China Industrial Overcapacity Has Peaked, EIU Report Says

China’s overall manufacturing overcapacity has peaked as global demand picks up in consumer sectors, the Economist Intelligence Unit said, predicting trade tensions will persist due to Chinese companies’ rising competitiveness.

“We consider the worst of China’s excess industrial capacity to have already passed,” the EIU said, adding that a slowdown in investment by firms seeing lower profitability will lead to slower capacity growth.

The report feeds into a global debate over the idea that China’s industry is experiencing unusual overcapacity that’s depressing prices, with US Treasury Secretary Janet Yellen and German Chancellor Olaf Scholz pressing Beijing on the issue.

Chinese electronics and other consumer goods sectors are experiencing a degree of overcapacity, but that’s likely temporary, the EIU said, predicting a cyclical upturn in global retail sales in 2024. Retail reports in the US and parts of Europe have beaten expectations early this year.

Overcapacity in Chinas Industrial Sectors

The Chinese industries experiencing the most overcapacity include steel, cement and construction machinery, due to a structural contraction in demand caused by China’s years-long property market slump, the EIU said.

Overcapacity pressure is milder in electrical machinery including batteries and solar panels, the automotive sector and pharmaceuticals, the EIU said.