1 NEV overcapacity in China creates new risks
April 22
The National Development and Reform Commission’s price monitoring center published an article on its website with data showing that the prices of new energy vehicles (NEV) in Shenzhen have generally declined this year, with price drops in the five to 10 percent range.
The BYD Song Plus (DM-i 110KM flagship model) topped the list of the 10 NEVs whose price declines were announced by the NDRC price monitoring center, with its price falling from 154,800 yuan per vehicle at the start of the year to 139,800 yuan (down 9.69 percent). Four other BYD models also ranked in the top 10, coming in at second (down 9.45 percent), third, (down 9.3 percent), fourth (down 7.15 percent), and ninth (down 3.42 percent). Meanwhile, Tesla China had two models in the top 10, ranking sixth (down 5.93 percent) and 10th (down 0.94 percent).
The NDRC price monitoring center attributed the price declines to market oversupply, decreasing battery costs, and the advantages of scale and the entire industrial chain.
The NDRC subsequently deleted the article from its website, but not before it was republished by other mainland media outlets.
Backdrop
1. Data released by the China Association of Automobile Manufacturers (CAAM) showed that automobile production and sales reached 6.606 million units and 6.72 million units respectively in the first quarter of 2024, an increase of 6.4 percent and 10.6 percent respectively from a year ago.
The production and sales of NEVs (market share of 31.1 percent) reached 2.115 million units and 2.09 million units respectively, an increase of 28.2 percent and 31.8 percent respectively year-on-year. Meanwhile, domestic sales of NEVs increased by 33.3 percent from a year earlier to reach 1.783 million units.
CAAM data also showed that automobile exports increased by 33.2 percent year-on-year in the first quarter to reach 1.324 million units. Of the total, exports of traditional fuel vehicles increased by 36.3 percent year-on-year to 1.017 million units while the exports of NEVs grew by 23.8 percent year-on-year to 307,000 units.
2. Mainland media reported that the planned delivery volume of NEVs from BYD, Huawei’s AITO, and Li Auto in 2024 will increase by 2.3 million units. However, the forecasted market demand is only set to increase by 2.1 million units.
Our take
1. NEV prices in China appear to be dropping due to oversupply, an issue that has long been acknowledged and discussed in the Chinese auto industry but is rarely admitted to by the CCP authorities. The NEV oversupply issue is largely the CCP’s own doing:
i) The CCP authorities vigorously promoted the development of the NEV industry after the 2008 global financial crisis partly with an eye on leapfrogging the West and dominating a key part of the green economy. In the long run, the PRC would look to transform an advantage in NEV production to take up more of the international automobile market share and gradually squeeze out foreign car companies, promote technologies that the CCP can potentially control and exploit, and aid the regime in its push for global hegemony.
To accelerate NEV development and drive the growth of the industry, both the central and local governments have been rolling out subsidy policies since 2008. According to mainland media reports in February 2023, the cumulative subsidies for NEVs were in excess of 200 billion yuan over the past 13 years. Scott Kennedy, a researcher of Chinese economic policies at the Center for Strategic and International Studies, estimated that the PRC spent about $173 billion in NEV subsidies between 2009 to 2022. A study by the Kiel Institute for the World Economy published on April 10, 2024 found that BYD received direct subsidies amounting to about 220 million euros in 2020 and 2.1 billion euros in 2022. In terms of business revenue, BYD’s direct subsidies increased from 1.1 percent in 2020 to 3.5 percent in 2022. Dirk Dohse, research director at the Kiel Institute and co-author of the study, noted that the figures “clearly understate the true scale and scope of green technology in China,” noting that BYD also benefits from subsidies to battery producers through lower input prices and subsidies to buyers of NEVs that stimulate demand.
The CCP’s promotion of the NEV industry would continue after Xi Jinping took office in 2012. In visiting the Shanghai Free Trade Zone in May 2014 during his first term in office, Xi talked up the importance of the automobile industry and added that the development of NEVs is the “inevitable path for China to transition from being a major automotive country to a strong automotive power.” Xi’s NEV push coincided with his effort to have the PRC make major breakthroughs in key core technological areas and “firmly grasp the trend of the industrial revolution.”
