It's not Overcapacity, but a Matter of Global Imbalances

Abstract

Against the backdrop of geopolitical conflicts and major power competition, the US and several Western nations have claimed that China has significant “overcapacity” in manufacturing and have imposed various tariff and nontariff trade measures to shield domestic industries. Using data from publicly listed companies, this study conducted an industry‐level analysis of investment and capacity expansion in China's manufacturing sector. We find that the growth in manufacturing investment is currently driven mainly by the “new trio” (electric vehicles, solar cells, and lithium batteries), and most enterprises have begun market‐oriented clearing. However, the new trio involved in investment and capacity expansion accounts for only a small portion of China's manufacturing sector. The US narrative regarding China's overcapacity is therefore fundamentally misleading. From the perspective of major power dynamics, the essence of the overcapacity narrative lies in China–US trade imbalances, which are, in turn, a consequence of macroeconomic imbalances between the two nations. Insufficient demand in China and excess demand in the US form the underlying impetus behind the trade imbalances.