China is accelerating its “new productive forces” campaign, focussing on high-end production of electric vehicles, solar panels, and batteries. But ‘excess capacity’ will further stoke trade tensions. Capacity utilisation for automobiles slid to 64.9% in Q1, a steep decline from Q4 (76.9%), as price wars in EVs fail to abate. Overall, capacity utilisation in manufacturing dropped to 73.8% in Q1, the lowest since Q1 2020.
Xi Jinping is not wrong, in claiming that China’s exports are helping to ease global inflation and are supporting the clean energy transition. But Beijing’s “new productive forces” campaign is colliding with the global politics of the green energy transition. The erection of more trade barriers is inevitable. China’s lead in key industries appears unassailable, but politically, another ‘China-shock’ is unpalatable in the West.
‘Excess capacity’ is a relative term. It seems perverse to talk about excess capacity for renewables when climate change is accelerating. But this is not the late-1990s/early-2000s. ‘Derisking’ supply chains is a priority for politicians, over and above reaching net zero within the quickest feasible timeframe. China’s “new productive forces” strategy could backfire. The large drop in manufacturing capacity utilisation is a warning: deflationary tendencies in China remain entrenched, as Chinese government bond yields tumble.
The immediate implication for markets, may be further downward pressure on durables prices globally, notably in EVs, solar, wind, batteries, and electronics. At the same time, this will prompt a further backlash from Western governments looking to de-risk from China. More trade barriers will get erected. Longer-term, the pressure on government finances will not abate, as climate change accelerates. The current flooding in China underlines the risks to government finances as extreme weather becomes more frequent.