Xi and the CCP’s efforts to promote NEVs have succeeded to a degree. Chinese NEVs make up about 60 percent of worldwide sales, with BYD rivaling Tesla for market share. Chinese NEV dominance has also almost certainly affected Western auto companies in their development and launch of electric vehicles.
However, Chinese NEV success is a double-edged sword for the CCP. NEV prices in China are currently falling in what is likely to be an oversupply problem. Meanwhile, the glut of Chinese NEVs on the market calls even more attention to the threat of PRC overcapacity and compels the U.S. and its allies to deal with the problem. In September 2023, the European Commission launched an investigation into whether to impose tariffs on NEVs to protect EU producers against cheaper Chinese NEVs. “Global markets are now flooded with cheaper electric cars. And their price is kept artificially low by huge state subsidies,” European Commission President Ursula von der Leyen said. An April 9 report by The Financial Times noted that European ports are turning into “car parks” for imported vehicles, with some car industry executives saying that the oversupply is due to Chinese car manufacturers not selling their vehicles in Europe as quickly as they expected. Industry executives also say that some Chinese-brand NEVs have been sitting in European ports for as many as 18 months, with many of the unloaded vehicles staying in ports until they are sold to distributors or end users.
On Feb. 29, 2024, President Joe Biden ordered the U.S. Commerce Department to investigate foreign-made software in cars, citing PRC technology as a potential national security risk. “Connected vehicles from China could collect sensitive data about our citizens and our infrastructure and send this data back to the People’s Republic of China. These vehicles could be remotely accessed or disabled,” Biden said. And on April 25, U.S. Treasury Secretary Janet Yellen told Reuters that the U.S. will take nothing off the table in responding to the PRC overcapacity issue.
ii) NEV overcapacity in China appears to be partly due to the CCP authorities looking to create a new economic “growth point” to compensate for the economic impact of the real estate downturn.
Real estate, which the CCP authorities dubbed a “pillar industry” of the Chinese economy, accounted for 7.34 percent of the GDP in 2020. However, real estate would only account for 5.9 percent of the GDP in 2023, or a regression to the level in 2014.
Meanwhile, the industrial added value of the auto manufacturing industry in China in 2023 increased by 13 percent from a year ago, or more than the 8 percent increase in the added value of the manufacturing industry during the same period. The auto manufacturing industry’s revenue also increased by 11.9 percent year-on-year to reach an excess of 10 trillion yuan. However, the price war that drove the auto manufacturing industry’s double-digit added value and revenue growth also led to profits only increasing by a single digit; profits increased 5.9 percent year-on-year to reach 508.63 billion yuan.
2. NEV oversupply is bringing new risks to the Chinese economy:
i) Wu Songquan, a professor at the China Automotive Technology and Research Center, argued in an April 22 piece on China Economic Net that most Chinese NEV ventures are currently operating at a loss.
Wu noted that the automotive industry is a “pillar industry” in many provinces and cities, playing an important role in driving local economic development and increasing employment and tax revenue. However, the auto industry faces trouble because the production and sales of traditional fuel vehicles and NEVs are in opposition; the resulting decline in the production of traditional fuel vehicles and the weak growth of NEVs as the auto industry in some areas make conversions will impact operating income and tax revenue, and the impact on local economic and social development will gradually become apparent.
Wu also pointed out that traditional fuel vehicles are still the main source of profits for the major traditional fuel vehicle companies, but the profitability of such companies are declining. That being said, the entire NEV industry has been suffering from long-term and widespread losses. Wu noted that only few NEV companies like Tesla, BYD, and NIO have achieved profitability, while NEV firms that mainly focus on domestic sales are generally losing money with losses per vehicle ranging from 10,000 to 30,000 yuan. Wu added that BYD and NIO only earned profits of 10,000 yuan and 31,000 yuan per vehicle respectively in 2023, far below that of Tesla.
