The Hindu: Published on 23rd July 2025:
Why in News?
China is signaling a new round of industrial capacity cuts to tackle deflation, echoing its past supply-side reforms. However, analysts warn that the strategy faces new structural challenges and may not yield quick results due to deep-rooted overcapacity, private ownership dominance, and weak domestic demand.
Economic Context:
Deflation Woes: China’s Producer Price Index (PPI) has dropped for 33 consecutive months, indicating falling factory prices.
Price Wars: Fierce price-cutting, especially in sectors like EVs, batteries, and solar, is hurting profits and prolonging deflation.
Trade War Impact: Ongoing tensions with the U.S. are intensifying these price wars and distorting trade flows.
Government Strategy:
Supply-Side Reforms 2.0: Inspired by the successful 2015 campaign to trim overcapacity in steel, coal, etc., China now aims to repeat the strategy in high-tech sectors.
Industrial Targets: This time, Beijing is eyeing “new three” industries — autos, batteries, solar panels — once seen as growth engines but now plagued by oversupply.
Challenges & Risks:
Private Ownership Dominance: Unlike the 2015 reforms focused on state-owned heavy industries, most modern sectors are privately run, making direct administrative intervention harder.
Local Government Resistance: Local authorities often incentivize overproduction for job creation and regional GDP gains, directly clashing with central government goals.
Limited Stimulus Options: China's ability to counter job losses through stimulus is narrower than before due to existing debt burdens and fragile demand.
Employment Risk: Youth unemployment is already at 14.5%, and job cuts from capacity reduction may threaten social stability.
Expert Opinions:
He-Ling Shi (Monash University): The risk of failure is high; if reforms fail, economic growth could further decline.
Yan Se (Peking University): Capacity cuts will be slow and insufficient to end deflation — stimulating consumer demand is more effective.
Structural Issues:
Overcapacity Across the Board: Most sectors are operating below the 80% capacity utilization threshold, the benchmark for healthy industrial activity.
Misaligned Incentives: National efforts to trim capacity clash with local agendas to boost industrial activity.
Cheap Credit Problem: Easy access to capital has encouraged firms to expand recklessly, despite evident overcapacity.
Geopolitical Angle:
U.S. & EU Concerns: Western countries accuse China of flooding global markets with cheap goods, calling it a threat to their own industries.
Trade War Feedback Loop: Export dependence and retaliatory tariffs are worsening price competition, especially in overexpanded sectors.
What’s Next?
Politburo Meeting (Expected late July): May deliver high-level policy directions, though not likely to provide concrete action plans.
Gradual Reforms: Beijing is expected to proceed cautiously, balancing economic growth (~5%) with restructuring goals.
Demand-Side Measures?: Analysts are increasingly calling for domestic consumption boosts (e.g. tax cuts, cash transfers) rather than just producer-focused solutions.
Conclusion:
While China may begin industrial capacity pruning, this alone is unlikely to pull the economy out of deflation quickly. The complex interplay of overcapacity, private sector dominance, weak demand, and geopolitical headwinds demands a more balanced policy mix, including stimulating consumer demand, fostering innovation, and managing employment risks.
