China’s production capacity exceeds its current output across various sectors, but solutions to address this imbalance, such as boosting domestic markets and exporting, face challenges. The country’s investment-driven growth model, effective for decades, now risks industrial overcapacity, revealed again post-COVID-19 due to production-oriented stimulus measures.
China has the capacity to produce more than it does, that this is not new, but that this time it applies to a wide range of sectors. Each solution to this imbalance has its drawbacks: boosting domestic markets, but Chinese consumers lack confidence; improving quality, but it is already high; exporting, but tariffs are increasing… and not only in the US. These difficulties call for greater Chinese investment worldwide.
China has long accustomed to an investment-driven growth model, which is central to its stellar economic growth over the past three decades. But it also makes the economy susceptible to supply-demand imbalances, leading to recurring episodes of industrial overcapacity. These can be traced back to the 1990s, when accelerated market reforms led to a glut of labor-intensive manufactured goods. A more recent episode occurred in 2014-2016, when the massive investment-led stimulus that followed the global financial crisis triggered an oversupply of construction materials.
During the Coface Country Risk Conference last February, we asked Agatha Kratz about the impact of industrial overcapacity on China:
A growth model that has reached its limits
While this playbook is not new, the imbalances have become evident again since the COVID-19 outbreak (Chart 1), largely due to a production-driven stimulus approach aimed at reducing social interaction. Meanwhile, to pick up…
