China’s Overproduction Crisis and Its Global Implications

The Chinese economy, once hailed as the unstoppable engine of global growth, now finds itself in a state of stagnation. The expectations that followed Beijing’s abrupt end to its “zero COVID” policy in late 2022 have failed to materialize. Instead of roaring back to life, China’s economy has faltered, struggling with sluggish GDP growth, crumbling consumer confidence, and a spiraling real estate crisis. Official data released in mid-2024 confirmed that GDP growth was falling short of the government’s modest five percent target. The post-pandemic recovery many had anticipated has been disappointingly muted, and the underlying cause of this stagnation is not merely cyclical—it’s structural.

At the heart of China’s economic woes lies a decades-old strategy that prioritizes industrial production over other sectors, a policy that has created enormous overcapacity in key industries. For years, Beijing’s focus on maximizing production has led to an oversupply of goods, both for domestic consumption and international markets. This surplus, unsustainable in the long run, has now become a destabilizing force, not only within China but across the global economy.

One of the most glaring symptoms of this overcapacity crisis is China’s troubled real estate sector. Property prices, which had long been buoyed by speculative investments and unchecked development, are collapsing, leading some of the nation’s largest companies to default. But the issue extends far beyond real estate. China has for years been producing far more than it—or the rest of the world—can absorb, leading to a vicious cycle of falling prices, factory closures, and job losses. The more prices drop, the more producers are forced to flood the market with cheap goods in a desperate bid to service their mounting debts. This strategy, however, is unsustainable and risks pushing China into a “doom loop” of declining profitability and rising insolvency.

The ramifications of China’s overcapacity problem are not confined to its domestic economy. On the international stage, China’s overproduction is distorting global trade, undercutting foreign competitors by pushing prices below break-even levels. European Commission President Ursula von der Leyen and U.S. Treasury Secretary Janet Yellen have both warned that China’s industrial policies are creating "unsustainable" trade imbalances and causing economic dislocation worldwide. From steel to electric vehicles, Chinese products are flooding global markets at cutthroat prices, leaving Western manufacturers unable to compete and threatening long-term economic stability.

China’s industrial overproduction is not a recent development; it is the product of decades of state-led economic planning that emphasizes infrastructure development and industrial expansion over household consumption. This imbalance is not simply a policy failure—it reflects the Chinese Communist Party’s fundamental economic vision. For the Party, consumption is seen as a potential threat to the country’s industrial strength, an individualistic distraction that could divert resources away from its core economic base. Instead, the Party has long relied on high savings rates and state-directed capital investment to fuel industrial growth. The result is a bloated industrial sector that relies on cheap financing and political subsidies to survive, creating an economy where political control and production goals are tightly intertwined.

This approach has allowed Beijing to maintain a tight grip on both the economy and its elite. Chinese companies are beholden to the state for their survival, and access to cheap financing is contingent on political loyalty. In contrast to the West, where money influences politics, in China, politics influences money. The business elite cannot challenge the Party because their economic survival is dependent on the continuation of state subsidies and access to financing. As long as Beijing maintains this model, it is unlikely that the Chinese government will shift toward a more balanced economic structure that prioritizes consumption and sustainable growth. The political control that comes with an industrial-heavy economy is too valuable for the Chinese Communist Party to abandon.

For the West, China’s overcapacity poses a significant and long-term challenge. Attempts to isolate China by erecting trade barriers or restricting imports of Chinese goods will not solve the structural inefficiencies that have been accumulating for decades. Even if the United States and Europe manage to limit the flow of cheap Chinese goods into their markets, this will not force Beijing to address the root causes of overcapacity. At best, it might push China to redirect its excess production to other regions, further destabilizing global trade without addressing the underlying imbalances.

Moreover, Xi Jinping’s increasing emphasis on economic self-sufficiency—driven in part by a perception that the West is trying to economically isolate China—has exacerbated the overproduction problem. Instead of scaling back, Beijing is doubling down on its state-led production strategy. In doing so, it risks becoming even more disconnected from the global economic system, with potentially disastrous consequences for both China and the rest of the world. If left unchecked, China’s industrial overcapacity will continue to distort global markets, reduce profits for foreign manufacturers, and strain international trade relations.

To craft a more effective response, Western policymakers must recognize the deeper forces at play in China’s economy. The overcapacity problem is not just an issue of unfair trade practices—it is the result of a deeply ingrained economic model that has guided China’s development for decades. Instead of further isolating China, the West should focus on keeping Beijing integrated within the global trading system. This would allow the international community to exert pressure on China to adopt more balanced growth policies and abandon its overreliance on industrial production.

The current strategy of isolating China risks pushing the country further into its state-led model, making it even more difficult for China to reform its economy and for the world to manage the consequences of its overproduction. A more nuanced approach is needed, one that acknowledges the political and economic complexities driving China’s actions and seeks to create incentives for Beijing to pursue a more sustainable and balanced economic path.

Without such a strategy, the West will continue to face an increasingly unrestrained China, one that is willing to prioritize its industrial output at the expense of global economic stability. As China’s economic struggles deepen, the world must grapple with the long-term consequences of an economy that is not only stuck but potentially driving toward an even more dangerous future.