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What overcapacity in Chinese manufacturing could mean for American businesses


Secretary of State Antony Blinken is headed to China this week. His trip follows a visit by Treasury Secretary Janet Yellen earlier this month, where she took time to flag a growing concern over capacity in Chinese manufacturing. She says it could hurt American businesses and workers. But as NPR John Ruwitch reports from the Chinese City of Hefei, some in China don't see it that way.

JOHN RUWITCH, BYLINE: At Sungrow Power Supply, a company officer gives a cheerful tour to a group of reporters brought to the factory as part of a government-organized press tour.

UNIDENTIFIED PERSON #1: Good morning, ladies and gentlemen. Welcome to Sungrow...

RUWITCH: The company is known for its photovoltaic inverters, which make the power from solar panels usable.

UNIDENTIFIED PERSON #1: What we displayed here are 3-25 kilowatt residential products.

RUWITCH: The solar industry is a poster child for Chinese overcapacity, catalyzed by government support. China controls more than 80% of global solar manufacturing, but despite a growing market worldwide, the amount of gear that China exports outstrips the ability of countries to install it. Prices have fallen. This is just the kind of thing that's prompted complaints from the U.S. and Europe, and has the potential to damage relations.

UNIDENTIFIED PERSON #2: (Non-English language spoken).

RUWITCH: At Sungrow, though, nobody seems to see it as a problem. According to a Sungrow executive, overcapacity is just something that happens as industries develop.

UNIDENTIFIED PERSON #2: (Non-English language spoken).

RUWITCH: The best way to overcome it, he says, is through innovation. For its part, China's central government has at times acknowledged that overcapacity is a problem. But at others, it's pushed back against accusations that it's flooding the market with cheap goods. The trade minister recently argued that China's industries are dominant simply because of innovation and robust supply chains. In Hefei, local officials who are incentivized to grow the economy are quick to brush off questions about overcapacity, and trumpet their achievements instead.

UNIDENTIFIED PERSON #3: The total number of high-tech enterprises in Anhui has exceeded 19,000, ranking to eighth in China. And the number of tech-based SMEs...

MICHAEL PETTIS: So I often get the impression that there's this hope that if we just invest in enough technology, something will happen that will solve our imbalance problems.

RUWITCH: That's Michael Pettis, a professor of finance at the Guanghua School of Management at Peking University. He's talking about imbalances in the Chinese economy. It's been propelled for years by investment in things like real estate, infrastructure and manufacturing. But despite a long-standing recognition that consumption needs to rise, it hasn't happened.

PETTIS: They cannot increase investment in the property sector. They don't want to increase investment in infrastructure. They're finding it very difficult for consumption to go up.

RUWITCH: According to Pettis, the government is stuck now.

PETTIS: So they have to choose between continuing on this path or allowing GDP growth to slow a lot.

RUWITCH: Beijing denies that it overly subsidizes industry. But Pettis points to a range of benefits that give Chinese companies a leg up and are effectively types of subsidies, including targeted lending, tax breaks and a ban on independent labor unions. Back in Hefei, we visit a new factory that's a partnership between a leading battery maker called Gotion and German car maker Volkswagen.

UNIDENTIFIED PERSON #4: So this is actually the incoming aluminum for the cathode, and we apply then on that aluminum foil here…

RUWITCH: Like solar and EVs, the battery sector suffers from excess capacity in China, according to experts. The country makes more than it can use, but that's not stopping this venture. A German executive on secondment from Volkswagen explains.

UNIDENTIFIED PERSON #5: Today, we have around 3,000 cells per day. But the final will be up to 80,000.

RUWITCH: The company seems to recognize concerns abroad about Chinese exports. It said it will locate one-third of its manufacturing overseas by next year, but there have been snags. The company plans to build a factory in Michigan with huge tax breaks and other subsidies, but it's in limbo after a local backlash. Pettis, the Beijing-based economist, says, on a macro level, encouraging and subsidizing more manufacturing capacity is well and good if it can be absorbed.

PETTIS: But when you're already one-third of global manufacturing, for China to do that, the rest of the world has to accommodate it.

RUWITCH: And many are signaling that won't happen without a fight. John Ruwitch, NPR News, Hefei, China. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

John Ruwitch is a correspondent with NPR's international desk. He covers Chinese affairs.