Meyer Burger, a Swiss solar panel manufacturer, has warned that it may have to close its loss-making production unit in Germany unless the government intervenes with financial support. Meyer Burger is facing intense competition from China.

“Chinese manufacturers are deliberately selling goods in Europe far below their own production costs,” chief executive Gunter Erfurt told Reuters.

“They can do this because the solar industry in China has been strategically subsidised with hundreds of billions of dollars for years.”

Concern over China’s industrial overcapacity is growing. Bringing cheap goods to the European Union is creating a new front in the West-China trade war that began in 2018 with Washington’s import tariffs.

Additionally, Brussels’ trade policy is becoming more defensive against the global effects of China’s debt-driven, production-oriented economic model.

Over the course of the previous year, Chinese policymakers made clear that they intended to shift the focus of growth from external factors to internal demand in order to wean the second-biggest economy in the world off of its long-standing dependence on real estate and infrastructure.

However, China has shifted financial resources away from people and towards manufacturers, which has deepened factory-gate deflation, raised worries about overcapacity, and prompted a probe by the European Union into its electric vehicle industry.

Pascal Lamy, a distinguished professor at China Europe International Business School and a former head of the World Trade Organisation, cautions that China’s current course will only result in more trade disputes.

“This is not sustainable,” Lamy said. “Overcapacity will inevitably lead to a problem.”

“We have come to the realisation that this is a structural problem and that it stems from the fact that part of the Chinese production system is not driven by market behaviour, but by Chinese Communist Party-directed investment.”

China’s main industries, including steel, are overcapitalized due to this investment-driven approach. More recently, the auto industry’s production of electric vehicles and high-tech items has also experienced overcapacity.

China’s trading allies are retaliating.

In addition to imposing trade tariffs, Washington seeks to deny Beijing access to advanced semiconductor chips in order to impede Beijing’s military and technological advancements. Additionally, it is increasing domestic industrial and infrastructural investment.

China’s battery production capacity is expected to surpass demand by a factor of four by 2027, according to the Economist Intelligence Unit, as the country’s electric car market continues to expand.

Brussels is attempting to lessen its need on China for the products and resources required for its green transformation, even outside the automobile sector.

Beijing is looking into EU brandy through its own anti-dumping investigation.

In September 2023, India enforced anti-dumping taxes on a portion of Chinese steel. These tariffs, along with additional trade restrictions and investment limitations, caused Chinese automakers to halt their planned projects.

According to Michael Pettis, senior fellow at Carnegie China, should China sustain its current economic structure and grow at a rate of 4–5% per year over the next ten years, its proportion of world investment would increase to 38% from 33%, and its share of global manufacturing would rise to 36%–39% from 31%.

He stated in a December letter that other large nations would have to allow their economy to lose some manufacturing and investment share in order to accept that.

“Even without the geopolitical tensions of recent years and policies in the United States, India and the European Union … this would be highly unlikely,” Pettis said.

Furthermore, according to Pettis’ calculation, China’s total debt ratio would need to increase from its current level of roughly 300% of GDP to 450–500% of GDP in order to maintain the country’s high investment levels for an additional ten years.

“It is hard to imagine that the economy could tolerate such a substantial increase in debt,” he said.

Undoubtedly, the slowdown in the economy has hindered China’s efforts to achieve rebalancing as giving resources to people would cause even more hardship in the short run.

George Magnus, a research associate at Oxford University’s China Centre, asserts that China is more dependent on imports from other nations since it is unable to boost local demand.

“The game has no end. Magnus noted that the West has “become more politically feisty about that,” saying that “if imports go up, then that’s substituting for domestic production.”

Some economists contend that rather than only focusing on selling larger quantities of commodities, Beijing’s resource reallocation towards the manufacturing sector is primarily intended to move exports up the value chain.

Attempts by the United States and Europe to re-industrialize their economies, according to Peking University economics professor Xia Qingjie, would be costly since they would require more capital and labour expenditures, and they would “take a long time.”

“Nothing can stop there being more competition,” Xia replied. “But they cannot restrict China’s technological advance.”

Professor William Hurst of the University of Cambridge, who studies Chinese development, is sceptical that China is betting too much on this one.

He contends that Beijing’s efforts to progress areas like biotech, artificial intelligence, and aviation have not been effective enough to advance those industries’ technological frontiers or create additional jobs.

“If it doesn’t succeed, then we just have yet more debt, yet more distortion in the economy,” Hurst said. “If it does succeed, we have the potential of having yet more overcapacity.”

“So I don’t see that it’s really going to be this amazing shift that will suddenly make the Chinese economy more competitive globally.”

(Adapted from Reuters.com)

Categories: Economy & Finance, Geopolitics, Strategy, Sustainability