According to publicly available sales data published by automakers, there were 7.264 million units of NEVs sold in China between March 2023 to March 2024. Of the total, BYD (2.812 million units), Tesla (675,000 units) and NIO (420,000 units) accounted for 3.907 million units (53.8 percent). Assuming that Wu Songquan’s assessment is accurate, this means that nearly 3.4 million units (46.2 percent) of NEVs sold by Chinese automakers were sold at a loss. Assuming that automakers lose an average of 20,000 yuan per vehicle, the Chinese NEV industry on the whole lost as much as 67.12 billion yuan between March 2023 to March 2024. The estimated average loss per vehicle is relatively conservative; Citigroup published a research report dated April 2 which noted that Xiaomi is expected to sell between 55,000 to 70,000 SU7 NEVs, and could generate a loss of 4.1 billion yuan based on projected annual sales of 60,000 units, or 68,000 yuan per unit.
ii) Chinese NEV marks could look to export their wares to ease oversupply issues. However, the flood of Chinese NEVs abroad could lead to sanctions and tariffs from the U.S., the EU, and other countries as governments look to protect local auto manufacturers. Sanctions and tariffs would result in the Chinese NEV glut having nowhere to go, creating new risks for both local provincial economies and the national economy.
2 US, EU target the PRC before Blinken’s China trip
Blinken travels to Shanghai and Beijing
U.S. Secretary of State Antony Blinken traveled to Shanghai and Beijing from April 24 to April 26. While in China, Blinken met with Xi Jinping, foreign minister Wang Yi, public security minister Wang Xiaohong, and Shanghai Party secretary Chen Jining. According to news reports, Blinken held talks with Wang Yi for five and a half hours.
Notable points in the State Department readout of Blinken’s China trip include:
- Both sides had “in-depth, substantive, and constructive discussions on key priorities in the bilateral relationship and on a range of regional and global issues.” Blinken said that the U.S. will “continue to use diplomacy to make progress in areas of difference and areas of cooperation that matter to the American people and the world as part of responsibly managing competition with the PRC.”
- Blinken pressed the PRC for continued progress in implementing the commitments between President Joe Biden and Xi at the Woodside Summit in California in November 2023.
- Both sides talked about strengthening ties between the people of China and the United States. Blinken called for “responsible and reciprocal policies to facilitate expanded exchanges between students, scholars, and businesses.”
- Blinken brought up the PRC’s “non-market economic policies and practices that distort trade or threaten our national security and raised concern about the global economic consequences of PRC industrial overcapacity.” He also said that the U.S. will take necessary action to defend the interests and values of America and its allies, including “preventing advanced U.S. technologies from being used to undermine our national security and economy without unduly limiting trade or investment.”
- Blinken said that the resolution of cases of American citizens who are wrongfully detained or subject to exit bans in China remains a top priority. He also raised concerns over the erosion of Hong Kong’s autonomy and the PRC’s human rights violations in Xinjiang, Tibet, and transnational repression and individual cases of concern.
- Blinken raised “serious concerns with PRC support to Russia’s defense industrial base that is enabling Russia to prosecute its war against Ukraine and undermining European and transatlantic security.”
- Blinken brought up the Taiwan and South China Sea issues, as well as discussed the crisis in the Middle East and the U.S. commitment to the complete denuclearization of the Korean Peninsula.
At a press conference in Beijing on April 26, Secretary Blinken said, “I reiterated our serious concern about the PRC providing components that are powering Russia’s brutal war of aggression against Ukraine. China is the top supplier of machine tools, microelectronics, nitrocellulose – which is critical to making munitions and rocket propellants, and other dual-use items that Moscow is using to ramp up its defense industrial base.” He also said, “Beijing cannot achieve better relations with Europe while supporting the greatest threat to European security since the end of the Cold War. As we’ve told China for some time, ensuring transatlantic security is a core U.S. interest. In our discussions today, I made clear that if China does not address this problem, we will.”
Blinken announced at the press conference that both sides had agreed to hold the first U.S.-PRC talks on artificial intelligence in the coming weeks. “We’ll share our respective views on the risks and safety concerns around advanced AI and how best to manage them,” he said.
In an interview with CNN published on April 26, Blinken said, “We have seen, generally speaking, evidence of attempts [by the PRC] to influence and arguably interfere [in U.S. elections], and we want to make sure that that’s cut off as quickly as possible.” He added, “Any interference by China in our election is something that we’re looking very carefully at and is totally unacceptable to us, so I wanted to make sure that they heard that message again.” Blinken also told CNN, “We are (now) focused on areas where we’re working to cooperate, but also we’re being very forthright about our differences and that’s important if we’re going to avoid the competition we’re in turning into conflict.”
PRC official media and foreign ministry also published readouts of the meetings between Blinken and top PRC officials.
