Does China Have an Overcapacity Problem?
When domestic demand is insufficient, China turns outward
China’s factory deflation persisted into a 33rd month, with the producer price index falling 3.6% from a year earlier.
The decline was the most since July 2023 and sharper than any economists had expected.
Given this context, an obvious question that arises is:
Does China have an overcapacity problem?
The evidence is certainly the continued deflation at the producer level.
China’s Producer Price Index (PPI) has been falling year-on-year for 33 straight months.
A 3.6% drop, the sharpest since mid-2023, signals that factories are cutting prices - often to stay competitive or clear inventories.
What that suggests is a clear signal of overcapacity - i.e., too much industrial production relative to demand.
Especially in sectors like:
EV, solar panels, steel, chemicals, construction equipment.
Much of this capacity was built up via state-backed lending, subsidies, and investment-driven growth.
There is also a political confirmation, as the FT from London recently reported.
Even Qiushi, the CCP’s official theory magazine, recently acknowledged “overcapacity” as an issue - despite earlier denials by Xi.
So yes: China does have a structural overcapacity problem, and PPI deflation is one of the most visible symptoms.
What does this mean for the eurozone?
The euro area is China’s largest trading partner - so the economic effects will likely show up through trade and pricing channels.
A keyword: Flood of cheap exports.
China will increasingly try to export its industrial surplus to external markets, especially high-income ones like the EU.
It is coherent to expect a surge in low-priced Chinese goods (e.g., EVs, solar modules, machinery, white goods).
This puts competitive pressure on European producers, especially in Germany and France.
The risk of deindustrialization in Europe rises if its own firms can’t match China's pricing, especially in green tech.
Another keyword: Imported disinflation.
China exporting cheap goods = deflationary impulse to Europe.
Eurozone core goods inflation may stay low even if services remain sticky.
This could delay ECB rate hikes, or accelerate rate cuts if growth slows further.
A third keyword: Trade tensions respectively and tariffs.
The EU has already launched anti-subsidy probes into Chinese EVs.
If overcapacity worsens, we would expect:
More trade remedies
Retaliation from Beijing
Strained EU-China economic relations
Bottom line:
The key macro risk remains: China re-exports its industrial slack.
If domestic demand remains weak and stimulus avoids household consumption, China may default to its old growth engine: exports.
This would:
Undermine global rebalancing
Pressure European industry
Increase geo-economic tensions
Yes, it is fair and increasingly certain to say China faces an overcapacity problem.
And the eurozone, as China’s top export destination, will feel the effects - both in price competition and geopolitical-economic tensions.
China starts exporting that surplus production to global markets - especially to Europe, Latin America, and Southeast Asia - at very low prices.