China’s transformation into the world’s factory has been one of history’s most dramatic economic feats. But today, that same manufacturing power is becoming an enormous burden. Overcapacity – producing far more than domestic or global markets can absorb – has reached across nearly every sector of the Chinese economy. From solar panels and steel to batteries and electric vehicles, China’s vast industrial engine is running at full speed even as demand falters.

The issue is rooted in decades of government-directed growth. Local governments have been rewarded for expanding output, building factories, and protecting local champions rather than allowing inefficient producers to fail. The result, as economist George Magnus noted, is a system where “most firms operate under a soft budget constraint,” and loss-making enterprises can survive indefinitely. The outcome is predictable: too many goods, too little profit, and global markets flooded with products sold at prices others cannot match.

From Success to Surplus

China’s expansion into green technologies was meant to represent a pivot toward high-value manufacturing. Instead, it has become the latest arena for overcapacity. The country now controls around 80 percent of the global solar supply chain and sells electric vehicles for as little as $10,000, compared with entry-level U.S. models that typically start near $30,000. Rather than being celebrated, this flood of cheap exports has provoked anger abroad.

In May 2024, President Biden’s administration imposed tariffs of up to 100 percent on Chinese imports, accusing Beijing of “flooding global markets with artificially low-priced exports.” The European Commission followed in October 2024 with its own duties on Chinese EVs, citing what it called “unfair government subsidies” that posed “a threat of economic injury” to European producers. The response underscored a shared belief among Western policymakers that China is making more than the world can take.

Domestic Strains and Industrial “Involution”

Inside China, the costs of this overproduction are becoming painfully clear. Factories have been locked in what Beijing now calls “involution,” or neijuan—a cycle of destructive internal competition where too many producers fight for too few buyers. President Xi Jinping, who once dismissed European concerns about overcapacity as a misunderstanding of China’s “comparative advantage,” has since warned of “neijuan-style vicious competition.” His shift in tone reflects an internal recognition that the country’s industrial machine is consuming itself.

The numbers are stark. Deflation has deepened, with China’s GDP deflator falling for nine consecutive quarters as of mid-2025. Magnus described how “the fall in factory gate prices for consumer durables is the biggest since the 2008–09 financial crisis.” A 40 percent plunge in solar panel prices over the past year has devastated margins, while electric vehicle makers have slashed prices to survive. Local governments, heavily dependent on tax revenue from manufacturing, continue to prop up weak firms, creating what analysts describe as “zombie companies” that cannot die.

How Overcapacity Ripples Across the World

The consequences of China’s overcapacity are global.

• United States: Washington sees Beijing’s export surge as a direct threat to American industry and jobs. The Biden administration’s tariffs, which doubled or even quadrupled import costs for some products, were described by officials as a “defensive response to Beijing’s unfair trade practices.”
• European Union: European Commission President Ursula von der Leyen warned at the G7 summit that “we are seeing a new China shock,” arguing that as China’s growth slows, “Beijing floods global markets with subsidised overcapacity that its own market cannot absorb.”
• Brazil and India: Both have begun imposing tariffs on Chinese products, concerned that domestic producers in steel, chemicals, and clean energy are being pushed out by imports priced below cost.
• Indonesia and other developing nations: Southeast Asian officials warn that low-cost Chinese machinery, textiles, and solar components threaten to “deindustrialize” local economies before they can mature.

As Finbarr Bermingham reported from Brussels, European governments fear “companies that make everything from industrial machinery and chemicals to wind turbines will be eaten alive,” while jobs in traditional industrial heartlands may vanish forever.

Xi Jinping’s Balancing Act

Beijing’s response to this crisis has been uneven and politically sensitive. Xi continues to insist publicly that there is “no such thing as China’s overcapacity problem,” describing China’s output advantage as a sign of competitiveness. Yet behind the scenes, policy is shifting. In July 2025, the Communist Party’s flagship journal Qiushi admitted that “disorderly competition has destroyed entire industry ecology,” marking what economist Diana Choyleva called “a remarkable policy U-turn.”

Xi later told the Central Urban Work Conference that not every province “has to target the development of artificial intelligence, computing power, and new energy vehicles.” The comment was widely interpreted as a rebuke of the blind provincial competition that has fueled China’s industrial glut. The Central Financial and Economic Affairs Commission has since called for “low-price competition to be regulated” and obsolete capacity to be “phased out in an orderly manner.”

Reforms and Obstacles

Regulators have responded by drafting new pricing laws prohibiting companies from selling below cost. The Ministry of Industry and Information Technology has met with leading EV and solar manufacturers, urging them to “monitor and standardize” pricing behavior. Industry associations have begun proposing mergers to consolidate struggling producers, particularly in the polysilicon and battery sectors. Yet local governments still resist large-scale closures that would cause job losses and weaken their tax base.

As Henry Storey observed, “even when they really want to, it can be hard for central government agencies to maintain effective oversight over industrial activity.” The problem, he explained, is structural: China’s growth incentives are tied to output, not efficiency. “With Beijing and local governments unwilling to dispense with China’s growth addiction,” Storey wrote, “manufacturing was tasked with filling the growth void left by property.”

The Structural Trap

When China’s property market deflated in 2020, the government sought to replace lost growth with industrial expansion. But this only deepened the imbalance between supply and demand. The construction slowdown slashed demand for steel, cement, and appliances, while massive new investments in EVs, high-speed rail, and solar power flooded the economy with even more output. Economist Michael Pettis of Peking University called overcapacity “the obverse of low consumption,” arguing that government transfers to industry come at the expense of workers’ incomes and household spending. At just 39 percent of GDP, China’s household consumption remains among the lowest in the world.

Without stronger domestic demand, the country’s industrial glut will continue to spill outward. “Overcapacity is a systemic problem,” Magnus warned, “not a random occurrence.” China’s state-driven approach, he said, “prioritizes production and supply at the expense of flexibility and balance.”

A Shift in Rhetoric, Not Yet in Reality

In the past, Beijing framed overcapacity as a foreign exaggeration. Now, Chinese officials call it a problem of “price wars” and “irrational competition.” Choyleva explained that this framing allows China to act without admitting failure: “By focusing on pricing behavior, China can position itself as promoting fair competition rather than acknowledging fundamental structural imbalances.”

Still, the reforms underway hint at deeper unease. The government has begun coordinating efforts among ministries and regulators to reduce redundant investments, curb subsidies, and consolidate firms. But implementation remains slow, and political will uncertain. “China’s messaging U-turn on overcapacity may have come late,” Choyleva concluded, “but it represents a crucial first step toward addressing one of the global economy’s most persistent distortions.”

Whether Beijing can succeed in managing its overcapacity problem will determine the stability of its economy and its trade relations for years to come. If it reins in destructive competition and strengthens consumption, China could transition to a more balanced model that benefits both itself and the world. If not, the pattern of gluts, price wars, and deflation will persist—dragging down profits, fueling trade conflicts, and unsettling global markets.

As Storey aptly wrote, “Facing an addiction to manufacturing, Beijing’s rhetoric will need to be matched by deep structural and political reforms.” Without them, China’s greatest strength may yet become its greatest weakness.

ACZ Editor: China will be slow to address this issue because, in our opinion, this is not just a “structural” issue, it is a method of attack. Dumping to put industries in other countries out of business is designed to undermine the economies of rivals and adversaries.

Don’t look for China to make dramatic changes in the near term.