The PRC’s Overcapacity Problem Depends on Who You Ask

Executive Summary:

• Senior Party and government officials have identified overcapacity as a major economic challenge, but state media have instead downplayed or denied its existence, framing concerns from the West as politically motivated.
• Regional governments have traditionally addressed overcapacity through top-down restrictions, but this strategy now conflicts with technological development goals, complicating policy implementation.
• Conflicting national signals on overcapacity have left regional policymakers cautious to address the issue directly, as misalignment with either national-level directives or media narratives could risk officials’ careers.
• Overcapacity’s real economic impact is visible in industries like construction materials, where demand collapse has caused job losses and pessimism, showcasing the long-term negative consequences of unchecked industrial growth.

Top economic policy makers have explicitly identified “overcapacity (产能过剩)” as one of the foremost challenges facing the economy of the People’s Republic of China’s (PRC). At the Central Economic Work Conference held in December 2023, overcapacity was singled out as a key obstacle that must be addressed for economic recovery, alongside issues like insufficient demand (Xinhua, December 12, 2023). In his 2024 Government Work Report at the National People’s Congress, Premier Li Qiang (李强) referenced “overcapacity” twice: first, when listing core economic challenges, including household income stagnation and employment pressures; and second, when advising new and emerging industries to guard against overcapacity and improve efficiency (Xinhua, March 12). High-level Party documents of this kind are instances in which every word is meticulously chosen and serve as a signal of nationwide policy priorities. The references to overcapacity in two of the most important economic policy documents from the last year indicate how seriously the PRC’s economic planning leadership views this as a problem.

This diagnosis is in stark contrast to most state-published political commentaries from the last few months, which have asserted that there is no overcapacity problem. This narrative has emerged in response to international criticism from the United States and Europe, as well as from Global South countries such as Chile, India, Indonesia, and Thailand (South China Morning Post, April 23; Business Standard, June 27; CNN Indonesia, July 5; Bangkok Post, August 28). These countries have voiced concern that the PRC’s focus on boosting manufacturing capacity in a variety of sectors through policy support will negatively affect their own homegrown industries and are therefore moving to introduce targeted tariffs on imports from the PRC.

In May, the Party’s flagship newspaper, the People’s Daily, published an editorial by Zhong Caiwen (钟才文) on page two arguing that “without any factual basis, the United States is doing the utmost to exaggerate the PRC’s so-called ‘overcapacity’ problems in its new energy sector (在缺乏事实依据的情况下，美国极力渲染所谓中国新能源 ‘产能过剩’ 论调),” aiming to undermine the PRC’s competitiveness in strategic and emerging industries, and persuading other countries to follow suit (People’s Daily, May 12). [1] Similarly, state media outlet Xinhua published an analysis in June contending that Western accusations of “overcapacity” constitute “a malicious means of using political tricks to force an intervention in the market (是以政治手腕强行干预市场的恶劣做法),” and are “a common maneuver to contain emerging countries’ attempts to achieve rapid growth (遏制新兴国家 ‘弯道超车’ 的常用伎俩)” (Xinhua, June 27). Other editorials similarly framed the overcapacity narrative as politically motivated. The China Economic Daily published a commentary titled “Refuting the Theory of China’s Overcapacity in New Energy (再驳 ‘中国新能源产能过剩论’),” while another Xinhua piece was titled “The China Overcapacity Theory is a False Proposition” (Xinhua, April 11; China Economic Daily, May 13).

Editorials in the People’s Daily and Xinhua are not just propaganda but wield significant influence in guiding regional governments on development policy and priorities. The contradictory messaging between these articles and high-level policy documents is likely to confuse those tasked with implementing policy at the local level.

Defining Overcapacity

Popular and scholarly definitions of overcapacity in PRC literature are very similar to those used by their overseas counterparts. A concise definition agreed upon within American discourse is that overcapacity is “too much product (and too much production capability) chasing too few buyers” (Harvard Business School, February 1, 1999). This is mirrored in definitions used by PRC writers and theorists. Journalists at Xinhua define overcapacity as occurring when an industry’s production capacity overshoots market demand (Xinhua, April 11). Director of the Central Party School’s Economics Department Zhao Zhenhua (赵振华) writes that overcapacity is not just supply in a particular industry far exceeding demand, but when this situation persists over a prolonged period (Study Times, June 23, 2014).

The core cause of overcapacity is also more or less agreed upon both inside and outside the PRC. Rhodium Group, a private research firm based in the United States, describes structural overcapacity as being “when companies maintain or grow their unused capacity without worrying about making a profit (or a loss), often due to a lack of economic pressure to operate efficiently, like a hard budget constraint” (Rhodium Group, March 26). Zhao Zhenhua would agree with this definition. In 2014, he wrote that overcapacity in the PRC “is the result of the combined effects of blind expansion of enterprises and blind intervention of the government (是企业盲目扩张和政府盲目干预共同作用的结果),” and that to manage overcapacity “we need to make full use of the invisible hand of the market economy, and the government does not need to intervene (需要充分运用市场经济这只看不见的手，政府无须干预)” (Study Times, June 23, 2014).

