Commentary: Why China is finally starting to acknowledge its overcapacity problem

CNA

30-07-2025

LONDON: For years, Beijing dismissed Western concerns about Chinese overcapacity as protectionist rhetoric. When the United States and European Union complained about cheap Chinese exports flooding global markets, China's response was predictable: These were simply competitive advantages in a free market economy.
That narrative has now fundamentally shifted. In a remarkable policy U-turn, China has not only started acknowledging the overcapacity problem but is treating it as a national priority that requires urgent intervention.
While there have been signs of this narrative change for a while, the clearest signal of this messaging transformation came through recently on China's own policy channels.
In July, the Communist Party's leading journal Qiushi warned that "disorderly competition has destroyed entire industry ecology". This wasn't diplomatic language about market dynamics – it was an admission that destructive competition had reached crisis proportions.
Around the same time, President Xi Jinping chaired a meeting of the Central Financial and Economic Affairs Commission, calling for "low-price competition to be regulated" and outdated production capacity to be "phased out in an orderly manner." Weeks later, the State Council explicitly linked "irrational competition" to weak domestic economic circulation, naming high-profile sectors like new energy vehicles as targets for immediate oversight.
This represents a dramatic departure from China's previous stance. Where Beijing once celebrated its manufacturing prowess and export competitiveness, it now openly discusses the need to curb "involution" – or neijuan, the Chinese term for excessive and destructive internal competition that has become central to policy discourse.
WHY THE CHANGE?
The shift reflects a sobering recognition that China's industrial overcapacity has moved beyond an export problem to become a domestic economic threat.
The cost of some raw materials has reached historic lows due to supply chain deflation, yet factory prices are being cut even further as manufacturers engage in suicidal price wars. The result is unsustainable profit margins that are forcing many manufacturers to suspend operations entirely.
This deflationary spiral now threatens what Chinese leadership calls the "whole-chain manufacturing model" – the integrated production networks that Mr Xi recently reaffirmed as a national priority. When factories cannot operate profitably, the entire industrial ecosystem becomes vulnerable.
The messaging change also reflects Beijing's broader strategic recalibration. As China faces mounting external pressure and talks increasingly about economic self-reliance, maintaining a healthy domestic industrial base has become a matter of national security rather than just economic efficiency.
FRAMING THE PROBLEM AS PRICE WARS
Importantly, China is not using the language of "overcapacity" that has dominated international criticism. Instead, Beijing frames the problem as "price wars" and "disorderly competition".
This distinction matters because it allows Chinese policymakers to address the underlying issue while avoiding the admission that their industrial policy created systemic overproduction.
By focusing on pricing behaviour, China can position itself as promoting fair competition rather than acknowledging fundamental structural imbalances. This semantic shift enables policy action without losing face internationally or undermining confidence in China's economic model.
However, the practical effect may be similar. Whether addressed as overcapacity or predatory pricing, the solution requires reducing output, consolidating industry players, and restoring sustainable profit margins across key sectors.
THE PATH TO ACTION
Chinese ministries are already coordinating their response. The Ministry of Industry and Information Technology, market regulators, and the National Development and Reform Commission have held symposiums with new energy vehicle companies, warning that pricing practices must be "monitored and standardised".
Platform companies have been told to respect anti-unfair competition laws, and regulators are moving to contain large-scale subsidy wars. Just last week, China released draft revisions to its pricing law, aimed at containing improper pricing behaviours.
But meaningful action faces significant obstacles. Local governments have strong incentives to protect regional champions, often offering subsidies to maintain employment and economic output. Provincial leaders compete to attract investment in priority sectors like artificial intelligence, electric vehicles and semiconductors – creating the very fragmentation that fuels destructive competition.
As Mr Xi recently acknowledged at a Central Urban Work Conference: "When it comes to launching new projects, it's always the same things ... Should every province in the country be developing industries in these areas?"
BETTER LATE THAN NEVER?
But those seeking immediate results may be disappointed.
China's approach appears to favour gradual consolidation and regulatory discipline over dramatic market interventions. This methodical approach reflects the political complexity of dismantling entrenched local interests.
For global markets, China's acknowledgment of its overcapacity problem should be welcomed, albeit cautiously.
If Beijing can successfully curb destructive price competition, it could lead to more stable global commodity prices and reduced trade tensions. Sectors like solar panels, steel and electric vehicles might see healthier profit margins as Chinese producers focus on sustainable competition.
The shift also signals China's evolution toward a more mature economic model – one that prioritises long-term industrial health over short-term market share gains. Whether this transformation succeeds will depend on Beijing's ability to overcome local resistance and implement the structural reforms necessary to address decades of misaligned incentives.
China's messaging U-turn on overcapacity may have come late, but it represents a crucial first step toward addressing one of the global economy's most persistent distortions. The real test now is whether shifting rhetoric will translate into meaningful action.