Opinion | Chinese overcapacity isn’t a numbers problem. It’s a productivity gap
Beijing has spent the past month attempting to turn one of the West’s sharpest economic accusations back on itself. On July 28, the Ministry of Commerce rejected the link between subsidies, weak domestic demand and Chinese overcapacity, arguing China’s export strength reflected innovation and economies of scale. Last week, a People’s Daily commentary went further, calling claims that state subsidies caused China’s industrial overcapacity a deliberate smear.
Beijing’s rhetoric is escalating because the overcapacity issue is increasingly used to justify tariffs, investigations and efforts to shield strategic industries from Chinese competition. However, treating overcapacity as largely a numbers problem oversimplifies the issue.
Imagine the world buys 100 million cars annually and has factories capable of producing exactly that amount. Then a new production system emerges that can manufacture another 30 million cars more cheaply. Demand remains unchanged, leaving capacity at 130 million cars.
There are now 30 million units too many, but that conclusion does not tell us why they exist. If the new factories survive only because governments absorb their losses, perhaps they should never have been built. If they are cheaper because they use better batteries, more automation and denser supply chains, perhaps older factories are simply no longer economically viable. The measurement is identical, yet the diagnosis is different.
What makes China unusual is that this spare capacity increasingly coexists with cost advantages. Chinese battery packs were around 30 per cent cheaper than those in North America and 35 per cent cheaper than in Europe in 2025. China also produced 16 million electric vehicles (EVs) last year, nearly three-quarters of global output. Its production exceeded domestic EV demand, but more importantly, Chinese consumers themselves are increasingly choosing domestic vehicles over foreign ones.
China can therefore have too many EV factories and still be better at making EVs. This does not mean every factory is efficient or that every one should exist. China’s own campaign against “involution” implicitly acknowledges that relentless investment, destructive price wars and local government incentives can keep weak companies alive. A factory sustained indefinitely by cheap credit and losses is not evidence of industrial strength. It is deferred closure.