Friday, June 14, 2024

EU to press China on industrial overcapacity at Beijing summit

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EU leaders met President Xi Jinping in Beijing on Thursday, kicking off a summit throughout which they plan to press China on industrial overcapacity, amid indicators it’s pumping a whole lot of billions of {dollars} of recent funding into the manufacturing of merchandise focused at European markets.

The EU delegation for the annual EU-China summit — the primary in-person for the reason that pandemic — is led by European Council president Charles Michel and European Fee president Ursula von der Leyen.

Throughout a gathering on Thursday morning, Xi urged his company to keep up the “momentum” of the connection in remarks that sought to distinguish the EU from the US, which Beijing sees as its principal strategic rival. “As the 2 main forces selling multipolarity, the 2 main markets that assist globalisation . . . China-EU relations are associated to world peace, stability, and prosperity,” state media reported Xi as saying.

However the EU leaders, who’re scheduled to have lunch with Xi earlier than assembly his quantity two Li Qiang, within the afternoon, are anticipated to ship a blunt message to their Chinese language counterparts about commerce and different points, such because the Ukraine warfare.

The EU is fearful China is growing its industrial capability, notably in renewable power merchandise, at a time when Chinese language home demand is weak and different buying and selling companions such because the US are limiting entry to their markets. This leaves Europe as an vital goal for an overflow of China’s exports.

Valdis Dombrovskis, EU commerce commissioner, informed the Monetary Occasions that Chinese language overcapacity was “a trigger for concern”, including many international locations’ markets have been extra protected towards low-cost Chinese language exports.

“Our commerce relations are imbalanced. Final yr we had an virtually €400bn commerce deficit,” Dombrovskis mentioned. “On Chinese language electrical automobiles there’s a 25 per cent tariff within the US. We’ve seen tariffs in India and Turkey and the EU is now the most important market which is open.”

Column chart of EU’s goods trade deficit with China (€bn) showing EU’s trade deficit with China widened to almost €400bn last year

European enterprise mentioned the deficit stemmed partially from China’s state subsidies and obstacles to overseas firms. The EU this yr launched an anti-subsidy investigation into imports of electrical automobiles from China. On Wednesday, Brussels introduced €3bn in subsidies to encourage electrical automobile battery manufacturing in an try to cut back reliance on China.

Beijing has accused Brussels of “a unadorned protectionist act” over the anti-subsidy inquiry and criticised EU efforts at “de-risking”, wherein the buying and selling bloc is looking for to chop its dependency on some Chinese language items.

However EU member states range of their stances in the direction of Beijing and the union has careworn it desires to succeed in compromise on commerce disagreements with China, fairly than resort to unilateral measures.

Concern about Chinese language manufacturing overcapacity is being fuelled by information exhibiting state banks have lower new lending to China’s debt-stricken property sector and are as an alternative focusing on industries resembling electrical automobiles.

Whereas bond issuance by Chinese language trade has slowed, excellent financial institution loans to the sector have been up about 31 per cent, or Rmb5tn, within the third quarter of this yr, in contrast with a yr earlier. Lending to the manufacturing sector was up 38 per cent.

Throughout earnings calls this yr, executives of China’s largest banks cited manufacturing as a precedence, consistent with Beijing’s strategic targets of shifting trade up the worth chain into extra invaluable manufacturing and lowering its dependence on overseas inputs.

“We totally assist the development of nationwide vital tools like domestically produced massive plane, . . . high-speed trains, manned area flight, and new power sources,” state-owned lender Industrial and Industrial Financial institution of China mentioned at its analyst convention in June.

Agricultural Financial institution of China, one other massive state lender, mentioned it was “intensifying its credit score assist” for the “high-end, clever and inexperienced transformation of the manufacturing trade”. China Retailers, a medium-sized financial institution, mentioned at its third-quarter analyst convention that manufacturing loans comprised 46 per cent of its company mortgage disbursements this yr.

“I’m very involved about among the lending practices that I see,” mentioned one senior EU official, who mentioned the bloc estimated China misplaced €30,000 on every electrical automobile it produced.

Chinese language policymakers needed to stimulate financial exercise whereas supporting longer-term financial and strategic targets, analysts mentioned.

Robin Xing, chief China economist for Morgan Stanley, mentioned Beijing most popular to stimulate the financial system by funding inexperienced industries, consistent with decarbonising targets, fairly than by making fiscal transfers on to households, which may gas inflation.

“I feel they are going to proceed to take action subsequent yr, doubling down on the inexperienced transition capex funding,” Xing added. Different areas can be superior manufacturing, resembling semiconductors and information centres, to serve not simply financial targets however safety targets.

“What does that imply for the remainder of the world? Does that carry extra deflation or overcapacity strain? I feel it’s believable,” Xing mentioned. “In lots of sectors together with batteries, inexperienced merchandise [and] capital items, it could be difficult particularly for world pricing.”

Others mentioned that, whereas loans have been flowing into manufacturing, fastened asset funding within the sector as a complete was rising solely about 7 per cent, implying not all firms have been investing.

The exception was renewable industries, however except there was a much bigger push world wide to fulfill renewable power targets, even this trade may wrestle to keep up speedy funding development, they mentioned.

“My impression is that the overcapacity comes from the truth that each China and the remainder of the world haven’t put in renewables on the pace that will have been required to fulfil their [climate] targets,” mentioned Alicia García-Herrero, chief Asia-Pacific economist at Natixis.

She predicted the EU-China summit would disappoint. China was unlikely to alter its home insurance policies and wanted the massive commerce surplus to assist offset capital outflows.

The EU, in the meantime, was not more likely to yield on points resembling EVs, analysts mentioned.

Xi Jinping and Ursula von der Leyen at an EU-China summit in April 2022
Xi Jinping and Ursula von der Leyen at an EU-China summit in April 2022 © Olivier Matthys/Reuters

However the senior EU official sounded a hopeful be aware, saying Beijing was realising overcapacity was “inflicting a backlash” and that Europe was nonetheless eager to influence China to handle the difficulty itself.

“Commerce defence devices are a blunt instrument. To make use of them is at all times a failure of discovering an answer. It’s a final resort,” the official mentioned.

With further reporting by Wenjie Ding in Beijing

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