Is Yellen right on China's manufacturing?

At US Treasury Secretary Janet Yellen's April 8, 2024, press conference in Beijing, she laid out her views on China's manufacturing and highlighted three sectors: electric vehicles, lithium-ion batteries, and solar. I disagree with Yellen's views for the following reasons:

It is difficult to determine the marginal demand for the emerging industries. When we discuss supply and demand, the term should be limited. For example, Yellen focuses on electric vehicles, lithium-ion batteries and solar, which all belong to the emerging green industry, and there is no overcapacity problem in the green industry looking at the medium and long term. Whether it is the IEA's World Energy Investment 2023 report or Bloomberg's Energy Transition Investment Trends 2024 report, both point out that the current level of investment in clean energy is far from sufficient to allow the world to achieve carbon neutrality in 2050. And the measured investment gap is as high as 60 percent-70 percent. In the short to medium term, under the market's supply and demand adjustment mechanism, once prices fall, manufacturers in each country will also readjust their production plans, which will also address the current short-term supply glut.

The accusations against China's green industry are particularly unjustified. Over the past few years, Chinese companies gained a competitive edge in the green industry by making brave attempts earlier than others. Before China’s attempts, almost no big company was willing to invest in the mass production of electric vehicles and batteries for electric vehicles. In a way, the Chinese companies and the Chinese people boldly took the first step, bore the business risk, to create the electric car market size and business prospects, and then came the current large-scale follow-up of manufacturers in various countries. To quote India's Foreign Minister S. Jaishankar, "You should be admiring me, not criticizing me.”

Chinese enterprises have the right to expand their economic interests in a lawful and compliant manner. There is nothing wrong with Chinese companies increasing their economic interests on the premise of complying with Chinese laws, the laws of the countries in which they operate, and the existing WTO agreements. This is exactly the core of the market mechanism. If you do not recognize this point, then you cannot convince the global audience.

In fact, Yellen does not need to worry too much about the so-called overcapacity problem whether now or in the future.

China is making every effort to expand residential income and consumption to absorb more products. Borrowing from W.W. Rostow's economic model, China is in the stage of evolution from what it describes as “drive to maturity” to “high mass consumption”. China has eliminated absolute poverty and is now working to increase the income and consumption levels of more people. However, it is important to realize that the rate of increase in residential consumption is much slower than the growth of industrial capacity in our industrial society, and it takes some time to complete the transition.

Other countries and Chinese companies will assess and make policy and production adjustments in the short and medium term. Policy measures include but are not limited to adjusting tariffs and trade policies and attracting Chinese production capacity for investment, etc. In fact, Chinese companies now attach great importance to overseas investment. Since the launch of the Belt and Road Initiative in 2013, China has invested billions of dollars in projects in BRI countries, especially in the Global South, to corporate with local governments, enterprises and residents to realize a win-win situation.

The Chinese government does not support overcapacity at all. The Chinese government backs and encourages innovation and green transformation, but it has never been about overcapacity. Instead, the Chinese government has always been against overcapacity, considering it a serious waste of resources. In 2016, China proposed “supply-side structural reform”, with the core requirements of cutting excess capacity, destocking, deleveraging, lowering corporate costs and improving weak links, all emphasizing the need to reduce and lower overcapacity rather than increase it. However, it should also be noted that by supporting innovation and green transformation, the Chinese government cannot fully anticipate the business behavior and results of market players, which may objectively cause overcapacity in a few industries, which has already been discussed at the Central Economic Work Conference in Dec 2023.

To summarize, my personal recommendation to Yellen:

First, Yellen need to think big about how to take advantage of China’s manufacturing as well as the opportunity low green product prices offer to accelerate the green transformation of the US and the world, rather than focusing on short-term supply glut.

Second, Yellen is sure to know that emerging industries have fast technology iterations and it is very common for one to “finish first though begin last”. As in car batteries, where solid-state batteries are now becoming the new favorite, Yellen should caution US companies to catch up on R&D and production, rather than letting Chinese companies stop moving forward.

Third, Yellen and US companies surely know the future potential of the Chinese market. Chinese people sincerely welcome more competitive products to be put into China, and the emergence of more Apple and Tesla-like excellent enterprises and their products in the world. Hope that Chinese and US companies and agencies can join hands to overcome more scientific problems, and seek a better common prospect for human society.

Last, despite my disagreement with Yellen's views, I very much welcome the fact that the she continues to express her mature views on all kinds of economic phenomena, just as we have often expressed our views on the US monetary hegemony and the international financial imbalances that it has brought about. This is not only so that China and the United States can better understand each other's concerns, but also so that both sides can better view the current state of their own economies. As the old Chinese saying goes, "to correct mistakes if you have made any and guard against them if you have not." But we are opposed to looking at everything China does through tinted glasses, which is a kind of "double standard", which will ultimately be distasteful to everyone.

The author is an associate researcher at the Chongyang Institute for Financial Studies, Renmin University of China.

The opinions expressed here are those of the writer and do not necessarily represent the views of China Daily and China Daily website.

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