Although support from local governments has stimulated the explosive growth of the new energy sector, China should refrain from further government intervention and let the market do its work to weed out excess capacity, a prominent academic has said.
In light of increased complaints from the West regarding overcapacity, China should fully tap its domestic demand for renewable energy by solving choke points in consumption, said Zhao Zhongxiu, president of the University of International Business and Economics in Beijing.
“Comparing current domestic production capacity and directional demand, there is actually no so-called overcapacity,” said Zhao, an authority on international trade and global value chains, in an interview with the Post last week.
Excessive production in the sector is the result of a “complete and competitive” supply chain that spurs iterative advancements in technology, Zhao said.
“Not long after the goods of the previous generation were put into production, the new generation of technology has already come out and replaced the old one, which has to exit the market,” he said. “[This] in turn leads to some idle or even wasteful production capacity.”
Thus, he said, the government should allow the market to eliminate inefficient or outdated production capacity in new energy, rather than issue administrative orders forcing companies to shut down production – a measure China adopted in the past when dealing with the same problem in the heavy industries such as coal, steel and cement that were the backbone of the country’s early modern economy.
While the old methods had to be adopted due to local protectionism – regions kept the fires roaring despite low or nonexistent profits – Zhao said the role of the state should be reduced for new energy, especially as private firms currently dominate the market.
“I would say this is a lesson. Since we have been deepening reform, which means further unleashing the role of the market …[the government] should no longer intervene [in the market] forcibly via administrative means,” he said.
For China’s green energy sector, Zhao conceded local leadership and administration had fuelled competition and expedited development – citing the example of Hefei, capital of the southeastern province of Anhui, which in a few scant years has been transformed from an industrial backwater to a hub for the electric vehicle supply chain.
But not all cities and provinces have the same luck, he said, and failure would mean an enormous waste of capital and resources – but one that would ultimately form a part of the industrial life cycle.
Zhao Zhongxiu
“Even though it seems wasteful, it is a necessary cost for industry’s iterative competition,” Zhao said.
As the rapid development of China’s green sector has already raised alarm bells in the United States and European Union – both of which have imposed tariffs against new energy imports from China, citing “unfair” subsidies from the government – Zhao said domestic companies should explore the vast opportunities present in emerging markets, including by investing in local production.
“It is not yet the time to say that the market is so saturated that it cannot survive without the US,” he said.
Meanwhile, he added, China’s massive domestic consumption potential for green products – from EVs to solar panels – has yet to be fully unleashed.
For example, one of the biggest hurdles for the integration and consumption of wind and solar energy – sources which can be unpredictable even in ordinary times – is the lack of infrastructure like storage facilities and extra power grids.
“To further optimise domestic market conditions, we need to resolve these points,” Zhao said.
Despite worsening trade fragmentation, he added, China should commit to the openness of its own market by letting foreign players compete with domestic ones on a level playing field.
“Because there is such a large market in China, it can accommodate lots of manufacturers. Everyone is improving in the process. In the end, it would be survival of the fittest.”
