Beyond the Myth of Overcapacity: Analyzing China's Industrial Realities

Par Xiakedao

In psychology, there is a concept known as attribution theory: people tend to attribute their successes to internal factors, such as their own efforts, while attributing their failures or problems to external factors.

This tendency is especially pronounced among trade protectionists. When the industries of certain countries fall behind, become outdated, or suffer from domestic deindustrialization, they shift the blame onto others, claiming that China is at fault.

In response to these phenomena—politicizing trade issues, hyping up the "overcapacity" problem in China, and escalating restrictions on the country—the Chinese Ministry of Commerce officially released a document titled "China's Position on the So-called Excess Capacity Issue."

The 12,000-word document systematically deconstructs the "overcapacity theory."

What does overcapacity mean? Does large production capacity necessarily mean overcapacity?

Simply put, overcapacity occurs when supply exceeds demand. However, market supply and demand are in constant flux. For example, refrigerators sell very well in summer but less so in winter. We cannot conclude that production is insufficient based solely on summer demand, nor can we conclude that there is overcapacity based solely on winter demand.

The document clarifies that excess capacity is a dynamic phenomenon in a market economy. Capacity supply and demand in the world economy go through a dynamic cycle of "balance, imbalance, and rebalance," without a permanent state of equilibrium. Whether surplus capacity exists depends on supply and demand through dynamic adjustments within the industry's life cycle. Supply-demand balance is relative, while imbalance is universal.

As a complex concept, excess capacity should be approached from the perspective of macroeconomic scenarios rather than a narrow focus on absolute capacity levels or a limited perspective confined to a particular time or region. There are no globally accepted criteria for determining the reasonable range of capacity utilization, as standards differ across economies. Data from relevant institutions indicate that the median capacity utilization rate for advanced and fast-growing economies mostly falls between 75 and 80 percent, whereas that for less developed countries usually stands between 50 and 64 percent.

As the "world's factory" and "world's market," China's industrial capacity utilization rate generally remains within a reasonable range. In 2025, China's industrial capacity utilization rate for enterprises above a designated size reached 74.4 percent, with high-tech manufacturing, high-end equipment manufacturing, and strategic emerging industries utilizing capacity more fully. The temporary decline in capacity utilization within some traditional raw material industries was mainly due to adaptive adjustments driven by structural reforms and green transformation.

Xu Yingming, director of the Institute of International Market Studies at the Ministry of Commerce's Research Institute, noted that judging a country's capacity utilization rate generally involves comparing it with its long-term equilibrium or average value. The long-term average capacity utilization rate in the United States from 1967 to 2007 was 81.4 percent, while the average from 2008 to 2021 was 76.1 percent, a decrease of 5.3 percentage points.

In contrast, over the past three years, China's average capacity utilization rate in key subsectors—such as general equipment manufacturing and electrical machinery and equipment manufacturing—has remained within a relatively healthy range, closely approximating its average capacity utilization rate since 2006.

Regardless of whether trade protectionists are genuinely confused or feigning ignorance, the document provides an objective analysis of the relationship between industrial subsidies, trade surpluses, economic imbalances, market competition, and "overcapacity," offering a solid factual reality check.

For instance, no necessary link exists between industrial subsidies and overcapacity. Multiple reports from the UN Conference on Trade and Development indicate that the number of global industrial policies has grown rapidly over the past five years, with research and development subsidies, tax incentives, and low-interest loans for emerging industries becoming international practices. Reasonable industrial subsidy policies help correct market failures, promote technological innovation, environmental protection, poverty reduction, and balanced development, without causing "overcapacity."

A large trade surplus does not automatically equate to overcapacity. Eighty percent of US-produced chips are exported, and about two-thirds of Boeing's commercial aircraft are sold to customers outside North America. Furthermore, the European Union's 2025 trade surpluses in automobiles, pharmaceuticals, and cosmetics reached $92.2 billion, $214.6 billion, and $11.6 billion, respectively. China does not deliberately pursue a trade surplus. In the first half of the year, China's merchandise imports grew by 22.1 percent, significantly outpacing exports. Foreign-invested enterprises contributed 16 percent of China's trade surplus in 2025 and reaped substantial returns. As the saying goes, "The surplus is in China, but the benefits are shared by all parties."

The claim that "insufficient domestic demand in China leads to excess capacity" is equally inaccurate. According to World Bank purchasing power parity calculations, China's total retail sales in 2025 were equivalent to 1.7 times those of the United States, making it the world's largest consumer market for goods. China ranks first globally in physical goods consumption, and per capita annual consumption of certain industrial products is approaching the levels of developed countries.

In fact, market competition itself serves as the most effective mechanism to prevent the disorderly expansion of production capacity; otherwise, unsold goods, financial losses, and market elimination inevitably follow. The number of market entities in China has exceeded 200 million, creating a highly competitive market environment. A survey by the US-China Business Council shows that 92 percent of surveyed US companies were profitable in China in 2025, while a European Union Chamber of Commerce in China survey indicates that 75 percent of companies believe their production efficiency in China surpasses that of other global regions.

Cui Fan, a professor at the University of International Business and Economics, noted that the document's discussion of four key relationships clarifies vague and erroneous international understandings regarding production capacity. For example, leaving issues like climate change entirely to market forces may fail to meet urgent low-carbon emission reduction targets. Only a combination of an effective market and a capable government can adequately address these challenges.

Data from the International Renewable Energy Agency shows that over the past decade, the average cost per kilowatt-hour for global wind and solar power has cumulatively decreased by over 60 percent and 80 percent, respectively, largely driven by Chinese innovation, manufacturing, and production capacity.

The purpose of deconstructing the "excess capacity theory" is not to engage in verbal disputes, but to clear up doubts and foster win-win cooperation. As the document states, mutually beneficial and pragmatic cooperation on industrial and supply chains that expands the global development pie serves the common interests of all nations.

In recent years, China has continuously expanded its opening-up, reduced import tariffs, broadened service trade access, and implemented a strategy to boost domestic demand, Cui added. For products with rapid export growth prone to trade friction, China has proactively reduced or canceled export tax rebates to maintain orderly export performance. The decline in industrial competitiveness in certain economies stems from factors other than China's production capacity. China continues to actively expand imports, promote balanced trade development, and provide broader market opportunities for its trading partners.

The data speaks for itself: China has ranked second globally in imports for 17 consecutive years and serves as a major export destination for nearly 80 countries. It has also implemented zero-tariff policies for 63 countries, becoming the first major economy to achieve full zero-tariff coverage for all African countries with diplomatic ties, as well as all least developed nations maintaining diplomatic relations with Beijing. China remains the only country in the world to host the China International Import Expo. Having successfully held eight editions, the event has accumulated an intended transaction volume exceeding $580 billion. During the 14th Five-Year Plan (2021–25) period, cumulative import volume surpassed 90 trillion yuan ($13.3 trillion).

These facts point to an irrefutable conclusion: China is not only an increasingly powerful "world factory," but also a vibrant "world market." China's modern industrial development represents not a "China shock 2.0" for the world, but rather a "China opportunity 2.0."

This article was compiled and translated by the Global Times English edition based on a piece published by Xiakedao, the new media platform of the People's Daily overseas edition, on July 30, 2026.