'Overcapacity’ talk reflects a West irked by China’s industrial rise

Bruegel, a Brussels-based think tank specialising in economic policy, recently published a working paper, “To what extent can green infrastructure investment mitigate China’s clean-energy overcapacity?” It argues that China’s industrial policies made it the global leader in renewable technologies but at the cost of severe overcapacity, falling prices and weaker profitability.

China has enormous production capacity, but it has also deployed renewable energy at extraordinary speed at home, and exports have grown because prices are attractive. The question is not simply whether China produces too much. It is why the same scale can be seen as a threat by some economies, a climate opportunity by others, and both at once by some.

A recent South China Morning Post opinion piece made a related point: China may be the visible pressure, but not necessarily Europe’s real problem. Europe’s deeper difficulty lies in competitiveness, investment, energy costs, technology gaps and the inability to turn defensive measures into industrial renewal.

That observation applies beyond Europe. China’s clean tech expansion has been extraordinary. Its companies have brought down costs across solar, wind, batteries and electric vehicles. Cheap solar panels are not a climate problem; they are part of the climate solution. Many developing countries would find decarbonisation much harder at Western production costs.

Yet China’s success creates discomfort. Other economies see manufacturers squeezed, worry strategic industries will disappear, and fear dependence on one country for future technologies. These concerns are understandable. But they are not proof that China has violated any settled international principle.

The term “overcapacity” blurs different issues. Economically, it can mean production capacity that exceeds profitable demand. Politically, it can mean another country’s industrial system has become so powerful its effects are felt elsewhere. What begins as industrial policy at home becomes a political problem abroad.

There is nothing inherently wrong with producing more than one’s domestic market can absorb. Export-led growth has been central to the development of Germany, Japan, South Korea, Singapore, mainland China and even Hong Kong in earlier decades.

Nor are subsidies automatically illegitimate. The United States and Europe subsidise agriculture, aircraft and semiconductors because they think those sectors matter. Global trade rules do not ban subsidies, except in narrow circumstances. There is no general rule that says a government may not build industrial capacity.

The harder issue is China’s speed and scale. China is a socialist market economy, a manufacturing superpower and a strategic competitor to the West. Some are ideologically offended by socialism. They don’t like central planning targets, state-bank lending and local government support. These are not offences in themselves. In truth, they are difficult to accept when China’s production reshapes global markets.

Bruegel’s key point is that China’s supply-driven model encouraged capacity to expand faster than profitable demand could absorb. That may be right as an industrial diagnosis. But the more important point is simpler: China has moved up the value chain.

For decades, China’s low-cost manufacturing was treated as a benefit of globalisation. The mood changed when China began making sophisticated products at scale. Solar panels, batteries, electric vehicles and other clean technologies are not just cheap imports. They are the industries of the future. What was once called efficiency is now called overcapacity.

This is why Western inconsistency is hard to miss. When the US or Europe subsidises, the language is of resilience, a green transition or national security. When China subsidises, the language becomes one of distortion and overcapacity. The difference is not principle but anxiety.

Recent moves in Brussels show where this anxiety is heading. The European Union is considering tougher trade-defence tools, faster anti-dumping and anti-subsidy action, supply diversification rules and “Buy European” preferences to protect strategic industries.

These responses show Europe does not want to lose the industrial base needed for the next economy. But defensive measures are not the same as an industrial strategy. This is the danger: Europe may be mistaking diagnosis for strategy. If Europe’s real problem is weak competitiveness, constraining China cannot be a substitute for industrial renewal.

The Bruegel paper argues that China should redirect more green investment from manufacturing to infrastructure, especially power grids, because grid constraints limit renewable absorption at home.

China is, in fact, building a new energy system with heavy investment in grids, storage and electrification. But if infrastructure is part of the answer in China, it is also part of the answer globally. The world needs more clean energy systems; China is best placed to supply many of them. It would be better for Europe to consider cooperation rather than make China’s success the explanation for Europe’s industrial weaknesses.

The real question is not whether China is allowed to subsidise. All major economies practise industrial policy and they also subsidise. The question is what happens when one country’s success becomes intolerable to others. Trade restrictions cannot answer that fully. This is a question about power and coexistence among different economic systems.

Overcapacity is not just an economic diagnosis. It is the language governments use when another country’s industrial rise begins to irk. The challenge is whether that irritation can be managed through rules, restraint, domestic renewal and cooperation, or whether it becomes another front in the fragmentation of the global economy.

Contributed by Prof. Christine Loh. The article was published on SCMP: