EU to press China on industrial overcapacity at Beijing summit

EU leaders will stress their rising concerns about Chinese industrial overcapacity when they meet President Xi Jinping for a summit in Beijing on Thursday, amid signs China is pumping more funding into manufacturing.

The EU delegation for the annual EU-China summit — the first in-person since the pandemic — will be led by European Council president Charles Michel and European Commission president Ursula von der Leyen.

The EU leaders are expected to raise the issue of overcapacity in products they see as targeted at European markets when they meet Xi and later his number two Li Qiang, along with other issues such as the Ukraine war.

The EU is worried China is increasing its industrial capacity, particularly in renewable energy products, at a time when domestic demand is weak and other trading partners such as the US are limiting access to their markets. This leaves Europe as an important target for an overflow of China’s exports.

“China’s trade deficit with us is growing. It’s just below $400bn at present. And as you can imagine, the doubling of the trade deficit within a matter of two years is a matter of great concern . . . particularly over its sustainability,” said a senior EU official ahead of the summit.

European business said that the deficit stemmed in part from China’s state subsidies and barriers to foreign companies. The EU this year launched an anti-subsidy investigation into imports of electric vehicles from China. On Wednesday, Brussels announced €3bn in subsidies to encourage electric vehicle battery production in an attempt to reduce reliance on China.

Beijing has accused Brussels of “a naked protectionist act” over the anti-subsidy inquiry and criticised EU efforts at “de-risking”, in which the trading bloc is seeking to cut its dependency on some Chinese goods.

But EU member states vary in their stances towards Beijing and the union has stressed it wants to reach compromise on trade disagreements with China, rather than resort to unilateral measures.

Concern about Chinese manufacturing overcapacity is being fuelled by data showing state banks have cut new lending to China’s debt-stricken property sector and are instead targeting industries such as electric vehicles.

While bond issuance by Chinese industry has slowed, outstanding bank loans to the sector were up about 31 per cent, or Rmb5tn, in the third quarter of this year, compared with a year earlier. Lending to the manufacturing sector was up 38 per cent.

During earnings calls this year, executives of China’s largest banks cited manufacturing as a priority, in line with Beijing’s strategic objectives of moving industry up the value chain into more valuable production and reducing its dependence on foreign inputs.

“We fully support the construction of national critical equipment like domestically produced large aircraft, . . . high-speed trains, manned space flight, and new energy sources,” state-owned lender Industrial and Commercial Bank of China said at its analyst conference in June.

Agricultural Bank of China, another large state lender, said it was “intensifying its credit support” for the “high-end, intelligent and green transformation of the manufacturing industry”. China Merchants, a medium-sized bank, said at its third-quarter analyst conference that manufacturing loans comprised 46 per cent of its corporate loan disbursements this year.

“I am very concerned about some of the lending practices that I see,” said the senior EU official, who said the bloc estimated China lost €30,000 on each electric vehicle it produced.

Chinese policymakers wanted to stimulate economic activity while supporting longer-term economic and strategic goals, analysts said.

Robin Xing, chief China economist for Morgan Stanley, said Beijing preferred to stimulate the economy by funding green industries, in line with decarbonising goals, rather than by making fiscal transfers directly to households, which could fuel inflation.

“I think they will continue to do so next year, doubling down on the green transition capex investment,” Xing added. Other areas would be advanced manufacturing, such as semiconductors and data centres, to serve not just economic goals but security objectives.

“What does that mean for the rest of the world? Does that bring more deflation or overcapacity pressure? I think it is plausible,” Xing said. “In many sectors including batteries, green products [and] capital goods, it may be challenging especially for global pricing.”

Others said that, while loans were flowing into manufacturing, fixed asset investment in the sector as a whole was growing only about 7 per cent, implying not all companies were investing.

The exception was renewable industries, but unless there was a bigger push around the world to meet renewable energy targets, even this industry could struggle to maintain rapid investment growth, they said.

“My impression is that the overcapacity comes from the fact that both China and the rest of the world have not installed renewables at the speed that would have been required to fulfil their [climate] targets,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis.

She predicted the EU-China summit would disappoint. China was unlikely to change its domestic policies and needed the large trade surplus to help offset capital outflows.

The EU, meanwhile, was not likely to yield on issues such as EVs, analysts said.

But the senior EU official sounded a hopeful note, saying Beijing was realising overcapacity was “causing a backlash” and that Europe was still keen to persuade China to address the issue itself.

“Trade defence instruments are a blunt instrument. To use them is always a failure of finding a solution. It’s a last resort,” the official said.

With additional reporting by Wenjie Ding in Beijing