How do China-US relations affect China new energy industry?

Kefei Liu
Portfolio Manager - CCB Principal Asset Management (Hong Kong) Co., Limited

With the rapid development of China's new energy industry, many companies on the mainland have established close connections with the global market through the export and import of related raw materials and finished products. The United States is one of the significant export markets for mainland China's new energy products. However, in recent years, tensions between China and the U.S. have led to implementation of policies that are unfavourable to China's related industries, such as photovoltaics and new energy vehicles. What is the response of Chinese new energy companies to these policies, and to what extent are these policies impacting the industry's development? Moreover, what is the size of the overseas export market for China's new energy products, excluding the United States?

Lithium Batteries

In March 2023, the United States issued specific guidance under the Inflation Reduction Act (IRA) outlining the required percentage of critical minerals and battery components. The guidance established new rules regarding domestic content and set an effective date for restrictions pertaining to “foreign entities of concern”. The rules regarding domestic content took effect on April 18, and the assessments for domestically produced critical minerals and battery components remained unchanged. Under the IRA, a tax credit of up to USD 7,500 per vehicle is provided. If the vehicle's critical minerals are produced in the U.S., 50% of that tax credit can be claimed. If the battery components are also produced in the U.S., the remaining 50% of the tax credit is granted. However, starting in 2024, tax credits will not be available for electric vehicles that contain battery components and critical minerals sourced from foreign entities of concern. This ban includes companies controlled, owned or subject to the jurisdiction of China, Iran, Russia and North Korea.

The overseas market is of certain importance to China's lithium battery industry. For instance, in 2022, 23% of sales revenue of CATL, China's leading electric vehicle battery manufacturer, came from overseas. To circumvent the impact of the U.S. legislation, some Chinese lithium battery companies are partnering with U.S. firms to establish joint manufacturing facilities. It is expected that more Chinese companies may form similar joint manufacturing facilities with other U.S. automakers in the future to mitigate the impact of the relevant legislation.

Photovoltaics

On June 21, 2022, the Uyghur Forced Labor Prevention Act (UFLPA) came into force, involving photovoltaic polysilicon and valid for 8 years. The law stipulates that the goods manufactured wholly or partially in China's Xinjiang region or involving entities on the UFLPA Entity List violate the U.S. Tariff Act of 1930. This includes goods made in, or shipped through, China and other countries that contain inputs made in Xinjiang. The law prohibits U.S. Customs and Border Protection from importing such goods. For several years, the U.S. has levied tariffs on China-produced solar components. To evade the direct tariffs, some Chinese photovoltaic companies have established manufacturing facilities in Southeast Asia to export products to the United States.

In fact, currently the U.S. photovoltaic supply chain still relies heavily on China, as over 80% of global photovoltaic capacity is located in China. If the U.S. does not import photovoltaic components from China, its photovoltaic industry would be unable to meet its solar installations demand. To fulfil its needs, the U.S. currently purchases photovoltaic components originally produced in China from countries such as India, Turkey and Southeast Asia. On June 6, 2022, U.S. President Biden issued an executive order to allow solar panels imported from Thailand, Malaysia, Cambodia and Vietnam to be free of duties for 24 months. The policy has benefitted Chinese enterprises with manufacturing facilities in these four Southeast Asian countries, enabling them to resume previously suspended exports to the United States.

It should be noted that the development of the new energy industry in the U.S. is also hampered by its own policies. In 2022, the U.S. installed only 20.2 GW of photovoltaic capacity due to import controls related to the UFLPA, anti-dumping and anti-subsidy investigations. This represents a 16% year-on-year decrease and a significant slowdown in growth1. Meanwhile, uninstalled photovoltaic projects in 2022 totalled 73.85 GW, exceeding the annual installation volume2. The restrictions on component imports caused by trade policies are partly to blame for this and have slowed down the progress of photovoltaic installation. Given the need for the United States to develop its own new energy industry, it is expected that future policies towards China's new energy industry may not tighten significantly.

Overall, while policy restrictions have curbed China's new energy industry exports to the United States, their impact on China's industry has been limited. On the one hand, China's domestic new energy industry is thriving, as much of the existing infrastructure is in need of improvement or replacement. The relatively significant domestic demand can absorb most of the related products’ supply. On the other hand, many countries are increasingly prioritising energy security and enacting policies to promote new energy. For example, the European Union will ban the sales of fossil fuel vehicles in 2035, and at the same time plans to increase the proportion of renewable energy consumption to 69% of total electricity consumption in 20303. Due to the comparatively good value-for-money Chinese products offer, they are well-received in foreign markets; export demand remains strong.

For example, in Europe, in order to meet local new energy industry development needs in the short term, imports of new energy components from Chinese enterprises are necessary. Sif Group, a European company providing pipe piles for offshore windmills, has already booked orders for equipment from Chinese enterprises to meet its needs until 2025. In fact, many Chinese wind power, photovoltaic, energy storage and lithium battery enterprises have been exporting products to Europe. In the medium term, Chinese new energy enterprises are actively increasing production capacity in Europe and are expected to expand sales channels in the future. For example, CATL plans to increase battery production capacity by 100 GWh in Germany and Hungary respectively. Photovoltaic equipment manufacturers LONGI Green Energy Technology Co., Ltd. and TCL Zhonghuan Renewable Energy Technology Co., Ltd. also plan to build factories in Europe and the Middle East.

In summary, as long as the goal of achieving "carbon peak" and "carbon neutrality" remains unchanged, future policies are expected to continue favouring new energy industry development. Chinese new energy companies need to take advantage of this opportunity, actively pursue research and development of new technologies, and gradually enhance their positioning in overseas markets to create more room for growth.

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