Excess Capacity in China’s Economy: Not a Flaw, but a Design Choice

Following the March meeting of China’s National People’s Congress, it became clear that President Xi Jinping planned to strengthen the country’s manufacturing capabilities in order to shift its economy away from real estate and infrastructure investments, and promote growth. This move has sparked concerns about the potential consequences of the excess capacity generated by Xi’s policy, which has been widely discussed in the media.

In sectors such as electric vehicles, this policy adjustment has resulted in a significant increase in Chinese exports to other countries. In many markets, Chinese electric vehicles are priced lower than their counterparts due to government subsidies that are a key component of China’s industrial policy. However, Xi Jinping’s decision to prioritize exports disregards advice from economists and policymakers to boost domestic consumption through direct support for consumers and workers. A recent report by Rhodium Group predicts that this focus on industrial policy 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 defined as when companies maintain or expand their unused capacity without considering profitability due to there being no economic pressure to operate efficiently. The concept is particularly relevant in China’s shift towards advanced manufacturing as a means of stimulating economic growth. The report highlights how China’s rapid economic growth in recent years has resulted in excessive capacity in various sectors based on government priorities at the time.

By Sophia Gonzalez

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