At a glance: China's overcapacites in infographics

Beijing prioritizes "supply-side" measures (which support the production/investment side of the economy) rather than "demand side" measures (which boost household incomes and consumption). This model’s imbalances are driving a surge of production that cannot be met by demand. Furthermore, Beijing’s industrial policy is focused on economic upgrading and catching up in key technologies at any cost. The outcome is that Beijing’s economic model has diverged even further from liberal market economies.

Large campaigns promoting self-reliance and supply-side reforms are common under President Xi and have driven capital into industrial production, often regardless of the return on investment. Several prominent economic policy slogans suggest the unbalanced allocation of resources to the supply-side will grow.

Overcapacity risks in China are already apparent in traditional industries like steel and passenger vehicles and increasingly for high-tech technologies like legacy chips and electrolyzers for green hydrogen production.

China’s steel overcapacity is well documented. Efforts to resolve overcapacity have not meaningfully reduced total output or underutilization. Europe’s own steel sector was undermined as China offered cheap steel at scale in global markets.

Massive industrial policy and market intervention supported the rise of China’s passenger vehicle industry, and this trend was most acute in EVs where years of extensive industrial policy created a huge wave of market entrants.

China is in the process of building up massive capacity in legacy semiconductors, i.e., chips of older design that are found in household appliances, for instance. The resulting supply will far exceed domestic demand at current projections.

Beijing plans to use hydrogen for decarbonization and is driving significant investment in the production of electrolyzers, the key equipment for green hydrogen production. China’s electrolyzer manufacturing capacity accounts for 60 percent of global capacity and is growing rapidly. 

The distortions and risks from China’s overcapacity entering the EU are diverse and will require different tools and strategies to address them; these include, but go beyond, preventing market distortions. Such distortions can be categorized by the kind of impacts they bring.

A growing number of countries outside the OECD are raising barriers to China’s disruptive exports, making coordination with partners more feasible for the EU - though not easy.