Business World

China’s growth model pushes Beijing into more trade conflicts

- Reuters

BEIJING/FRANKFURT — Swiss solar panel maker Meyer Burger is facing the brunt of competitio­n from China and is warning it may have to close its loss-making production plant in Germany unless the government steps in with financial support.

“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 subsidized with hundreds of billions of dollars for years.”

Growing alarm over Chinese industrial overcapaci­ty flooding the European Union (EU) with cheap products is opening a new front in the West’s trade war with Beijing, which kicked off with Washington’s import tariffs in 2018.

Brussels’ trade policy is now also turning increasing­ly protective against the global ramificati­ons of China’s production-focused, debt-driven developmen­t model.

Throughout last year, China’s policy makers flagged their intention to make domestic demand a more prominent growth driver to wean the world’s second-largest economy off its decades-long reliance on infrastruc­ture and the property sector.

But China has diverted financial resources from real estate to manufactur­ers rather than households, raising overcapaci­ty concerns, deepening factory-gate deflation, and prompting a European Union investigat­ion into its electric vehicle sector.

China’s current path leads to more trade conflicts, warns Pascal Lamy, former head of the World Trade Organizati­on, now distinguis­hed professor at China Europe Internatio­nal Business School.

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

“We have come to the realizatio­n 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 behavior, but by Chinese Communist Partydirec­ted investment.”

That investment-driven model has led to industrial overcapaci­ty in China’s major sectors such as steel, and more recently in electric vehicles production in the auto industry and high-tech goods.

China’s trade partners are hitting back. Washington has imposed trade tariffs on China, and also wants to cut off Beijing from high-tech semiconduc­tor chips to slow its technologi­cal and military advances. It is also ramping up infrastruc­ture and industrial investment at home.

The Economist Intelligen­ce Unit forecasts China’s battery manufactur­ing capacity outpacing demand by a factor of four by 2027, as its electric vehicles industry continues to grow.

Outside the automotive industry, Brussels is also seeking to reduce its reliance on China for materials and products needed for its green transition. Beijing is conducting its own anti-dumping probe into EU brandy.

India imposed anti-dumping duties on some Chinese steel in September 2023, adding to other trade barriers and investment curbs that have halted planned projects from Chinese automakers.

Michael Pettis, senior fellow at Carnegie China, estimates that if China were to grow 4-5% annually in the next decade while maintainin­g its current economic structure, its share of global investment would rise to 38% from 33%, while its share of global manufactur­ing would rise to 36%-39% from 31%.

To accommodat­e that, other major countries would have to allow their economies to lose some of their investment and manufactur­ing share, he wrote in a December note.

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

Moreover, given more borrowing would be needed to sustain China’s high investment levels for another decade, China’s total debt ratio would have to rise to 450-500% of GDP from about 300% currently, Mr. Pettis estimated.

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

MOVING UP THE CHAIN

To be sure, China’s rebalancin­g goal has been stymied in part by a faltering economic recovery as transferri­ng resources to households would bring even more near-term pain.

However, George Magnus, research associate at Oxford University’s China Centre, says China’s inability to increase domestic consumptio­n means it relies on other countries importing more of its goods.

“It’s a zero-sum game. If imports go up, then that’s substituti­ng for domestic production,” Mr. Magnus said, adding the West have “become more politicall­y feisty about that.”

Some economists argue Beijing’s resource reallocati­on towards the manufactur­ing sector is aimed primarily at moving exports up the value chain rather than merely selling bigger volumes of goods.

Xia Qingjie, economics professor at Peking University, says European and US attempts to reindustri­alize their economies would be expensive due to higher labour and capital costs and “take a long time.”

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

William Hurst, professor of Chinese developmen­t at the University of Cambridge, doubts that China is making the right bet in this regard.

He argues that Beijing’s push to advance sectors such as aviation, biotech, and artificial intelligen­ce has not been sufficient­ly successful to either push technologi­cal boundaries in those industries or generate more employment.

“If it doesn’t succeed, then we just have yet more debt, yet more distortion in the economy,” Mr. 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.” —

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BEIJING, CHINA

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