China's Industrial Overcapacity Resurfaces, Reform Path Remains Unclear
Taylor Wilson
Loss-making firms now account for nearly 25% of China's industrial base, up from roughly 10% in 2010 — a severity drawing comparisons to Zhu Rongji's sweeping SOE reforms of the late 1990s, yet neither a reformer of that caliber nor a clear restructuring roadmap is in sight.
How bad is the overcapacity problem?
MERICS — a European China-focused think tank — tracks Chinese industrial overcapacity. Its data shows nearly one in four industrial firms is now loss-making, more than double the ratio fifteen years ago.
Steel, cement, autos, chips, robotics — the losses cut across both legacy and emerging sectors. This is not a single-industry cycle.
This means → the problem is systemic: the entire industrial base is releasing capacity far faster than demand can absorb it.
How extreme are the auto-sector numbers?
China sold 23.9 million vehicles domestically last year. Estimated production capacity: 45–50 million — roughly double actual sales.
In plain terms = the country can build twice as many cars as people are buying.
HSBC data shows that over 70% of EV sales (including plug-in hybrids) go to just 10 brands, while 47 other brands fight over the rest. The ICE market mirrors this: 10 brands hold ~70%, and 73 brands split the remainder.
This reflects a pattern of "top-heavy saturation" — overcapacity is not evenly distributed; dozens of smaller brands have effectively no viable market left.
Can exports absorb the surplus?
In the first five months of 2026, Chinese auto exports rose over 60% year-on-year, topping 4 million units. Full-year exports could exceed 10 million, up from 7.1 million last year.
But trade protectionism is escalating globally. Chinese automakers are already building plants in Germany, Spain, Hungary, Brazil, Thailand, and the UK to sidestep tariffs.
This means → exports provide a short-term pressure valve, but tariff walls are narrowing the channel — overseas factory construction is itself a signal that the export route is under strain.
Could consolidation work?
Keyu Jin, professor at Hong Kong University of Science and Technology, argues that in sectors like EVs — where Chinese firms already hold a global lead — local governments are more likely to push mergers, culling brands while keeping factories and jobs intact.
In plain terms = the strategy is not shutting plants but letting big fish eat small fish — workers stay, only the badge on the factory changes.
The logic echoes Zhu Rongji's "grasp the large, release the small" approach, but that era's price tag was staggering: 30–40 million workers lost their jobs and thousands of facilities closed permanently.
Is the "anti-involution" policy enough?
Beijing's "anti-involution" push — curbing destructive price wars and improving supplier treatment — has shown early results, but analysts broadly agree it falls short of resolving overcapacity at its root.
Premier Li Qiang told the Summer Davos forum that China's competitiveness stems from technological innovation. This reflects an effort to deflect the "subsidy-driven" narrative — but offered no concrete plan for capacity reduction.
Can a reform window actually open?
Tu Le, founder of Sino Auto Insights, warns: "The music in China will eventually stop — this is something the central government has to address… I think the bill comes due in roughly 18 months."
Yet according to the Financial Times, no figure in Xi Jinping's inner circle currently champions the kind of sweeping reform Zhu Rongji once drove.
Cash-strapped local governments can no longer replicate the 2020 playbook — when Hefei rescued NIO with nearly $1 billion in bailout funding.
This means → urgency is rising, but neither the political will nor the fiscal capacity for structural reform is in place — whether overcapacity can be unwound without large-scale social disruption remains the central unanswered question.
Content is for reference only, not financial advice.