AsianFin--A report by the New York-based Rhodium Group, which researches the Chinese market, shows that the utilization rate of China's silicon wafer capacity dropped from 78% in 2019 to 57% in 2022. In 2022, China's lithium-ion battery production reached 1.9 times the domestic installation volume, showing that the problem of overcapacity in clean energy fields is emerging.

China's exports of electric vehicles, solar cells and lithium batteries have increased even more significantly. Data shows that in 2023, China's electric vehicle export volume was seven times that of 2019, while its solar cell export volume in 2023 was five times that of 2018, an increase of 40% from 2022.

The report notes that while temporary overcapacity may be harmless and a normal part of the market cycle, it becomes a problem when it is perpetuated by government intervention.

The Rhodium Group's report says that China's National People's Congress in March focused on industrial policies that benefit high-tech industries, while there is little financial support for household consumption.

"This policy mix will compound the growing imbalance between domestic supply and demand," says the report. "Systemic bias toward supporting producers rather than households or consumers allows Chinese firms to ramp up production despite low margins, without the fear of bankruptcy that constrains firms in market economies."

China's structural overcapacity problem is not a new phenomenon. Rhodium Group's report says the last time China had large overcapacity issues was from 2014 to 2016, a few years after the government launched a massive stimulus package in response to the global financial crisis that began in 2008. The stimulus package centered on infrastructure and real estate construction, triggering major capacity build-up in a range of associated industries.

In 2014, as the demand for real estate and infrastructure construction weakened, there was obvious overcapacity in heavy industrial products such as steel and aluminum.

In previous overcapacity cycles, cheap Chinese exports contributed to rising trade tensions and a series of anti-dumping investigations, such as the EU investigations on Chinese steel in 2016. Overcapacity also hurt Chinese companies’ profits and came with unsustainable debt growth. Reducing overcapacity thus became a priority for the Chinese government in 2016, the report said.

“Many Chinese firms are still using overseas markets to make up for lower prices, margins, or even losses on the China market,” the report said.

Rhodium Group noted that Beijing has expressed its awareness and called for more guidance in investment to prevent overcapacity. “However, the solutions adopted will likely center on retiring obsolete capacity and letting the most uncompetitive companies shut down while continuing to support capacity expansion, innovation, and exports in others,” the report said.

There are signs that this over-expansion is widespread. As of early last year, aggregate utilisation rates, which measure overall unused factory capacity, had dropped below 75% for the first time since 2016, according to the report. The decline happened not just in sectors linked to the property sector, but across the board in industries including food, textiles, chemicals and pharmaceuticals. Absolute inventory levels have also risen.

Beijing is also desperately looking to rebalance the economy away from the infrastructure and property sectors and toward new growth drivers. Yet in the absence of a clear strategy to prop up consumption, this means supporting the manufacturing industry—particularly in emerging sectors such as renewable energy and electric vehicles—as a core engine of growth.

This policy mix will only compound the trade impacts of China’s growing state-supported industrial capacity and set China on a course of trade confrontation with the rest of the world, the report pointed out.