China Battery Supply-Side Reform: Selectively Positioning in Leaders

Overview

This J.P. Morgan report focuses on the Chinese battery supply chain, arguing that amidst a significant recent sector correction (15-40%), domestic capacity control policies are the true key catalyst rather than the trade friction overly focused on by the market. The report systematically reviews six major policy/geopolitical factors: tightening of domestic capacity approvals (positive), new regulations on outbound investment (neutral), EU trade tensions (neutral), Hungarian project scrutiny (neutral to negative), US Section 301 tariffs (neutral), and expansion of the Section 1260H list (neutral), recommending selective positioning in industry leaders. The core conclusion is that supply-side reform will accelerate industry consolidation; leaders will expand market share leveraging technological, financial, and operational advantages; effective supply growth will slow from 2027; and the supply-demand balance is expected to improve in 2028.

Core views

The report's core views center on the positive impact of domestic capacity control policies while downplaying the short-term impact of external trade risks. **Domestic Capacity Control (Positive)**: MIIT, NDRC, NEA, and SAMR have recently jointly tightened approvals for new battery projects and capacity expansions. New policies centralize approval authority, introduce a quota system (allocated based on capacity utilization, R&D intensity, environmental standards, etc.), and raise entry barriers (energy density, cycle life standards). Existing projects remain unaffected, and expansion plans approved in 2026 will proceed normally, with impacts primarily manifesting after H2 2027. The report views this essentially as a new round of supply-side reform for the battery industry, which will reduce cutthroat competition, enhance industry profitability, and channel more policy resources toward leading companies. **New Outbound Investment Regulations (Neutral)**: State Council Decree No. 837, "Regulations on Outbound Investment," embeds export control requirements into the outbound investment framework, involving compliance reviews for technology, data, and personnel transfers. Current battery-related export controls focus on manufacturing equipment, high-performance LFP cathodes, and batteries exceeding 300Wh/kg (e.g., solid-state batteries), but implementation was suspended for one year following its announcement in October 2025. The new regulations will not alter the strategic priority of overseas expansion, but future projects will face higher compliance costs and potentially longer approval cycles. **EU Trade Tensions (Neutral)**: The EU is considering stricter trade measures covering solar, autos, steel, and semiconductors, but batteries have not been explicitly listed as immediate targets. The report believes the risk of broad EU tariffs on batteries in the short term is low, as Europe lacks domestic substitutes and requires a stable battery supply for its green transition. However, long-term policy direction is shifting toward supply chain "de-risking," and Chinese battery manufacturers with approved EU capacity projects (e.g., CATL's Hungary plant) may gain an advantage through localized production. **Hungarian Project Scrutiny (Watch)**: Hungary's new government (elected May 9) maintains an open and pragmatic attitude toward Chinese investment but emphasizes stricter scrutiny and expectations for "value-add." CATL's Hungary Phase II/III projects face political challenges, with the government explicitly stating it will not support the construction of Phase II and III plants. CATL's Hungary Phase I (34GWh, EUR2.7bn investment) completed installation and commissioning by end-2025 and is currently ramping up; Phase II (38GWh, EUR2.1bn) was originally planned for commissioning in 2027 or later. BYD's Szeged plant also faces labor and environmental investigations. **US Section 301 Tariffs (Neutral)**: USTR proposed an additional 12.5% Section 301 tariff on Chinese goods on June 2, currently in the public consultation phase. The report considers this a non-event for the Chinese battery industry, as current US import tariffs on Chinese energy storage batteries are already as high as 38.4%, and the US ITC tax credit (accounting for 30-40% of project capex) already excludes Chinese battery components. The market has fully priced in the loss of US energy storage market share by Chinese battery suppliers. **Section 1260H List Expansion (Neutral)**: On June 8, the US DoD updated the Chinese Military Companies List, adding 80 parent companies and 188 affiliated entities, including strategic sectors such as EVs (BYD, NIO) and battery manufacturing (EVE Energy, CALB) for the first time. The report notes this list is advisory in nature and does not directly prohibit commercial transactions or investments, posing no material earnings risk in the short term, though potential escalation to stricter NS-CMIC or Entity Lists warrants monitoring.

