(Bloomberg) -- China’s overflow of goods abroad is set to change course in the next few years, according to Goldman Sachs analysts, though relief isn’t likely for electric vehicles and steel.
Chinese manufacturers are producing more than the world can absorb in several industries, Goldman analysts wrote in a report to clients Tuesday. While some sectors, including lithium batteries and solar components, may be about to wind down production to better suit demand, overcapacity is likely to remain for EVs and steel. These have prompted the most pushback recently from other large economies.
Goldman Sachs looked at seven manufacturing sectors that make up nearly one-quarter of China’s economic growth, including solar modules, steel and air conditioners.
“We estimate that Chinese capacity in five of these seven sectors is higher than the entire global demand pool for their respective products,” wrote analysts led by co-head of China equities research Trina Chen. “We expect a rebalancing in supply versus demand, a restoration in profit, and sharp deceleration of Chinese supply to the world through 2028.”
China’s economy is at a crossroads entering the second half of the year, as policymakers contend with weakening demand for exports and more roadblocks from abroad. That hasn’t gone unnoticed by Chinese firms, who’ve taken a hit from lower prices and are adjusting supply.
Trade and manufacturing data in recent days underscored this dynamic. July exports unexpectedly eased while manufacturing activity contracted for the first time in nine months. Export prices have tumbled since the middle of 2022.
Chinese solar module capacity now makes up 200% of global demand, and lithium batteries are equal to about 150%, according to Goldman. Oversupply has led to price drops of as much as 55% since early 2023, making investment less appealing.
While an inflection point is imminent for solar parts and lithium batteries, it’ll take another two to three years before supply balances with demand for EVs and power semis, the analysts said.
The market share of Chinese supply abroad could be cut as much as 19% for lithium batteries and solar modules, compared to gains of up to 40% in the 2020-2023 period. EVs, air conditioners and power semis could see gains of 4%, down from prior years but still an increase.
“Chinese manufacturers are responding to poor profitability and uncertainties around limitations to market access to the US and EU,” Goldman said. That’s led to companies “pre-emptively adjusting the pace of future additions of capacity.”
Contrary to the narrative that China’s overcapacity is led by government investment, Goldman found that the problem is due more to the economy’s size and the rapid pace and size of demand swings. That makes it “extremely challenging to estimate a potential market size, especially at the beginning of a cycle,” they wrote.
They found the average government subsidy accounted for only 2% to 10% of operating cash flow.
(Updates with chart on prices for key products dropping. An earlier version of this story corrected analyst title.)
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