From Foreign Policy · Lizzi C. Lee, Xiao Ma · · 2m
China’s Overcapacity Has a Mind of Its Own
Beijing’s industrial policies face local competition that fuels overcapacity despite central control.
In brief
Beijing’s industrial policies face local competition that fuels overcapacity despite central control. China’s local governments prioritize short-term gains over long-term industrial health, creating overcapacity in sectors like EVs and manufacturing. Originally reported by Foreign Policy.
China’s export juggernaut grows
China’s auto exports have grown more than tenfold since 2020 and are estimated to reach 10 million vehicles this year.
Record trade surplus in August
China posted a record trade surplus of $119.1 billion in August alone, putting it on track to surpass the $1.2 trillion surplus of 2025.
China rejects overcapacity claims
China has vehemently rejected accusations that it is exporting excess capacity.
Local competition drives overcapacity
Local governments prioritize short-term gains over long-term industrial health, creating overcapacity in sectors like EVs and manufacturing.
Railway program example
In 2004, China’s railway program was initially planned for 12,000 kilometers by 2020 but ended up with nearly 38,000 kilometers by 2026.
Auto industry shift
Beijing’s original plan for state-owned automakers failed as private firms like Geely, BYD, and Nio now dominate the new energy vehicle market.
Local economic pressures
Changchun city faced unprecedented difficulties with industrial profits falling 20 percent in 2025.
Local officials’ incentives
Local officials compete for promotions based on key performance indicators including economic growth and environmental protection.
Short tenure problem
Provincial and city leaders serve an average of three and a half years, leading to quick decisions that prioritize short-term gains.
Local debt cycle
China’s local government debt is exacerbated by cycles of overinvestment that compound over leadership turnover.
Consumption policies ineffective
Pro-consumption policies are slow to take effect and difficult to measure, making them low priority for local leaders.
Structural central-local conflict
Beijing relies on local competition to advance policy goals but struggles to control incentives that drive excessive investment.
The attention economy
Local governments secure investment through attention from top leaders via photo opportunities and media coverage.
Overcapacity consequences
China’s overcapacity in manufacturing and EVs creates market coordination failures that harm global supply chains.
Structural problem
Beijing’s central-local relations are undermined by incentives that prioritize short-term gains over long-term industrial health.
The short version
China’s local governments prioritize short-term gains over long-term industrial health, creating overcapacity in sectors like EVs and manufacturing.
