panels.
Chinese exports of solar panels increased by around one-third year over year in the first half of 2023, to 114 gigawatts, equivalent to the total installed solar panel capacity of the U.S., according to Ember, an independent energy think tank.
In Europe, solar module prices fell by 50% within four weeks starting late last year even though market fundamentals were largely unchanged during that period, said Gunter Erfurt, chief executive officer of Meyer Burger Technology, a Switzerland-based manufacturer of solar cells and modules.
To Erfurt, it was a sign China was discounting at what he called “unprecedented speed” to grab market share.
Longi Green Energy Technology, a solar-energy company in northern China’s Shaanxi province, cut prices for a type of silicon wafer by more than 50% between March and September, according to its website.
Its president, Li Zhenguo, said in October that prices for some products had become irrational and were falling to levels that will make the industry unprofitable. “Everyone is struggling,” he said.
The company has continued to grow between 20% and 30% overseas in recent years and expects to keep expanding next year, Li told investors.
European solar producers sent a letter to EU authorities in September urging them to buy up their inventories to avert a new wave of bankruptcies related to intensifying Chinese competition and slowing demand in Europe.
A EU spokesman said regulators are closely monitoring the situation, but haven’t made a decision.
Steel industry concerns
Another industry economists are watching closely is steel.
China, the world’s biggest producer, is likely to see demand fall 1.1% this year from a year earlier, in part because of sluggish housing construction, according to forecasts by the China Iron and Steel Association in July. Production continues to rise, it said.
China’s steel export prices have plunged about 60% from a year earlier, while its steel exports volume went up 53% in October compared with 2022, according to Frederic Neumann, chief Asia economist at HSBC.
In response to a petition from the U.S. steel industry, Washington in August announced a levy of around 123% on imported can-making metal from China, along with levies of under 10% on German and Canadian companies that produce the material.
Overcapacity in China, combined with too much production elsewhere, “can trigger deep crises in the steel industry in the future,” said Ulf Zumkley, chair of the steel committee of the Organization for Economic Cooperation and Development, a forum for governments of mostly rich countries, in a September statement.