China's industrial policy is too successful - and that's creating instability at home and abroad

China's astounding technological success in mass-producing quality electric vehicles (EVs) sits alongside a serious flaw in its industrial model: overcapacity.

- George Magnus

It has the capacity to produce about three times as many units as it can sell at home. The consequences so far have included widespread price cutting, large losses, misallocation of capital, and surging low-cost EV exports leading to trade conflict.

The bigger problem, though, is that EVs are just a part of a broader overcapacity problem involving a myriad of sectors and products. At home, Chinese overcapacity lies at the heart of the destruction of profits, debt management problems, and persistent deflation. The broadest measure of inflation, the GDP deflator, has been falling for nine quarters as of June 2025, and the fall in factory gate prices for consumer durables is the biggest since the 2008-09 financial crisis.

Abroad, the surge in exports – the other side of the coin of excess domestic capacity, referred to as the "second China shock" – is being met by trade defence measures including tariffs by both developed economies and middle-income and emerging nations such as Brazil and India.