Analysis framework

The report employs a multi-policy event-driven analytical framework to assess the comprehensive impact on the battery industry. First, starting from stock price performance, it notes that Chinese battery supply chain stocks have corrected 15-40%, with the market primarily focused on weak demand and trade friction, whereas the report argues the long-term structural impact of domestic capacity control policies is truly underestimated by the market. Second, it categorizes recent policy/geopolitical events into four groups by geography and theme: Domestic Policy (Positive), Outbound Investment (Neutral), EU & Hungary (Neutral/Watch), and US (Neutral), providing respective short- and medium-term impact assessments. Third, at the industry level, combining capacity utilization data (charts show top eight players' utilization recovering from 81% in 2023 to 104% in 2026), changes in green loan growth rates (declining from a peak of 40%+ in 3Q22 to falling again in 1Q26), and policy continuity since 2024 including raised MIIT standards, fair competition reviews, and anti-involution campaigns, it demonstrates that capacity expansion has materially slowed and leader concentration will further increase. Finally, at the stock level, selecting leaders based on three criteria—"technology platform, capital strength, and operational track record"—it reiterates CATL as the top pick to navigate the cycle and recently upgraded CALB and Putailai to Overweight.

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Supply-Demand Framework

  The report uses supply-demand analysis to evaluate the impact of capacity control policies: the supply side (tightened new approvals, existing projects unaffected) will cause effective supply growth to slow from 2027, while the demand side (EVs and energy storage) continues to grow, thereby improving the supply-demand balance and industry profitability.

• Cycle & Sentiment FrameworkCapacity/Equipment Cycle (Juglar)

  Capacity Cycle and Utilization Analysis

  The report tracks capacity utilization in China's battery industry (fluctuating from 58% in 2023 to 77% in 2026) to determine the stage of the capacity cycle and judge when capacity control policies will begin to genuinely tighten the market.

• Event Arbitrage & Behavioral FinanceExpectations Gap/Expectations Management

  Expectations Gap Analysis

  The report distinctly points out that the market over-focuses on EU trade tensions while underestimating the structural benefits of domestic capacity control. This is typical expectations gap analysis—identifying investment opportunities by discovering discrepancies between market consensus and actual impacts.

• Industry/Sector Analysis FrameworkIndustry Concentration Analysis

  Industry Concentration and Leader Effect

  The report argues that tightened capacity approvals will lead to preferential allocation of policy resources (land, energy consumption quotas, expansion permits) to leading manufacturers, creating expansion barriers for smaller firms, further increasing industry concentration, and enabling leaders (such as CATL) to capture greater market share.

• Macroeconomic frameworkCredit/debt cycle

  Green Loan Growth and Capacity Cycle Linkage

  The report notes that China's green loan growth rate declined continuously from over 40% in 3Q22 to 1Q26, highly synchronized with the battery capex cycle, indicating that weakening policy financing support is simultaneously curbing capacity expansion, corroborating supply-side constraints from a credit cycle perspective.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• CATL (300750.SZ / 3750.HK)

  Report's top pick, Overweight reiterated, viewed as the "only compound-growth company capable of navigating the cycle"

  Strengths

  Leading technology platform, strong capital base, excellent operational track record, preferential policy resource allocation, approved Hungary Phase I project currently ramping up

  Weaknesses

  Hungary Phase II/III projects face political challenges from the new government; included on the US Section 1260H list

  Comparison

  Compared to CALB and Putailai, CATL is the report's most favored leader, covering both A-share and H-share markets

  Risks

  Risks of blocked Hungarian project approvals, escalation of EU trade measures, and migration of the Section 1260H list to stricter sanctions lists

• CALB (3931.HK)

  Recently upgraded to Overweight, benefiting from capacity control policies and increased industry concentration

  Strengths

  As a second-tier leader, may benefit from reduced competition following tightened capacity approvals

  Weaknesses

  Scale and technological strength weaker than CATL; added to the US Section 1260H list on June 8

