China’s New Emphasis on Manufacturing Sparks Debate Over Excess Capacity and Economic Stability

In China’s Economy, Excess Capacity is Intentional, Not a Flaw

After the March meeting of China’s National People’s Congress, it became clear that President Xi Jinping planned to focus on China’s manufacturing sector in order to steer the country’s economy away from real estate and infrastructure investments. This change in policy has raised concerns about the potential consequences of excess capacity that will be generated as a result.

In particular, this shift towards manufacturing is leading to a significant increase in Chinese exports abroad, especially in sectors like electric vehicles. Chinese EVs are gaining a competitive edge in many markets due to price advantages, partly fueled by subsidies from China’s industrial policy. However, this decision to prioritize exports by President Xi is against the recommendations of economists and policymakers who suggest boosting domestic consumption through direct support of consumers and workers. This move is expected to worsen tensions with trading partners like the United States and Europe, as stated in a report by Rhodium Group.

The concept of excess capacity was defined by Rhodium as “structural overcapacity” when companies maintain or expand their unused capacity without considering profitability, often due to a lack of economic pressure to operate efficiently. This issue has become a focal point in discussions about China’s transition towards advanced manufacturing to sustain its economy. Despite past years of growth leading to surplus capacity in various sectors based on government priorities at the time, it remains unclear how this new policy will impact China’s long-term economic stability.

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