(Bloomberg) -- In Washington and Brussels, there’s a consensus that China is experiencing a surge of excess capacity that could wipe out overseas industries, spurring protectionist measures to stem the damage. 

“China’s overcapacity distorts global prices and production patterns,” US Treasury Secretary Janet Yellen said ahead of her visit to the country this week, highlighting solar panels, electric vehicles and batteries. There are similar concerns in Europe, with EU Commission chief Ursula von der Leyen citing overcapacity as a reason for opening an anti-subsidy probe into Chinese EVs.

A look at the data suggests that while China does have widespread industrial overcapacity, much of this is driven by industries that Western nations don’t compete with China on, such as low-tech goods and those related to the nation’s property slump — from cement to furniture. 

For EVs, the issue for advanced economies appears to be more that Chinese companies are more efficient rather than loaded with excess capacity. 

Read more: Yellen Heads to China This Week to Press Beijing on Overcapacity

Chinese leaders have been pouring money into manufacturing, focusing on new industries such as EVs, batteries and renewable energy, as Beijing looks for new sources of growth for its slowing economy. Trading partners worried about the prospect of low-cost imports flooding their markets and wiping out jobs are pushing back — and in some cases raising the barriers on Chinese products.

Beijing has said it wants to curb overcapacity, so analyzing the data is important as it shows where China sees an issue. The EV industry is likely not one of them, though overcapacity is present in solar and batteries. It also provides advanced economies an indication where they might find more success when pressuring China to act on overcapacity. 

Here’s a look at what the numbers say: 


From the rest of the world’s perspective, overcapacity can be felt through lower prices. Chinese export prices fell last year at the fastest pace for almost a decade, but that was driven by low-tech goods like clothing and toys. 

China’s automobile exports, which surged last year as the country overtook Japan as the world’s top car exporter, actually became more expensive. That suggests their rising attractiveness isn’t due to price cuts.

Chinese companies aren’t dumping electric vehicles on global markets at a lower cost either. Leading Chinese EVs fetch roughly double on average in Europe than domestically.


The most common way of measuring overcapacity is capacity utilization, rated on a scale where zero means factories are laying idle, to 100 meaning maximum use.

China’s capacity usage rates across industry was below 76% for all of 2022 and 2023, the longest stretch recorded since 2016 when Beijing launched a nationwide capacity-cutting campaign. That was below the level of around 80% considered “normal,” according to a commentary by the Communist Party’s leading financial body.

But that doesn’t seem to be causing alarm in Beijing. First, the rate is several percentage points higher than in 2016 and has picked up in recent quarters. “Under these circumstances, it is hard to believe that China has a serious structural overcapacity,” Fan Lei, an economist at Guolian Securities, wrote in a recent note.

Second, data suggests that while some sectors like electrical equipment, which includes solar panels, have unusually low utilization, the headline number has been dragged-down by low-tech sectors impacted by China’s property crisis. That has cut demand for products like glass and cement, where capacity utilization has fallen to as low as 30%, according to Daiwa Securities Group Inc.

In other sectors like auto manufacturing, chemicals, and equipment such as wind turbines, the rate is climbing toward the 80% threshold. 

Use of Assets

Those conclusions are supported by China’s monthly survey of the financial performance at industrial firms, which allows the calculation of how efficiently companies are using their fixed assets.

That data shows historically low levels of asset efficiency in sectors like electrical machinery, phones and computers, according to analysis by Gavekal Dragonomics.

But the ratio for auto manufacturing is high by historical standards, likely reflecting strong use of production lines for electric vehicles, according to Gavekal’s Thomas Gatley.


China is by far the world’s largest market for pure electric and hybrid vehicles, with domestic sales surging 36% last year and expected to grow 25% this year. Its ratio of exports to production is far lower than other car producing nations such as Germany, Japan and South Korea.

Overcapacity might result in vast parking lots filled with unsold cars. But Chinese automakers’ inventories don’t look high, according to a Bloomberg analysis of listed companies. Data on dealers’ inventories from China’s car dealer association also doesn’t show an unusual increase.

Some analysts, who estimate China has a carmaking capacity of 50 million or more and conclude that utilization is below 50% relative to domestic sales of 22 million, include obsolete capacity in their calculation or are “simply bluffing,” said Paul Gong, head of China autos research at UBS Group AG. “The overcapacity narrative has been exaggerated and oversimplified,” he added.

One oversimplification is ignoring the distinction between EV and internal combustion engine (ICE) cars, of which sales have plummeted amid the transition to electric and hybrid vehicles. 

China’s biggest EV exporters including BYD Co., Tesla Inc.’s Shanghai factory and SAIC Motor Corp. all have capacity utilization rates above 80%, according to estimates from JSC Automotive. Only one major exporter, Geely Automobile Holdings Ltd., which relied on ICE vehicles for the majority of its sales last year, has a low capacity use of 44%.

The internal combustion engine sector is “much more affected” by overcapacity, said Camille Boullenois, an analyst at Rhodium Group. EV overcapacity is concentrated in smaller and uncompetitive companies which will likely not survive, she added. 

The real issue for advanced economies is that Chinese carmakers are more competitive, thanks to technology, local supply chains, brand new transport infrastructure, and lower energy and land costs. Government subsidies play a role, but they may be secondary to innovation: China leads the EU and the US in peer-reviewed publications on green technology.

China’s top EV exporters “are competitive on quality as well as price,” Boullenois added.

Green Goods

However, when it comes to batteries used in EVs, it’s clear that capacity is running ahead of demand.

Planned annual output capacity of China’s EV battery manufacturers will reach 4,800 gigawatt hours by next year but the country will need at most 1,200 GWh, Zhu Huarong, chairman of carmaker Changan Automobile, said last year.

Prices are plunging, with the cost of lithium carbonate – the white salt that goes into making batteries – down 80% from a 2022 peak. The same is true for solar panels as prices more than halved last year.

BNEF compared China’s planned manufacturing capacity for batteries used in EVs and power grids with the level consistent with reaching net-zero emissions by mid-century, finding capacity from 2024-27 is about double what would be needed.

For solar, it compared announced capacity with its “optimistic” demand scenario, finding China’s planned production capacity over 2024-27 will be more than double demand.

“The good news: an oversupplied world is one where costs are low,” said BNEF analyst Antoine Vagneur-Jones. But it will make plans by countries to onshore production much harder to justify, he added.

To be sure, future demand growth can exceed expectations. That potential for under-estimation is large for green goods, where carbon reduction targets may be raised in years to come.

New capacity can often replace older capacity, rather than sitting alongside it when an industry is developing new techniques. In solar, the traditional “PERC” solar cell design is being driven out by new technologies.

“The old factories are obsolete and any firm that doesn’t replace them will likely fail. This is one argument for the sheer levels of planned over-investment,” Vagneur-Jones added.

Market forces are already reducing the capacity pipeline. Chinese solar and battery companies have already canceled several large projects this year, and companies are bracing for a “brutal” wave of bankruptcies.

This has a downside for competitors overseas. China’s wave of solar sector bankruptcies a decade ago left only the most advanced firms standing. Today’s overcapacity problem can become tomorrow’s competitiveness challenge.

--With assistance from Dan Murtaugh.

©2024 Bloomberg L.P.