Noteworthy points in the PRC foreign ministry readout of the Xi-Blinken meeting include:
- Xi said that both sides should be “partners rather than rivals; help each other succeed rather than hurt each other; seek common ground and reserve differences rather than engage in vicious competition; and honor words with actions rather than say one thing but do another.”
- Xi proposed “mutual respect, peaceful coexistence and win-win cooperation” as the “three overarching principles” for the China-U.S. relationship.
- Xi said that he told President Biden in their phone call three weeks ago that both sides should “value peace, prioritize stability, and uphold credibility” in stabilizing and developing the bilateral relationship in 2024.
- Xi said that his “community with a shared future for mankind” has become “a flag of China’s foreign policy and has been welcomed by many countries.”
- Xi reiterated his consensus with Biden in California, and said that while the PRC is willing to cooperate, cooperation should be a “two-way street” and competition should not be a “zero-sum game.” He added that the PRC is committed to “non-alliance” and the U.S. should not “create small blocs.” Xi also said that each side “can have its friends and partners” and should not “target, oppose, or harm the other.”
- The readout claimed that Secretary Blinken expressed to Xi that the U.S. “does not seek a new Cold War, does not seek to change China’s system, does not seek to suppress China’s development, does not seek to revitalize its alliances against China, and has no intention to have a conflict with China.”
According to the official PRC foreign ministry readout of Blinken’s meeting with Wang Yi:
- Wang said that while “overall stability” has been achieved in the bilateral relationship, “negative factors are still accumulating.”
- Wang said that the fundamental question regarding the future direction of China-U.S. relations in the current complex international situation is whether both countries “will be partners or adversaries.” He added that if the U.S. continues to regard China as its primary adversary, the bilateral relationship will “only encounter continuous troubles and generate numerous problems.”
- Wang reiterated that the Taiwan issue is the “first and foremost red line in China-U.S. relations.” He added that the Chinese requests that the U.S. “earnestly fulfill President Biden’s commitments, such as not supporting ‘Taiwan independence,’ not supporting ‘two Chinas’ or ‘one China, one Taiwan,’ not using Taiwan as a tool to contain China, etc.” Wang also urged the U.S. to cease arming Taiwan and instead support the PRC and “peaceful reunification.”
The PRC foreign ministry also released “five points of consensus” between Wang Yi and Secretary Blinken that were reached after a “comprehensive exchange of views”:
- Both sides agreed to make efforts to stabilize and develop China-U.S. relations and accelerate the implementation of the San Francisco consensus.
- Both sides agreed to maintain high-level exchanges and contacts at all levels.
- Both sides will hold an inaugural dialogue on AI; will continue advancing consultations on guiding principles for the bilateral relationship; will hold new rounds of consultations on Asia-Pacific affairs and maritime affairs; and will continue consular consultations between both sides. Also, the China-U.S. anti-narcotics working group will hold a high-level meeting and the U.S. welcomes the PRC special envoy for climate change Liu Zhenmin to visit the United States.
- Both sides will take measures to expand cultural and educational exchanges, and welcome students from each other’s country.
- Both sides will consult each other on international and regional hotspot issues, with special envoys enhancing communication.
Putin to visit China
April 25
Russian leader Vladimir Putin announced a planned visit to China in May 2024. Putin’s China trip would likely be his first since being elected to a new six-year term in March.
Washington ramps up pressure on China
April 20
The U.S. House of Representatives passed a $95-billion aid bill for Ukraine, Israel, and Taiwan. The House also passed another bill to impose sanctions on Iran and either force the sale of or ban Chinese-controlled TikTok in the United States.
The Senate passed similar legislation on April 23 and President Joe Biden signed it into law on April 24.
April 21
In an interview on CBS News’ “60 Minutes,” U.S. Commerce Secretary Gina Raimondo said that China’s chipmaking capabilities are “years behind what we have in the United States.” She added, “We have the most sophisticated semiconductors in the world. China doesn’t. We’ve out-innovated China.”
Raimondo also said, “We want to trade with China on the vast majority of goods and services. But on those technologies that affect our national security, no.”
April 23
The Wall Street Journal reported that the U.S. is drafting sanctions to cut off some Chinese banks from the global financial system. Those banks have served as key intermediaries for commercial exports to Russia, handling payments, and providing client companies credit for trade transactions.
