Report: China’s industrial overcapacity has peaked

China’s overall manufacturing overcapacity has peaked as global demand picks up in consumer sectors, the Economist Intelligence Unit said, predicting trade tensions will persist due to Chinese companies’ rising competitiveness.

“We consider the worst of China’s excess industrial capacity to have already passed,” the EIU said, adding that a slowdown in investment by firms seeing lower profitability will lead to slower capacity growth.

The report feeds into a global debate over the idea that China’s industry is experiencing unusual overcapacity that’s depressing prices, with U.S. Treasury Secretary Janet Yellen and German Chancellor Olaf Scholz pressing Beijing on the issue.

Chinese electronics and other consumer goods sectors are experiencing a degree of overcapacity, but that’s likely temporary, the EIU said, predicting a cyclical upturn in global retail sales in 2024. Retail reports in the U.S. and parts of Europe have beaten expectations early this year.

The Chinese industries experiencing the most overcapacity include steel, cement and construction machinery, due to a structural contraction in demand caused by China’s years-long property market slump, the EIU said.

Overcapacity pressure is milder in electrical machinery including batteries and solar panels, the automotive sector and pharmaceuticals, the EIU said.

Nevertheless, capacity utilization and underlying profitability “will probably remain worse than the pre-pandemic norm” throughout 2024 in a range of sectors, the EIU said.

That’s especially the case for solar, batteries and wind turbines where “excess supply in certain parts of the supply chain is coupled with yet-to-materialize demand,” the report said.

Producers in those industries ramped up supply due to “highly optimistic” forecasts following Chinese President Xi Jinping’s 2020 announcement of a carbon neutrality target and Europe’s 2022 energy crisis, the report said.

While China could increase demand-side support for green sectors and global demand might accelerate, that may not be enough to halt protectionist moves by other countries aimed at China in sectors like electric vehicles, the EIU added.

“Trade tensions stem not only from overcapacity concerns but also from the rising competitiveness of Chinese products, particularly in ‘strategic” sectors,’” it said.