China's desire to grow new strategic industries and become a global climate leader has made its new energy industries into significant drivers of its economy, from solar manufacturing, to electric vehicles (EVs) and batteries. As the energy transition gains global traction, these industries could rejuvenate China's old economic model, which had grown over-reliant on the property sector and cheap manufacturing exports for growth. But that will ultimately depend on who is willing to buy China's clean energy technologies and products. So far, the West is reluctant, even at the risk of slowing its own energy transition.
China's clean energy manufacturing boom has turned its main components — EVs, lithium-ion batteries and solar panels — into the country’s “New Three,” replacing its “Old Three” engines of development: furniture, clothing and appliances. This new energy leap is not only propelling China's energy transition forward; it also offers its economy a much-needed lift. But overcapacity looms, and Beijing is resorting to old tactics to keep the momentum going: exporting surplus. Finding willing markets for its products may be harder than in the past.
Investment Surge
Last year saw China breaking multiple records. Its domestic EV sales and solar manufacturing hit unprecedented levels — of 8.3 million units and 640 gigawatts of new capacity, respectively. China also installed more than 300 GW of new renewables capacity, including 216 GW of solar. These surges came thanks to an estimated 6.3 trillion yuan ($890 billion) of investments in China’s clean energy sectors in 2023, up 40% year on year, Finland’s independent Centre for Research on Energy and Clean Air (CREA) estimates. Without such investment, China’s GDP might have grown by only 3%, instead of 5.2%.
China's clean energy expansion is expected to continue for years to come. The country has ambitious targets: to peak carbon emissions before 2030 and be carbon neutral by 2060. President Xi Jinping recently reaffirmed China’s commitment to green energy and carbon peaking despite economic headwinds. When the National People’s Congress meets this month for its yearly session, it is expected to rubber-stamp the government’s 2024 GDP growth target — likely at around 5% — and reiterate Xi’s climate goals.
Chinese EV production and sales are seen increasing further this year, and batteries output, too, as a result, while solar manufacturing is unlikely to fall much after last year’s massive manufacturing ramp up. China’s newly operational solar power generation capacity will again exceed 300 GW in 2024, for the second straight year, the industry body China Electricity Council reckons. That puts it on track to exceed the country’s coal capacity for the first time, and achieve Beijing’s 2030 targets of 1,200 GW of solar and wind power capacity six years early.
Booms and Busts
The surge in Chinese solar manufacturing and EV production is a boon for the country’s energy transition, and that of the world at large. China accounts for almost 60% of the new renewable capacity expected to become operational globally by 2028, the International Energy Agency said last month, making it a major contributor to the tripling of the world’s renewable capacity by 2030.
But this doesn’t necessarily mean that China’s energy transition is on a clear-cut path. Coal remains entrenched in the country's power grid, accounting for nearly 60% of China's total power generation in 2023. Energy security concerns, renewable power intermittency, droughts and successful lobbying have kept it as the power source of last resort.
In fact, the clean energy revolution is not only about climate. It is also about developing new strategic industries — as first envisaged in 2015 in Made in China 2025, a policy seeking to make China dominant in global high-tech manufacturing — brining new dynamism to an economy marred by a real estate crisis.
Batteries, EVs and renewable energy, and their related sectors upstream, made up just under 11% of China’s GDP last year, consultancy Oxford Economics estimates, an impressive figure, although still lower than the 20%-25% GDP share of housing, including construction activity and real estate services. But this could rapidly change.
“Our assumption is that the New Three’s share of GDP will grow by 1.5% per year, so that by end-2027 they will account for about 18% of GDP, becoming the main driver of China’s economy,” says the consultancy’s lead economist, Louise Loo. In contrast, the property sector would account for around 15% of China’s GDP by then, having become smaller, but more resilient.
But overcapacity concerns are already creeping up in the EV, batteries and solar panels segments. With annual solar manufacturing capacity potentially reaching nearly 1,000 GW by end-2023, more than twice as much as the world can consume, the days of more than 50% growth rates for renewables can’t go on for long, the Oxford Institute for Energy Studies cautions.
For many manufacturers and investors, this spells weakening profitability. “That is a continuous paradox of the industry that, while volumes are booming, it is not an easy industry to make money in,” CREA’s lead analyst, Lauri Myllyvirta, told Energy Intelligence. “The investment in clean energy will remain a substantial part of China's economy, but it just cannot keep driving economic growth at the scale that it did in 2023.”
Exports Dilemma
China’s growing domestic overcapacity is prompting Beijing to encourage more exports. The country’s exports of the New Three rose 29.9% last year, official data show, exceeding 1 trillion yuan ($139 billion) for the first time.
But China’s expertise and low-cost advantage are a growing source of tension with the West. The EU — the largest import market for China’s New Three — and the US are wary of Chinese products and technologies. Both are seeking ways to restrict imports of Chinese new energy goods without slowing down their energy transition, which China denounces as protectionist and endangering the global energy transition. The EU has launched an anti-subsidy probe after China’s EV exports to Europe jumped by 78% last year. In the US, under the latest guidelines, even if only one EV's component's manufacturer has as little as 25% of its board control in Beijing, that EV is not eligible for tax credits.
China has other options. The Belt and Road Initiative (BRI) it launched 11 years ago to promote ties with the Global South also aimed to find new markets for China’s overcapacity in infrastructure and coal power plants. The BRI has since been rebranded as a greener initiative and Chinese companies have — almost — stopped building coal power plants, and are instead investing in renewables and EV plants overseas. The Middle East, and especially Saudi Arabia, have welcomed Chinese EV and renewables companies and investments.
Maryelle Demongeot is a reporter at Energy Intelligence and Singapore deputy bureau chief. A version of this article originally ran in Energy Compass.
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