China's new energy sector far from 'overcapacity' against massive market demand

With rapid growth and continuous upgrading in its industrial structure, China has made remarkable progress in the new energy industries in recent years, such as electric vehicles (EVs), solar products and lithium batteries, which has not only met the domestic needs for high-quality development but also cater to the global market, playing a significant role in addressing challenges in climate change and global green transition.

However, the development has aroused the U.S. and Europe's hype targeting China's industrial production capacity.

In the "overcapacity" narrative, it has been claimed that China is dumping overseas markets with cheap goods, particularly those in new energy industries and driving output levels beyond domestic demand.

A false proposition

First of all, the misconception of "overcapacity" is contrary to economic principles and common sense.

The higher volume of exports is not overcapacity, Jin Xiandong, an official of the National Development and Reform Commission, said at a press conference on Wednesday.

In a market economy, supply-demand balance is relative and imbalance is common, said Jin, noting that having a moderate surplus in production over demand can be conducive to full market competition and promoting the survival of the fittest in the market, and "the phenomenon is very common in the world."

A review article published by Xinhua News Agency on April 10 pointed out that as an open market integrated into globalization, Chinese businesses take into consideration the demand from both domestic and international markets, which is standard practice for businesses worldwide.

"Defining 'overcapacity' as any production exceeding domestic demand is equating product exports with overcapacity and contradicts economic logic," it said.

Nicholas Lardy, a senior fellow at Washington D.C.-based think tank the Peterson Institute for International Economics, said in an interview with Xinhua News Agency that "this overcapacity idea is that you shouldn't produce more than you can sell domestically. If that was carried to an extreme, that would mean no trade globally."

"So Boeing should cut its production? U.S. soybean farmers should limit their production to what can be sold within the United States? " questioned Lardy.

In the era of economic globalization, Jin said both supply and demand transcend national boundaries. "Countries tend to have higher production capacity in their competitive industries but lower capacity in other sectors. This is determined by their comparative advantages."

Jin's remarks echoed with Lin Jian, Chinese Foreign Ministry spokesperson, who stressed at a press conference on Wednesday to view the issue of capacity in line with the principles of market economy and in the context of economic globalization, global labor division and market dynamics.

The U.S. has repeatedly blamed China's "overcapacity" for its export of high-quality, low-cost products, and now new energy products. However, this logic is untenable considering the U.S.'s significant export of products like chips and agricultural goods, said Lin.

"Overcapacity may look like an economic issue, but the truth is, the U.S. is using it to hit Chinese industries and give itself an unfair advantage in market competition. It's another example of U.S. economic coercion and bullying," he said.

Demands far from being met

From a global perspective, the production capacity in new energy sector is far from sufficient.

In the "Global EV Outlook 2023," the International Energy Agency (IEA) projected that by 2030, the global demand for new energy vehicles will reach 45 million, more than triple the global sales volume in 2023 and 4.5 times that of 2022. The global demand for new photovoltaic installations will reach 820 gigawatts, about four times that of 2022.

To fight global warming, "an additional 7 terawatts of renewable energy capacity" is needed in the next five years to stay in sync with Paris Agreement commitments, Denis Depoux, global managing director at German consultancy Roland Berger, told South China Morning Post. The International Renewable Energy Agency in 2023 estimated the global renewable power capacity must grow by around 1,000 gigawatts a year through 2030 to keep the Paris targets alive.

"The current production capacity is far from meeting the market demand, especially the huge potential demand for new energy products in many developing countries," said Chinese Vice Minister of Finance Liao Min at a press briefing on April 8.

No dumping, advantages from innovation

"From the rest of the world's perspective, overcapacity can be felt through lower prices. China's automobile exports, which surged last year as the country overtook Japan as the world's top car exporter, actually became more expensive. That suggests their rising attractiveness isn't due to price cuts," said a Bloomberg report on April 2.

The report said Chinese companies aren't dumping EVs on global markets at a lower cost, as leading Chinese EVs fetch roughly double on average in Europe than domestically. It attributed Chinese EVs' high efficiency and strong competitiveness to advantages in technology, supply chains and infrastructure.

Lin also stressed that China's leading edge in new energy is gained through "strong performance, tech innovation, and full-on market competition, not government subsidies."

China's new energy sector is rooted in the advantages of an ultra-large scale market, a comprehensive industrial chain spanning material research and development, engineering design, manufacturing, and final assembly, as well as rich human resources. Enterprises reduce production costs through technological innovation, making their products more affordable.

A teardown of a BYD Seal sedan by the UBS Investment Bank last year found that 75 percent of the components, ranging from batteries to power semiconductors, were manufactured in-house, mainly dependent on local supply chains. Xiaomi Group's launch of a new EV just three years after announcing its entry into the EV field also underscores China's overall advantages in the production supply chain.

Ironically, some Western countries are implementing robust subsidy policies in the EV sector. The U.S. government provides about $369 billion in tax incentives and subsidies for the clean energy industry, including EVs, through its Inflation Reduction Act.

"The real issue here is not one of industrial capacity but one of competitiveness. What is crystal clear is that the competitiveness of Chinese companies is overwhelming," French entrepreneur Arnaud Bertrand posted on X.

Benefiting global green transition

In the global pursuit of green and low-carbon transformation, the new energy sector is seeing a massive market demand for EVs and others, which will bring development opportunities for all countries, said Jin.

"China's sustained development in the new energy sector and the provision of high-quality production capacity not only serve its own needs for high-quality development but also make significant contributions to the global efforts to address and promote the green and low-carbon transformation," he said.

An IEA report in 2023 said China's investment in clean energy supply chains has been instrumental in bringing down costs worldwide for key technologies, with multiple benefits for clean energy transitions.