China’s Overcapacity Problem

With electric vehicles, for instance, carmakers in Europe are already facing stiff competition from cheap Chinese imports. Factories in this and other emerging technology sectors in the West may close or, worse, never get built. – Foreign Affairs

China’s economic strategy of relying on global markets to absorb its excess production has led to significant overcapacity across multiple sectors, including steel, aluminum, electric vehicle batteries, and solar panels. This overinvestment has saturated domestic markets and strained international relations as foreign governments become wary of China unloading its surplus production, not to mention the country’s supply chain dominance. The consequences are concerning.  Globally, Western manufacturing faces heightened competition, risking closures and stifling innovation. Domestically, overproduction has triggered price wars, depressed profits, and led to near-zero inflation, heightening the risk of China entering a deflationary spiral.

Key Facts

1. Excess Capacity: China has overproduced in key industries, including steel, aluminum, and electric vehicle batteries.
2. Global Impact: Western industries face stiff competition from cheap Chinese imports, threatening local manufacturing.
3. Economic Consequences: Overproduction is depressing prices and leading to near-zero inflation in China.
4. Price Wars: Domestic markets are saturated, leading to intense price competition and reduced profitability.
5. Sectoral Impact: 27% of Chinese automobile manufacturers were unprofitable in May 2024.
6. Innovation Risk: Overcapacity threatens the sustainability of high-value manufacturing industries in the West.
7. Debt Burden: China’s debt service ratio in the private nonfinancial sector is at an all-time high.
8. Consumer Confidence: Erosion of consumer confidence leads to further domestic consumption declines.