Beijing Watch: Is the 'World Factory' Causing Global Overcapacity? China Rejects 'Excess Capacity' Narrative as Foreign Media Fears Price War Sweeping Global Markets

In recent years, from new energy vehicles and photovoltaics to lithium batteries, China's 'excess capacity' (overcapacity) has become a frequently cited issue among Western nations. As previously reported, China is highly sensitive to the 'excess capacity' narrative, as it could disrupt the leadership's promoted 'dual circulation' development model. However, in response to skepticism from the United States, the European Union, and some emerging markets, Chinese authorities consistently emphasize that so-called 'Chinese overcapacity' does not exist. Instead, they argue it is a narrative shaped by global market demand, industrial competition, and trade protectionism.

On the afternoon of July 28, China's State Council Information Office (SCIO) held a press conference to address questions from domestic and foreign journalists on the issue of 'excess capacity.' Yan Dong, Vice Minister of China's Ministry of Commerce, stated that the claim of 'Chinese overcapacity' is the result of certain economies politicizing economic and trade issues and serves as a pretext for protectionism. The official document presented at the briefing argued from historical, theoretical, and practical perspectives, asserting that capacity fluctuations are a dynamic phenomenon in market economies. It emphasized that China's industrial capacity utilization remains within a reasonable range, trade surpluses do not equate to overcapacity, and industrial subsidies are not inherently linked to overcapacity.

The core message of the entire press conference centers on one point: the shift in global industrial structure from a single center to a multi-centered system is a result of international division of labor. China's emergence as the 'world factory' is a product of its integration into globalization, and other countries should not use 'overcapacity' as an excuse to pursue protectionist policies.

China's Historical Reliance on Exports and the Current Pressure of Weak Domestic Demand

Since China's reform and opening-up, its economy has long been heavily dependent on exports. This dependence goes beyond merely the share of net exports in GDP. Foreign exchange earnings from trade are strategically irreplaceable for an economy that relies on imports for energy, high-end technology products, and critical equipment. Export profits often exceed those from domestic sales, leading to natural expansion of production capacity.

In recent years, as China's economic growth has slowed and household debt pressures have increased, consumer spending has shown clear signs of downgrading. Products originally intended for the domestic market are now being redirected en masse to overseas markets. The explosive growth of cross-border e-commerce is driven, in part, by manufacturers seeking outlets for excess capacity.

Chinese officials emphasize that 'while the surplus is in China, the benefits are shared globally,' noting that Chinese products reduce costs for global consumers and support green transitions in trading partners. For China, foreign trade not only contributes to GDP but is crucial for sustaining foreign exchange earnings. This has elevated foreign investment attraction from a central economic policy to a key local development goal. For an economy that continuously imports energy, advanced equipment, core components, and cutting-edge technology, stable foreign exchange inflows remain strategically vital. Thus, the continuous expansion of manufacturing is an essential component of China's growth model.

In the past, when overseas market profits exceeded those in mainland China, companies naturally favored expanding exports and investing in new capacity. This mechanism did not create significant contradictions during periods of rapid real estate growth and rising household incomes, as the domestic market could absorb substantial output.

Internal Competition and Price Wars: A Competitiveness That 'Stuns' Foreign Firms and Governments

When other countries accuse China of 'excess capacity,' the core concern is not statistical discrepancies but the domestic normalization of 'neijuan' (internal competition) and price wars. This competitive model leaves foreign firms and governments struggling to respond—competing on price is often futile, and failure means impacts on tax revenues and employment. Even if competitors manage to keep up, their profit margins are severely compressed, creating persistent challenges.

This competitive pattern is particularly evident in industries like automobiles, photovoltaics, and lithium batteries, which also exhibit strong local protectionism. Local governments heavily rely on tax revenue and output from these industries. Since China calculates GDP using the production approach, continued production directly translates into political performance. As a result, companies find it difficult to truly 'stop.' Even in consumer goods sectors without direct protection, local governments benefit from tax bases and reduced unemployment, lacking incentives to actively eliminate excess capacity.

Han Yong, Director of the WTO Division at China's Ministry of Commerce, stated at the July 28 press conference: 'China's subsidies primarily support technological R&D, industrialization of technologies, and market consumption. They are more market-oriented and guiding, using public services, technical standards, and skills training, with a focus on technological innovation, SME development, and green energy efficiency.'

Why Do Western Countries Believe China Has 'Excess Capacity'?

As China's economic growth slows, the real estate sector undergoes prolonged adjustment, and household debt levels rise, consumer spending growth has clearly cooled. Many companies that previously relied on domestic sales are now turning back to overseas markets.

In China, 'neijuan' has become widespread. Previous investigations revealed that Chinese firms continuously lower prices to capture market share, compressing profit margins through economies of scale to maintain production and cash flow. When this competitive model enters international markets, it exerts immense pressure on local firms.

For countries in Europe, the U.S., Japan, and parts of Southeast Asia, local enterprises face not only higher labor costs but also the need to maintain local tax revenues and employment. When Chinese firms enter markets with lower prices—even with comparable product quality—local firms may rapidly lose competitiveness.

He Shaorjun, official from the Department of Foreign Trade at China's Ministry of Commerce, emphasized: 'Chinese-produced computers, smartphones, furniture, clothing, and toys provide consumers worldwide with more choices, lower consumption costs, and help buffer inflation risks.'

He also stressed: 'Although China has a large goods trade surplus, it runs deficits in services trade and capital and financial accounts. The current account surplus is about 3.7% of GDP, within the internationally recognized reasonable range, indicating no significant imbalance in international payments.'

For Chinese firms, as long as products can still be sold overseas—even with declining profits—it is often preferable to halting production. Thus, China's manufacturing sector has formed a new cycle: weakening domestic demand leads to a renewed rise in export share, which in turn intensifies international market competition.

Another Perspective on 'Chinese Excess Capacity': Why Can't Local Governments Reduce Capacity?

A more nuanced and professional observation of China's economic trajectory lies in how local governments implement industrial development policies. For local authorities, a large factory represents not only industrial added value but also tax revenue, employment, land development, and upstream and downstream industrial chains.

Moreover, under China's GDP accounting system, production activity itself generates economic value. For local governments, as long as factories keep operating, industrial data can still show growth.

Even if profits decline, as long as enterprises remain operational, local economic indicators receive some support. Conversely, even in competitive consumer goods industries without explicit local protection, they still contribute to local tax bases and employment stability, reducing incentives for proactive capacity reduction.

Therefore, whether in strategic emerging industries or traditional manufacturing, there are strong practical incentives to maintain production. China emphasizes production efficiency, industrial competitiveness, and global market allocation, while Western economies focus more on industrial security, employment stability, and supply chain resilience.

The combination of historical export dependence, domestic demand weakness leading to capacity spillover, neijuan-style price wars, and institutional incentives from local fiscal structures and production-based GDP accounting creates a structure that is difficult to change easily. Officially acknowledging systemic overcapacity would necessitate confronting a chain of issues, including investment compression, capacity elimination, and employment impacts.