China should be mindful of risks from overcapacity and prudently formulate industrial policies to guide enterprises amid Beijing’s hi-tech push in order to reorient economic growth and nurture new industries, a former government adviser said on Tuesday.

Beijing’s bid to upgrade the world’s second-largest economy by tapping so-called new quality productive forces has led to the rapid expansions of China’s electric vehicle industry and other green sectors.

“Policymakers should, in their push for new quality productive forces, have the foresight to make good predictions for supply and demand,” said Jia Kang, a former director of the Chinese Academy of Fiscal Sciences.

“If they don’t have such ability, they should refrain from making interventions off the top of their heads to favour a specific industry or project.

“The market can drive out excess capacity through competition.”

He added that Beijing must not resort to excessive interventions when formulating industrial policies, while saying that Washington’s allegations of overcapacity are invalid.

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He suggested, however, Beijing should make efforts to improve communication with the United States and EU – even though Brussels and Washington are levelling accusations at China’s green sectors – to settle disputes through cooperation and competition.

Jia said other countries should not characterise China’s lead in electric vehicles, lithium batteries and solar modules as an overcapacity issue, as long as the products can be sold and China’s competitiveness is achieved via open and fair global competition.

“People may jump to subjective conclusions about overcapacity, but industrial development is never static and perfect supply-demand match is unlikely,” Jia told the Shanghai-based The Paper.

Beijing has hailed its “new three” of electric vehicles, lithium batteries and solar panels, with their worldwide dominance in production and market share, as the vanguard for the strategy.

It has also urged officials to watch out for overcapacity risks, with President Xi Jinping having warned against a “headlong rush into new projects” when he discussed developing new quality productive forces at the “two sessions” parliamentary meetings in March.

China shipped more than 1 trillion yuan (US$138 billion) worth of “new three” products in 2023, but the export boom is facing pressure from the West.

On Tuesday, the State Council-backed Economic Daily newspaper argued in an editorial that China’s “quality capacity” was providing the much-needed impetus to the world economy and also the green transition.

“There is no overcapacity if we view it from a global perspective. There is severe undersupply of quality capacity in the face of the huge potential demand from developing countries,” the article said.

It added that the West hyping up China’s overcapacity threat contained motives to curb China’s technological and industrial upgrades.

The op-ed also argued that Chinese products fulfilling global demand are helping stabilise supply chains and lower green transition costs.

Jia, meanwhile, said overcapacity is a “relative concept.”

“One can’t assume that excess capacity is always problematic. If we explore more markets and promote free trade, our excess capacity can benefit other countries and all human beings” he said, adding Washington’s accusations are a tacit admission of China’s competitiveness in green sectors.

Jia, who is also a founding president of the China Academy of New Supply-Side Economics think tank, also defended the role of industrial policies because governments would not rule out using such policies since markets may malfunction.

He stressed, however, officials must be judicious when designing policies.