From high-speed rail to housing, the focus on Leninist industrial policies is destroying profits as well as GDP
China’s astounding technological success in mass-producing quality electric vehicles (EVs) sits alongside a serious flaw in its industrial model: overcapacity.
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.