  Comparison

  Smaller than CATL, but recent rating upgrade indicates institutional optimism regarding its improvement prospects

  Risks

  Section 1260H list risk, overseas expansion impacted by sanctions, intensified domestic competition

• Putailai (603659.SS)

  Recently upgraded to Overweight, a quality target in the battery materials segment

  Strengths

  Technological accumulation in battery materials; capacity control policies favor high-barrier material suppliers

  Weaknesses

  Raw material price volatility risk, downstream demand uncertainty

  Comparison

  Does not compete directly with CATL, but as a material supplier similarly benefits from industry supply-side reform

  Risks

  Declining lithium battery material prices, high customer concentration, industry overcapacity

Key data

• Sector Correction Magnitude15-40%Chinese battery supply chain stocks corrected 15-40% from early May 2026 highs, vs. CSI 300 down 5% over the same period
• Minimum EV Battery Pack-Level Energy Density Requirement (NCM)Increased from 150Wh/kg to 165Wh/kg2024 MIIT revised standards require new capacity to meet higher technical thresholds
• Minimum EV Battery Pack-Level Energy Density Requirement (LFP)Increased from 115Wh/kg to 120Wh/kgSame as above
• Minimum Energy Storage Battery Cycle Life RequirementIncreased from 5,000 cycles to 6,000 cyclesSame as above
• CATL Hungary Plant Plan (Total Three-Phase Capacity)Approx. 100GWhPhase I 34GWh (EUR2.7bn investment, ramping up), Phase II 38GWh (EUR2.1bn), Phase III approx. 30GWh (EUR2.5bn)
• Current US Import Tariff on Chinese Energy Storage Batteries38.4%Will be higher with the proposed additional 12.5% Section 301 tariff, but the report deems it has no material incremental impact on the US market
• ITC Tax Credit as % of Energy Storage Project Capex30-40%Projects using Chinese battery components are no longer eligible for this credit
• New Entities Added to Section 1260H List80 parent companies, 188 affiliated entitiesFirst inclusion of EV and battery manufacturing sectors, including EVE Energy, CALB, BYD, and NIO

Impact & implications

The report believes domestic capacity control policies will drive China's battery industry from an "era of unlimited expansion" to a "disciplined growth framework." Small and medium-sized manufacturers will lose opportunities for large-scale expansion, while leaders like CATL and CALB will gain market share and see improved profitability. New outbound investment regulations (Decree No. 837) will increase compliance costs and approval timelines for overseas projects but will not alter the strategic direction of overseas expansion; companies with approved EU capacity (e.g., CATL) can mitigate trade risks through localized production. EU trade tensions have limited short-term impact on the battery industry, but the long-term trend of supply chain "de-risking" is clear, requiring Chinese battery companies to adapt via localized production. The new Hungarian government's scrutiny creates uncertainty for CATL's Phase II/III projects, while the operational Phase I remains unaffected. US tariffs and the Section 1260H list have a neutral fundamental impact, but escalating geopolitical risks require investors to continuously factor them into valuations and overseas expansion expectations.

Risks

• EU adopts broader trade measures against Chinese battery imports (e.g., comprehensive tariff hikes)
• US Section 1260H list may escalate to stricter NS-CMIC sanctions list, Entity List, or UFLPA list
• Hungarian government rejects or imposes stricter conditions on CATL Phase II/III plant approvals
• China's new outbound investment regulations (Decree No. 837) increase complexity and extend approval timelines for overseas project execution
• US Section 301 tariff proposal is ultimately passed and implemented, although the report deems it has no material fundamental impact

What to watch

• Specific implementation rules and enforcement of capacity control policies (MIIT/NDRC, etc.)
• Direction of EU trade policy toward China at the June 18-19 Leaders' Summit
• Progress on investigations into CATL Hungary Phase II/III projects and BYD Szeged plant
• Public consultation phase for US USTR Section 301 tariffs (no major progress before July) and new measures following the expiration of Section 122 measures (July 24)
• Whether the Section 1260H list migrates to stricter sanctions lists