China’s industrial strategy has become a double-edged sword: its emphasis on massive capacity can both propel growth and trigger destabilizing overproduction. But here’s where it gets controversial—while many celebrate China’s impressive manufacturing dominance, a deeper look reveals worrying systemic risks that could impact not only China but the entire global economy.
Currently, China is responsible for more than 30% of global manufacturing output—an achievement that surpasses combined production from the United States, Germany, and South Korea. Some Chinese scholars advocate for increasing this share even further, targeting 45%, viewing sheer scale as a strategic advantage to counter pressure from the US and to bolster China’s influence in the world’s economic narrative.
This perspective highlights how leveraging industrial scale can serve as a powerful tool in geopolitical and economic competition. However, size alone can become a perilous asset. An overabundance of productive capacity disrupts market equilibrium, distorts international trade relationships, and introduces systemic risks that threaten stability both domestically and globally.
Central to China’s industrial ambitions is the Catalogue of Industrial Guidance, introduced in 1993 and formalized through China’s Five-Year Plans. This document categorizes industries as either encouraged, restricted, or prohibited, acting as the backbone guiding domestic industrial development. Over time, it has evolved into a sophisticated framework that links various sectors more explicitly.
The latest edition, issued by the National Development and Reform Commission, shapes the goals for China’s 15th Five-Year Plan. For 2024, the catalogue lists 51 industries to be promoted, five industries with restricted development, and another five that are outright prohibited.
In the highly strategic semiconductor industry, the catalogue details 16 sub-sectors spanning areas like information technology, materials, and manufacturing equipment. These include advanced components such as ultra-thin substrate glass for touchscreens, compound integrated circuits, packaging and testing technologies, electronic-grade polysilicon, and crystals of silicon and silicon carbide.
Similarly, for iron and steel, encouraged activities include high-efficiency ore beneficiation, low-carbon ironmaking, ultra-high-strength steel production, and recycling of scrap steel. Conversely, outdated or inefficient methods—such as open-hearth furnaces or small-scale blast furnaces—are either restricted or prohibited. This detailed blueprint guides resource allocation, influencing local governments to provide subsidies, land rights, and public infrastructure favoring these prioritized sectors.
Financial institutions, including state banks and investment funds, are encouraged to direct funds toward projects aligned with the catalogue, offering preferential loans or investments. Universities and government ministries respond by creating specialized training programs to prepare workers for these targeted industries.
Such coordinated efforts generate significant external economies—cost-saving benefits achieved through deep inter-sector linkages—creating a resilient Chinese industrial ecosystem. In this framework, subsidies or state ownership are secondary; the real power lies in the catalogue’s ability to orchestrate enterprise participation and sectoral connections across industries.
Yet this same mechanism has inadvertently fueled overcapacity. Local firms, often supported by ambitious but less technologically experienced local governments eager to develop frontier industries, ramp up production beyond actual demand. This phenomenon is now visible at a macroeconomic scale.
While traditionally overcapacity was thought to be confined to specific industries, recent evidence suggests something far more widespread. Official data on industrial deflation—ongoing price declines—indicates that excess capacity has become an entrenched systemic issue across nearly all sectors, not just isolated industries.
Within China’s policymaking circles, though, the term ‘overproduction’ remains politically sensitive—often dismissed or downplayed. Instead, the narrative has shifted towards ‘involution,’ a term that captures the idea of fierce but unproductive competition, avoiding uncomfortable truths about structural excess. However, empirical data shows that widespread overproduction is an undeniable—and perhaps fundamental—feature of China’s current growth model.
The implications are concerning: overcapacity leads to a dilution of the country’s purchasing power, drives down export prices, and erodes China’s terms of trade—a concept that economist Jagdish Bhagwati described as ‘immiserizing growth,’ where economic expansion ultimately worsens overall welfare.
Back in the mid-2010s, China’s steel and manufacturing sectors suffered from overproduction, temporarily cushioned by a booming property market. But by 2025, the property sector no longer provided this buffer. Instead, industrial policy has become entangled in geopolitical rivalries, forcing China into a relentless cycle of capacity expansion—even when it undermines the country's overall economic health.
The global repercussions are significant. Chinese exports of steel, solar panels, and electric vehicles are flooding markets worldwide—from advanced economies like the US, Japan, and the EU to emerging markets such as Vietnam, Indonesia, Mexico, and Turkey. This flood of cheap, surplus goods can distort local industries, inhibit fair competition, and provoke tension.
The existing international trade framework—namely the World Trade Organization—is increasingly ill-equipped to handle this new era of scale-driven economic power. Three areas warrant urgent reform:
1. Implement stronger, more nuanced disciplines that prevent excessive concentration of economic power in vital industries.
2. Recalibrate trade remedies like anti-dumping and countervailing measures to account for the outsized influence some nations wield in specific sectors.
3. Most critically, foster greater global cooperation on fair competition policies—establishing common standards for cross-border mergers and acquisitions to prevent state-led manipulations that distort markets.
Of these, international coordination on fair competition is the most pressing. The goal is to curb government-supported industrial expansion that harms fair play and to create a more balanced global economic environment.
China’s industrial policy, driven by the catalogue approach, has undeniably fueled impressive growth. But it has also created complex distortions—domestically, through unchecked capacity buildup; and internationally, through trade tensions and oversupply. As we look ahead, the core challenge isn’t whether industrial policy will persist, but how global governance can adapt to regulate the abuse of scale without stifling innovation and open markets.
The so-called ‘shadow of scale’ is no longer a Chinese-only dilemma—it’s a pivotal issue for the entire world to address. Are we prepared to redesign international rules to manage this new scale-driven landscape? Or will unresolved tensions spiral into greater conflict and economic instability? Your thoughts and debates in the comments are most welcome.