U.S. officials say that targeting Chinese banks with sanctions is an escalatory option for when diplomatic means are unable to sway Beijing to cease its commercial support of Russia’s military production.
April 25
1. The Financial Times reported that the U.S. wants Japan, South Korea, and the Netherlands to use existing export controls more aggressively, including preventing engineers from their countries from servicing chipmaking tools at advanced semiconductor fabs in China, citing five people familiar with the matter.
The U.S. also wants its allies to make it more difficult for the PRC to circumvent U.S. restrictions, particularly making it harder for companies from third countries to supply China with items that include technology produced in South Korea, Japan, or the Netherlands. One person familiar with the situation said that the U.S. was not getting its allies to create new mechanisms along the lines of America’s “Foreign Direct Product Rule,” but to use existing export control regimes to deal with the issue.
2. U.S. Treasury Secretary Janet Yellen told Reuters that Chinese overcapacity threatens the viability of manufacturers in the U.S., Europe, Japan, Mexico, and India, but the problem would not be resolved “in a day or a week.” Therefore, it is important that “China recognize the concern and begin to act to address it. But we don’t want our industry wiped out in the meantime, so I wouldn’t want to take anything off the table,” Yellen said.
NATO says PRC can’t have it both ways
April 25
NATO Secretary-General Jens Stoltenberg said in a visit to Berlin, “China says it wants good relations with the West. At the same time, Beijing continues to fuel the largest armed conflict in Europe since World War Two. They cannot have it both ways.”
Stoltenberg also said, “In the past, we made the mistake of becoming dependent on Russian oil and gas. We must not repeat that mistake with China. Depending on its money, its raw materials, its technologies – dependencies make us vulnerable.”
EU probes China subsidies
April 23
The European Commission and local law enforcement raided the Warsaw and Rotterdam offices of state-owned Chinese security equipment supplier Nuctech as part of an anti-subsidies probe.
Nuctech, which makes cargo, baggage, and human scanners that are deployed all across Europe, was once headed by Hu Jintao’s son Hu Haifeng. According to a Financial Times analysis of European Commission documents, governments in Europe awarded over 160 contracts (excluding contracts made directly with private companies) amounting to more than 120 million euros to Nuctech over the past 10 years despite warnings from Lithuania, Belgium, and other EU governments.
April 24
Bloomberg News reported that the EU formally launched an investigation into China’s procurement of medical devices and will seek to address concerns that China unfairly favors domestic suppliers. Bloomberg added that the EU is already looking into PRC government support for electric car manufacturers that could result in new tariffs, and is also investigating other industries like solar, wind energy, and railways.
EU tackles PRC espionage
Several European countries recently tackled PRC espionage, including:
The Netherlands
April 18: MIVD, the Dutch military intelligence agency, said in its annual report that PRC spies had targeted the semiconductor, aerospace, and maritime industries in the Netherlands to strengthen its military.
The MIVD report said, “China wants to be independent from Western knowledge and technology (and) wants to build a military that can match any other. To do so, it needs advanced technology it doesn’t yet fully possess. It tries to get this abroad, using legal means such as research and investments, but also through its intelligence agencies.”
United Kingdom
March 25: Britain said that PRC hackers had tried to break into the email accounts of UK lawmakers who are critical of Beijing and that a separate PRC entity was behind the hack of its Electoral Commission that compromised the data of millions of people.
April 22: Two men were charged in the UK with spying for China. One of the men was a parliamentary researcher for a prominent lawmaker in the Conservative Party.
Commander Dominic Murphy, head of the Counter Terrorism Command at the Metropolitan Police, said that the investigation had been “extremely complex” and the allegations were “very serious.”
Germany
April 22: Germany’s justice ministry said that three Germans had been arrested on suspicion of working with the PRC Ministry of State Security to hand over technology that could be used for military purposes, and potentially in strengthening the PLA Navy.
April 23: Germany arrested the aide of MEP Maximilian Krah, the Alternative for Germany party’s top candidate in the European Parliament election in June, over accusations that he is a PRC spy. “Jian G. is an employee of a Chinese secret service,” the German public prosecutor said in a statement.
On April 24, German Chancellor Olaf Scholz said that the allegations that Krah’s aide had been spying for the PRC were “very concerning” and called for more action to root out such cases.
