China’s new overcapacity problem could be solved by market action, not government action, researchers say

While local government support has spurred explosive growth in the new energy sector, China should refrain from further government intervention and let the market do its job to eliminate excess production capacitysaid an eminent scientist.

China should fully meet domestic demand for renewable energy by solving energy consumption problems amid growing complaints from the West about overcapacity, said Zhao Zhongxiu, president of the University of International Business and Economics in Beijing.

“Comparing the current domestic production capacity and directional demand, there is actually no so-called excess capacity,” Zhao, an expert on international trade and global value chains, told the Post in an interview last week.

The excess production in the sector is the result of a “complete and competitive” supply chain that spurs iterative advances in technology, Zhao said.

“Soon after the previous generation of goods is put into production, a new generation of technology has already arrived and replaced the old, which has to leave the market,” he said. “(This) in turn leads to a certain amount of idleness or even wasted production capacity.”

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Therefore, he said, the government should let the market eliminate inefficient or outdated new-energy capacity, rather than issuing administrative orders forcing companies to shut down production — a measure China has adopted in the past to deal with the same problem in heavy industries such as coal, steel and cement mining, which formed the backbone of the country’s early modern economy.

While local protectionism has forced the adoption of old methods — regions have kept the fires burning despite low or no profits — Zhao said the state’s role in new energy should be limited, especially as private companies now dominate the market.

“I would say that this is a lesson. As we deepen the reform, which means further freeing up the role of the market… (the government) should no longer interfere (in the market) by force through administrative means,” he said.

In the case of China’s green energy sector, Zhao credited local leadership and administration with fueling competition and accelerating development, citing Hefei, the capital of southeastern Anhui province, which has transformed itself in a few years from industrial backwater to the heart of the electric vehicle supply chain.

But not all cities and provinces are as fortunate, he added, and failure would mean a huge waste of capital and resources – but one that would ultimately become part of the industry’s life cycle.

It is not yet time to say that the market is so saturated that it will not survive without the US

Zhao Zhongxiu

“While this seems wasteful, it is a necessary cost for iterative competition in the industry,” Zhao said.

The rapid development of the green sector in China has already caused concern in the United States and the European Union – both of which imposed duties against new energy imports from China, citing ‘unfair’ government subsidies – Zhao said domestic companies should explore the vast opportunities offered emerging marketsincluding by investing in local production.

“It is not yet time to say that the market is so saturated that it will not survive without the United States,” he said.

Meanwhile, he added, China’s huge domestic consumption potential for green products – from electric vehicles to solar panels – has yet to be fully tapped.

For example, one of the biggest obstacles to integrating and using wind and solar power – sources that can be unpredictable even in normal times – is lack of infrastructure such as storage facilities and additional power grids.

“To further optimize domestic market conditions, we need to resolve these issues,” Zhao said.

He added that despite the deepening trade fragmentation, China should commit to open its own market, allowing foreign players to compete with domestic players on a level playing field.

“Because China has such a large market, it can accommodate many manufacturers. Everyone improves in the process. Ultimately, the fittest survive.”