Former NDRC official calls for improved dialogue between China and the West

Beijing needs to engage with the West on the question of overcapacity in the new-energy sector and should not rush to impose countermeasures as a substitute for dialogue, a prominent former official has suggested while also recommending cooperation between Beijing and Washington in the green economy despite ongoing frictions.

Xu Lin, formerly in charge of fiscal and financial affairs at the National Development and Reform Commission (NDRC), told the Post earlier this month that a level of excess capacity in China's new-energy sector is a "natural result" of competition, and that the country need not rush to retaliate against restrictive measures imposed by the West.

"On the contrary, even as Washington ramps up actions with 100 per cent tariffs, I don't think Beijing should respond with its own punitive duties," he said. "It still needs candid dialogue with the West."

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While admitting that overcapacity has become endemic in China's sprawling new-energy sector, Xu argued that China is not "deliberately" exporting overcapacity. Instead, he said, some certain level of excessive output emerged in serving the international market and is a natural result of competition amid market dynamism.

"Production capacity formation is driven by both domestic and international markets. It is not that there is excess capacity first and then China seeks to export it," said the 64-year-old Xu, now chairman of the China-US Green Fund.

He stressed that this is not the first time the West has accused China of exporting excessive capacity. And the ultimate reason behind the recent accusations, in his view, is that Chinese products - ranging from wind and solar power equipment, to energy storage batteries and EVs - are competitive enough in terms of quality, innovation and price.

"In response [to competition pressure], the US simply described the reasons as overcapacity and government subsidies," Xu said. "They really need such a narrative."

Xu's comments came before Beijing employed the same narrative on Monday when announcing an anti-dumping investigation into European pork and levelling accusations of overcapacity and government subsidies.

That action followed a European Union decision last week to impose tariffs on Chinese carmakers from July 4, following a seven-month probe. Xu declined to comment on the EU's latest move.

In May, Washington also hiked tariffs on Chinese EVs from 25 per cent to 100 per cent after raising concerns about China's overcapacity and alleged national security risks posed by Chinese EVs. This action came even though few Chinese EV makers directly export to the US, with many flocking instead to Europe and Southeast Asia in their overseas forays.

"If the West blocks China's exports through high tariffs, it is likely to accelerate the process of clearing up overcapacity in China and could put existential pressure on some inefficient, uncompetitive producers," Xu said.

"This will be a process of survival of the fittest, which will ultimately benefit China's new-energy technology innovation and further cost reductions," he added.

Xu, who was also at the helm of the NDRC's planning department for years and took part in drafting five-year plans for industry development, including for EVs, offered his take on the role of local subsidies.

He said local-level Chinese governments are in head-to-head competition to attract innovative companies with strong commercial prospects, and doing so involves subsidy payments.

But this practice can lead to capacity expansions and even overcapacity to some extent, he explained, resulting in some firms being forced to close up shop, thereby wasting public resources.

He argued that it could be difficult to convince local officials to abandon this practice when Western governments are also doling out subsidies for semiconductors, artificial intelligence and new energy.

"This seems to be setting an international example for local governments in China," he said, warning that local cadres must recognise the huge cost of continuing the subsidy race.

Xu said Beijing needs to draw a red line to restrain cadres, thereby avoiding excessive competition and more international trade disputes. Leading firms, he also added, should be encouraged to acquire existing manufacturers rather than opting to expand by adding new capacity.

He also lent his voice to the call for Chinese companies to not only export more, but to shift more production to Southeast Asia, the Middle East, Europe and the US to defuse supply-chain security concerns and contribute to local economies and employment.

Beijing should also rev up the construction of wind and solar farms and energy-storage facilities to help "digest" excess capacity at home, he said, while accelerating renewable-energy substitutions and the transformation towards carbon neutrality.

On green-energy cooperation between China and the US, Xu highlighted abundant opportunities, including making urban buildings more energy-efficient, more collaboration in trade, investment, scientific research and standard-setting in low-carbon technologies and products, as well as helping the world's least-developed countries decarbonate with financial and technical assistance.

"Chinese companies should not be the only players out there in the new-energy sector. There should be sufficient competition among companies from various countries," said Xu, adding that this will foster greater innovation and reduce costs amid the global effort to fight climate change.

"The [US and China] share the potential for a stable institutional framework for the green sector, but now this cooperation is very much influenced by US domestic politics, hindering progress," he lamented.

This article originally appeared on the South China Morning Post (SCMP).

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