Other developments
April 25
Reuters reported that the Angara, a U.S.-sanctioned Russian cargo ship implicated in North Korean arms transfers to Russia, has been anchored at a Chinese shipyard in Zhejiang Province since February 2024, according to satellite images.
April 26
Reuters reported that Russian companies are turning to intermediaries to make payments for goods in China as Chinese banks fear secondary sanctions, citing four sources familiar with the matter. A source said that the intermediaries are legal entities from Hong Kong, Kazakhstan, Kyrgyzstan, the United Arab Emirates, and other jurisdictions considered “friendly” to Russia.
Our take
1. The CCP readouts of Secretary Blinken’s meeting with top PRC officials suggest that Beijing is keen on maintaining the old status quo and does not want the U.S. to escalate tensions with China over its behavior. That is, the PRC wants to maintain good relations with the U.S. like during the “engagement” era, continue being “friends and partners” like Russia, Iran, and other countries that Washington might not be on good terms with without being held to account, pursue eventual “reunification” with Taiwan on its terms, and gradually expand its hegemony through the building of a “community with a shared future for mankind.”
The Xi leadership also appears to be concerned that the U.S. will not uphold its prior commitments to the PRC in the future. This is seen from the readout of the Blinken-Xi Jinping meeting where Xi said that both sides should “honor words with actions rather than say one thing but do another,” and “uphold credibility” in “stabilizing and developing the bilateral relationship in 2024.” This suggests that Beijing believes Washington is going to get tough on China over Russia and other matters, and is preparing to play the victim card so as to tap into nationalism at home and in an attempt to foster sympathy abroad.
Meanwhile, Blinken’s remarks in his press conference in Beijing and comments to CNN suggest that the Biden administration has made clear its red lines to the Xi leadership during Blinken’s China trip and is set on upping the pressure on the PRC. To that end, Washington could sanction some smaller Chinese banks and other entities over Russia, increase tariffs on certain Chinese exports (solar panels, lithium-ion batteries, NEVs, etc.), carry out anti-subsidy probes and impose sanctions, further restrict China’s access to advanced semiconductors and other critical technologies, raise awareness and take action to curb the CCP’s interference in U.S. elections and democracy, and do more to combat PRC espionage. The UK and EU countries could also follow the U.S. in adopting some or all of the aforementioned measures.
While both sides dealt with the issue in a relatively routine manner, the upcoming and future U.S.-PRC talks on AI could eventually become as significant as talks on nuclear arms following advances in the development of artificial general intelligence (AGI) and the dangers that AGI potentially poses to mankind.
2. The U.S. and the EU’s recent actions, including targeting PRC espionage, subsidies, and TikTok, could partly be due to increasing global awareness of the CCP threat in recent years. The governments of those countries now appear to be working to shore up their national security and guard against CCP subversion and domination.
The U.S. and the EU could also partly be looking to pressure the PRC over its support of Russia’s war effort as Ukraine’s situation becomes increasingly untenable. Washington, Brussels, and other European governments are likely to get tougher on Beijing as the Russian advance gains steam and Ukraine falters.
Greater pressure by the U.S. and its allies, however, will likely serve to only further reinforce paranoia in the CCP and Xi leadership that America is the PRC’s greatest adversary and to distrust the West. Beijing is also wont to continue supporting Russia, step up efforts to internationalize the renminbi and develop intercountry transaction systems (including strengthening the Cross-Border Interbank Payment System), and strengthen the PRC’s national security as the regime prepares to “delay and wait for change.”
3. Businesses, investors, and governments should prepare for worsening tensions between the PRC and the U.S. and its allies. Rising geopolitical risks will negatively impact China’s economy and speed up its already rapid deterioration.
Certain politicians and political parties in the West and elsewhere are also at risk of being proverbially caught in the crossfire as the Sino-U.S. “new cold war” heats up. For instance, investigations into PRC espionage and election interference are likely to cast a shadow on the careers and campaigns of certain politicians, as well as adversely affect the fates of certain political parties. The growing global movement to expose the CCP and its dangers could be negatively impacted if people come to believe that some governments, political parties, or politicians are “weaponizing” being “anti-CCP” or “anti-PRC” to go after other political parties, politicians, or dissidents.
