After the March meeting of China’s National People’s Congress, it was clear that President Xi Jinping had plans to strengthen the country’s manufacturing capabilities in order to shift the economy away from investing in real estate and infrastructure. This move has sparked concerns about the consequences of generating excess capacity through Xi’s policy.
The focus on industrial policy has led to a significant increase in Chinese exports, particularly in sectors such as electric vehicles. In many markets, Chinese electric vehicles have a noticeable price advantage due to government subsidies that are a key component of China’s industrial policy. However, economists and policymakers have advised Xi Jinping to boost domestic consumption through direct support for consumers and workers. A recent report by Rhodium Group predicts that this focus on exports may lead to tensions with China’s trading partners, including the United States and Europe. This move suggests a level of weakness domestically and an unwillingness to address challenging reforms.
Excess capacity is an economic term that refers to when companies maintain or expand their unused capacity without considering profitability, often because there is no economic pressure to operate efficiently. This concept is particularly relevant to China’s shift towards advanced manufacturing in order to stimulate economic growth. The rapid economic growth in recent years has resulted in excessive capacity in various sectors based on government priorities at the time. The Rhodium Group report highlights this issue, stating that “structural overcapacity” in China refers to when companies maintain or expand their unused capacity without considering profitability, often because there is no economic pressure to operate efficiently.