Professor Zhu Ning (朱宁), vice president of the Shanghai Advance Institute of Finance (SAIF) at Shanghai Jiaotong University, would agree with Zhao. In an op-ed published in 2016, Zhu wrote that overcapacity in the PRC’s steel, automotive, and photovoltaic sectors arose when local governments all formed development plans centered around the same set of industries, spurring rapid investment over a short period of time. Incentives and guarantees given by local and central government institutions within these sectors create moral hazard, which impacts the risk appetites of private investors and further exacerbates growth. Zhu recommends curbing overcapacity through a combination of increased coordination between local governments to prevent overfocus in single industries and increasing market-driven lending and investment practices (SAIF/FT Chinese, April 11, 2016).

Even today, there is still room for debate concerning new technologies and emerging industries. Chen Yuyu (陈玉宇), a Peking University professor and director of its Institute of Economic Policy, recently gave an interview in which he said that at the launch of new industries such as cloud computing or AI, while supply clearly outstrips demand, it would be wrong to describe investment in those fields as “overcapacity” as there is no traditional demand curve to drive early development (Guanghua School of Management, June 25). Meanwhile, Sun Yat-sen University Professor Sun Xingjie (孙兴杰) dismissed concerns about overcapacity in the green energy sector earlier this year, arguing that this sector in particular has required massive up-front government support to be fostered in other parts of the world too, citing historical examples in Germany and the United States (Guangming Daily, May, 9).

Behind each of these arguments lurks the unspoken question of who gets to decide the fate of enterprises. Both Zhao and Zhu were writing at a time when the rhetoric of financial policy within the PRC was focused on opening up the banking sector and state-owned enterprises to increased market pricing and competition. Furthermore, domestic consumption at the time was still on the rise and there was little concern that international consumption would contract. Today, the internal and external contexts have changed, with consumption at a standstill and international trade pressures mounting. This has significantly reduced the political will to lessen the government’s role in local industrial planning.

Regional Governments Struggle to Tackle Overcapacity

Policymakers have traditionally employed a top-down approach to managing overcapacity, first identifying industries exerting excess pressure and then limiting government approval for new business licenses in those sectors. For example, in 2014 the Shandong provincial government sought to reduce overcapacity in industries such as steel and cement by mandating government offices at all levels halt approval for new capacity projects, environmental assessments, new lines of credit, and production licenses (NDRC, January 28, 2014).

Current development policies must now strike a balance between technology advancement goals and overcapacity management. Shandong’s 2024 photovoltaic development policy begins with a growth commitment to Shandong’s photovoltaic industry to surpass 30 billion renminbi ($4.2 billion) by 2025, and ends by emphasizing the need for government offices to control and prevent excess capacity in the sector (Shandong Provincial Government, July 4). Meanwhile, less high-profile industries continue to follow the traditional top-down approach. For example, the Hunan Department of Commerce has instructed local governments to address overcapacity in automotive recycling through increased planning and the management of local recycling needs (Hunan Department of Commerce, May 17).

Challenges in Tackling Overcapacity Today

With national-level directives pulling regional policymakers in opposite directions, it is no surprise that industrial policies are hesitant to address overcapacity directly. Policymakers must carefully navigate the competing priorities outlined by Li Qiang and the Central Economic Work Conference while also considering the People’s Daily editorials that dismiss overcapacity concerns in key industries. Straying too far to either side could expose individual policymakers to criticism for not aligning with national-level guidance, potentially jeopardizing their careers.

Beyond political signals, substantial incentives exist for channeling resources into a few key industries. Frontline sectors can attract local and national grant funding or venture capital, while new industries generate jobs, particularly for young graduates, helping to alleviate unemployment pressures. Equally important is hope, which can provide a short-term boost to the economy, as optimism about future prospects encourages people to spend, borrow, and start new businesses.

The real impact of overcapacity in traditional industries is already spilling over into the real economy. In October, China Mining News reported that the abrupt halt in housing construction has led to a sharp decline in secondary industries such as sand and gravel mining. During the construction boom, provinces with natural advantages in gravel production, such as Guangdong, Henan, and Zhejiang, as well as less advantaged regions such as Guangxi, Gansu, and Xinjiang, opened large-scale mines to supply construction materials. Now, with a sudden drop in demand and limited export opportunities, mining companies are aggressively bidding for the few remaining production contracts (China Mining News, October 11).

Conclusion

The state of construction materials industries illustrates the fallout that follows the initial boost from “all in” industrial policies. Early gains in employment and market optimism are soon replaced by job losses and growing pessimism. Yet policymakers have limited space to explore creative solutions as they navigate the competing priorities they must balance. For now, there are no simple solutions to address the PRC’s overcapacity issue. Given the current political climate, even discussing it remains a challenge. 

Notes

[1] People’s Daily editorials are often published under code names for specific government offices or for high-profile topics. The name “Zhong Caiwen” is likely a high-profile pen name rather than an individual person, with a handful of People’s Daily editorials discussing economic policies starting in January 2024. For more on People’s Daily editorial pen names, see China Media Project, June 23, 2022.