China's high-tech manufacturing loans raise fears of wave of cheap exports

BEIJING, Nov 13 (Reuters): China's leaders, determined to upgrade manufacturing, are steering money toward makers of high-tech products, from semiconductors to EVs, raising fears that overcapacity will fuel a new wave of cheap exports.
Lending data from China's central bank offers a glimpse of government priorities: as of the end of September, outstanding loans to the troubled property sector fell 0.2 per cent year-on-year but lending to the manufacturing sector jumped 38.2 per cent.
Economists caution that this wave of investment differs in key respects from an earlier capital investment surge that, among other effects, inflated China's solar panel industry, triggered a trade fight and put scores of companies out of business.
But the trend has alarmed some key trading partners, particularly in Europe where an investigation into Chinese EV subsidies is underway.
"There is lower consumption in China right now but you have massive overcapacity that is being pushed out to the world, including in batteries, solar and chemicals," said Jens Eskelund, president of the European Chamber of Commerce in Beijing.
"Europe and China are like two trains that are going to collide," Eskelund said, referring to trade.
China's industrial policy will be on the agenda at this week's meeting of the Asia Pacific Economic Cooperation (APEC) forum in San Francisco, where Chinese President Xi Jinping is expected to meet US President Joe Biden.
Under Xi, China has sought to make itself an advanced manufacturing powerhouse for high-end goods for the world, including EVs, wind turbines, aerospace components and advanced semiconductors. Critics say the push has come at the expense of another need - to get China to consume more and export less, a structural shift many economists see as key to preserving high levels of growth.
Policymakers have struggled with overcapacity before. Stimulus following the 2007-2008 global financial crisis triggered a boom in steel, solar and other areas, but also generated growth that ultimately helped absorb much of that new production, said Frederic Neumann, chief Asia economist at HSBC.
This time, the government's focus is narrower, targeting high-tech and "advanced manufacturing", a goal laid out in 2021 in the 14th five-year plan.
"China has adopted a strategy to shift investment spending from the real estate sector into manufacturing, which will drive up capacity further. Rather than boosting goods absorption via surging construction, China is opting to drive up the capacity of goods-producing industries," said Neumann.
"Global markets, unfortunately, are not in a position to absorb the additional capacity."
Another difference from previous episodes of overcapacity: the sums are smaller.
The headline growth rate for financing into manufacturing is likely close to 18 per cent, said Tao Wang, chief China economist at UBS, because the other major source of financing for companies - bonds - is down sharply, meaning a more modest combined increase.
And overall investment growth in Chinese manufacturing has been slowing as producers respond to a weak market.
"Orders and profits are down and they tend to react to that," said Wang.
Still, investment in high-tech manufacturing outpaces the rest of the sector. It grew 11.3 per cent in the first nine months of 2023 year-on-year, compared with 6.3 per cent for overall manufacturing investment, according to data from China's National Bureau of Statistics.
A Reuters review of more than 100 publicly available policy documents and state media reports found that dozens of provincial and municipal governments are increasing the proportion of government loans directed to green development, advanced manufacturing and strategic industries.
For example, Guangdong province has increased lending to both high-tech and advanced manufacturing by about 45 per cent, state media reported. During the first half of 2023, outstanding loans to the high-tech manufacturing sector in the eastern province of Shandong jumped 67 per cent.