Overcapacity in China

Has China really built up huge overcapacity in recent years with the help of massive subsidies, with which it is now threatening to flood Western markets?

Tommy Wu

Commerzbank Economic Research

June 21 2024

A simple look at capacity utilization in the industries in question is not enough here. Rather, a whole set of indicators must be considered to clarify this question, and these do indeed point to considerable overcapacity in some industries in China. In addition, the Chinese government's growth strategy, which is focused on key emerging industries, gives rise to fears that the problem is likely to worsen in the coming years.

Higher tariffs for fear of China's overcapacity

The US and the EU accuse China of having built up oversized production capacities through massive subsidies, with notable concerns over industries that are deemed strategic. As a reflection of China's growth strategy, its lending to the industrial sector has increased markedly in recent years to finance the development of manufacturing and the expansion of capacity. To prevent their markets from being flooded by Chinese products and thus threatening their own industries, the US and the EU have imposed increasing trade measures. The US has significantly increased tariffs on some Chinese products, including electric vehicles, lithium-ion batteries, solar cells, and semiconductors. The EU has also raised tariffs on EVs produced in China.

From China's perspective, its industries are expanding partly in response to the expected massive increase in global demand, and in the long term the global demand would not be met solely by Chinese capacity. Arguably, at the country level, China’s overcapacity is not severe. According to the official statistics, capacity utilization rate of China's industry sector, which many use as an indicator of overcapacity, was at 73.6% in the first quarter of 2024. While this is lower than the average of around 76% in 2017-2022, it has not yet reached the low of 72.9% in 2016 (chart on front page). The problem is that this indicator is being depressed by the current phase of domestic economic weakness in China which is partly cyclical.

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