Explainer: Yellen's "Chinese overcapacity" fallacy defies economic basics

BEIJING, April 17 (Xinhua) -- U.S. Treasury Secretary Janet Yellen's misconception during the International Monetary Fund (IMF) meetings about the risks posed by "Chinese overcapacity" to the global markets is contrary to economic principles and common sense.

SUPPLY CHAIN INTEGRITY

Yellen said on Tuesday that the IMF is not sufficiently focused on the problem of "Chinese overcapacity," arguing that China's subsidies of its green energy sectors were creating an uneven playing field.

Yellen fails to understand that China's competitive advantages in green energy depend not on subsidies but on supply chain integrity and industrial concentration, full market competition and rapid technology upgrades promoted by its massive market.

With the most complete industrial system, China's manufacturing industry has ranked first worldwide for over a decade.

China's new energy industry has a complete industrial chain covering material research and development, engineering design, manufacturing and final assembly. This chain forms several auto industry clusters that conform to the country's "dual circulation" development model, which takes the domestic market as the mainstay while allowing domestic and international markets to reinforce each other.

The strengths of the new energy vehicle (NEV) industrial and supply chains and the construction of supporting infrastructure, such as charging facilities, strongly bolster the growth of Chinese NEVs.

China's huge consumer market provides a favorable environment for the research, development and upgrading of NEV technology. Meanwhile, due to the higher acceptance rate among Chinese consumers for vehicle intelligence and new technologies, many automotive companies are prioritizing the launch of new products and technologies in the Chinese market.

Compared with traditional cars, NEVs are more electrified, intelligent, Internet-connected and digitalized. China's NEV industry, featuring innovative thinking and capability, has leapfrogged in developing core technologies over nearly two decades.

EXCEEDING GLOBAL DEMAND?

Yellen said China's new energy capacity exceeds global demand, and the overproduction in the new energy sector could put firms in the United States and allied countries out of business.

The concept of overcapacity is deeply rooted in economic theory. Basic economics dictate that surplus products naturally seek out markets elsewhere once domestic demand is met, a practice played out by Western nations for centuries.

Contrary to an "overcapacity problem," the clean energy sector is struggling to meet global demand despite urgent climate change concerns and widespread efforts to transition toward cleaner energy.

At the end of 2023, the International Renewable Energy Agency projected that global renewable power capacity must grow by around 1,000 gigawatts (GW) a year through 2030 to keep the Paris targets alive.

According to the International Energy Agency, the world added a record high of around 507 GW in renewable energy capacity in 2023. This is half of what is needed to keep the 1.5-degree target within reach.

As China transitions to high-quality development, its "new three" industries -- electric vehicles, lithium batteries, and photovoltaic products -- are highly sought after globally. They support countries in achieving a green and low-carbon transformation and foster global economic growth.

CHINA IS NOT THE PROBLEM

According to a report by the investment bank UBS, 75 percent of the components of a 2022 BYD Seal sedan were manufactured in-house. Xiaomi Group recently launched its first NEV, the SU7, only three years after announcing its entry into the sector. Both showcase China's vibrant electric vehicle ecosystem.

A recent report by Bloomberg found that the majority of China's leading exporters in this sector boast capacity utilization rates well within internationally recognized norms.

Contrary to the narrative of "overcapacity" often attributed to China, the real challenge facing the United States and Europe lies in their comparative inefficiencies.

Ironically, the United States, Britain and France are now implementing robust subsidy policies in the electric vehicle domain. Through the Inflation Reduction Act, the U.S. government is providing approximately 369 billion U.S. dollars in tax incentives and subsidies for clean energy industries, including electric vehicles.

Several European countries are also implementing subsidy measures for their electric vehicle industries.

The double standard here is glaring; so is the West's calculations beneath it.

This new variant of the "China threat" theory is just a pretext for certain Western countries to poison the environment for China's domestic development and international cooperation. Ultimately, accusing China of so-called "overcapacity" is merely a way to create more protectionist measures for their own industries.