Trend Chinese overcapacity pressure concentrates on strategic EU manufacturing sectors

Summary

Chinese industrial overcapacity arises when production capacity grows faster than sustainable domestic and foreign demand while firm exits and capacity cuts lag, so imbalances are worked off through inventories, falling prices or rising exports. Weak domestic demand, investment competition between local governments, credit and subsidy support, and industrial policy favouring self-reliance and upgrading are cited as causes. The report finds that exports are not the main adjustment channel in every sector, so it cannot be said that Chinese surplus output is flooding Europe across manufacturing as a whole. The sectors where export pressure does appear, however, include cars, electrical machinery, general and special machinery and pharmaceuticals, which are central to EU manufacturing competitiveness and economic security. Because pressure is concentrated in industries that compete directly with Europe's core manufacturing and strategic supply chains, the report expects the impact on EU competitiveness to be substantial and the policy response to matter more.