Beijing attempts to trim overcapacity, but steers clear of structural issues
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Thu, 10/01/2026 - 14:49
picture alliance/dpa/HPIC | Han Jiajun
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Oct 01, 2026
6 min read
Beijing attempts to trim overcapacity, but steers clear of structural issues
Despite efforts to ease intense domestic competition, China continues to generate excess capacity across various industries, which is putting pressure on global markets. In this update to the MERICS Overcapacity Monitor , we find that China’s industry continues to produce more than domestic demand can absorb.
A few indicators are showing marginal improvement, such as stagnation and even a contraction in fixed-asset-investment (FAI) in sectors like manufacturing. If sustained, this could slow overcapacity growth in the coming years, even if it does not yet meaningfully reduce it now.
Similarly, a slight uptick in profit margins in industries like metals, chemicals and the automotive sector could help, but these remain well below healthy levels. Beijing’s efforts to get a grip on overcapacity may be underpinning these improvements. Whether this can reduce distortions in global markets depends on the government’s resolve.
China’s government continues efforts to fight cutthroat domestic competition
In 2026, the government continued to roll out efforts to combat “involution” （内卷）and “involution-style competition” （内卷式竞争）that began in 2025. This large-scale, cutthroat competition for market share, which leads to chronically lower profits and even losses, is a primary symptom of overcapacity in key industries.
At first glance, this might seem like a normal business cycle: Companies enter a new market and compete. The best ones rise to the top and displace weaker ones by lowering prices while maintaining profitability. Consolidation leads to a healthy equilibrium of supply and demand, and thus prices and profits. But in China, government support helps companies sustain razor-thin margins and even losses for extended periods, delaying consolidation. According to the OECD , “…Chinese firms received on average three to eight times more government support than firms based in the OECD, a conservative estimate.” Between subsidies, cheap financing and local protectionism by municipal authorities, weaker firms persist well past their ability to survive under normal market conditions.
Loss-making firms bolstered by public support are a drain on public resources
Beijing has good reason to try to counteract this trend. Loss-making firms bolstered by public fiscal and financial support are a drain on public resources. Weak or non-existent profits leave few corporate funds to fuel R&D, and they eat into Beijing’s tax intake and raise its debt levels. The IMF has estimated debt could reach 127 percent of GDP by 2031 (up from 99.2 percent in 2025).
However, Beijing, and especially local government officials, also has good reason to tolerate involution. For one, officials’ own jobs are tied to performance indicators that measure their ability to keep employment steady. Second, local governments and investors are suffering from a sunk-cost issue: They have put so many resources into these failing projects that it is politically difficult to let them fail. Third, local firms and officials are banking on either a breakthrough or their ability to outlast the competition. These factors create a situation where many firms are “living badly, but not dying” (“活不好、死不了”).
MERICS research shows: some factors inhibit serious change in domestic competition
MERICS has been tracking the progress of the government’s anti-involution campaign which emerged in 2025 and 2026. Our indicators show some progress but also factors inhibiting any serious change in involution-style competition in China.
The most successful example has been the anti-involution campaign in courier services (with similar trends in food delivery and e-commerce due to similar conditions). Starting in 2025, regulators and major players made a concerted push to establish price floors and raise them to stop price wars. As of September 2026, this seems to have yielded the desired results , with profits rising nearly ten percent in major markets.
Managing competition in EV sector is particularly challenging due to risk of stranded assets
In contrast, China has struggled to manage involutionary competition in the EV sector. Stark differences between the two sectors underline why it is hard to use the same methods for industrial sectors that have worked in the courier sector. The gig economy can readily scale supply up and down in response to price changes, as workers come and go easily and costs are limited to small vehicles. EV production, on the other hand, requires vast asset investment with risks of sunk costs and stranded assets if a factory closes. Years of industrial policy by local governments seeking a return on investment have made this much worse.
Courier services also compete almost entirely in terms of price, so there is a vested interest in agreeing to price floors, as players will still have customers even with higher prices. But among EV makers, there is a considerable range in quality and price. The lowest quality EV makers must offer rock-bottom prices to attract customers. It is unlikely that consumers would pay higher prices resulting from a price floor.
Wind energy sector has seen major market consolidation over the last 15 years
In the renewable energy sector, anti-involution efforts in wind and solar have faced very different market factors. Wind turbines are a technologically sophisticated product and are more design-intensive and less commoditized, so new entrants cannot rapidly scale production and expand capacity. This sector has already seen major market consolidation over the last 15 years, reducing the number of producers to 10 in 2025 from nearly 80 in 2010. The solar sector, on the other hand, is more commoditized and has long been plagued by overcapacity and an overcrowded market. In 2025, China could have met global demand for solar PVs while leaving 40 percent of its production capacity idle.
This difference in market consolidation also influences how effective coordinated action can be. Fewer players in the wind sector enabled a 2024 self-discipline pact , with companies pledging not to price products below cost. Meanwhile, the PV sector is comparatively easier to enter, as the machinery and inputs for PV production are readily available to any market entrant. This limits the value of product differentiation for buyers and thus exacerbates the pressure to compete on price and cost for producers.
Involution in the solar sector has led to far steeper price declines
On the demand side, wind project developers have been able to implement a benchmark price when tendering for wind turbines, to avoid excessive price competition. But for solar, government and corporate-led efforts have yet to significantly streamline capacity or set price floors. As a result, involution in the solar sector has led to far steeper price declines and even loss-making among firms, whereas for wind, prices have dropped and profit margins squeezed, but not into loss-making territory.
European policymakers and corporate strategists should continue to expect overcapacity and involution in many sectors. It is key to monitor where success is happening in China’s efforts to rein in involution, as that may meaningfully improve the outlook for distortions in global markets. But European stakeholders should not count on Beijing’s pledge to resolve this issue as indicative that it will succeed. The structural issues driving overcapacity and involution in many sectors are likely to persist, as the political cost of resolving them is higher than paying lip-service to fixing them.
This analysis is part of the MERICS China Overcapacities Monitor. Explore the project here .
Author(s)
Esther Goreichy
Visiting Fellow
Sophia Pradels
Analyst
Jacob Gunter
Head of Program
Author(s)
Esther Goreichy
Visiting Fellow
Sophia Pradels
Analyst
Jacob Gunter
Head of Program
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Beijing attempts to trim overcapacity, but steers clear of structural issues
Aggregated summary from an independent source. Read the original at Merics.