What overcapacity? China says its industries are simply more competitive

(Reuters) The last day of U.S. Secretary Janet Yellen’s trip to China coincided with the strongest retort yet from Beijing officials over her claims that China is flooding global markets with cheap goods, particularly in the new green industries.

As Yellen laid out plans to formalise dialogue with China over excess industrial capacity in electric vehicles (EVs), solar panels and batteries, saying Washington would not accept U.S. industry being “decimated”, the Chinese finance ministry issued a statement saying it had already “fully responded” to her concerns.

Commerce Minister Wang Wentao, at a roundtable meeting with Chinese EV makers in Paris on Monday, said U.S. and European assertions of excess capacity were groundless, adding China’s rise in these industries was driven by innovation and complete supply chain systems, among other factors.

China’s latest response, analysts say, centres on the idea that its production system is simply more competitive, a sharp change in tone from only a month ago when officials including Premier Li Qiang sounded their own warnings on overcapacity.

The strong pushback from Beijing contrasts with the generally warm interactions between Yellen and Chinese officials during her trip, leaving the two largest economies further apart on the hottest dispute in global trade, which could add to tensions.

“They cannot win the race, so they try to slow it down,” said Li Yong, chief researcher at D&C Think, a Chinese think tank, referring to the West’s rhetoric on overcapacity.

“We just do our things, they can do whatever they want – the knife is in their hands.”

Both sides believe they have solid, data-supported arguments not to back down.

The core criticism coming primarily from Washington and Brussels is that state-led support for manufacturers, coupled with depressed domestic demand, is pushing excessive Chinese supply onto global markets.

This drives down prices.

Volume growth weighs on Chinese solar and batteries export prices

Prices have fallen sharply in two of the green energy industries dominated by China. In lower-end industries prices have been more stable.

Year-on-year growth in volume and value ($1000) of Chinese exports

Consequently, it threatens U.S. and EU firms which survive on profits rather than what Western officials argue is a drip-feed of state resources in China. And, it can complicate longer-term investment decisions.

Growing numbers of loss-making manufacturers in China

China’s industrial complex is expanding, but many firms cannot cope with the heightened competition.

While China denies subsidies and points to U.S. and EU government programmes to support their own industries, its critics take a wider view of state support that incorporates cheap loans, land use, huge infrastructure investment and other benefits that span across a fully-integrated supply chain.

EU trade officials have singled out the huge resources redirected by China’s state-dominated financial system from the ailing property sector to its sprawling manufacturing complex, as Beijing looks for other economic growth drivers.

“If you think of it from this perspective, the Chinese government is subsidising the whole world’s green transition,” said Yue Su, principal China economist at the Economist Intelligence Unit.

“Whether this is fair to EU manufacturers or workers is a different question.”

“Having said that, even if the West increases tariffs, I still foresee that China is going to dominate in many of these industries.”

Additional reporting by

Kevin Yao, Joe Cash, and Ellen Zhang