Editor's note: Guo Bowei is an associate professor and the executive director of the Center for Research on Global Energy Strategy at Renmin University of China. The article reflects the author's opinions and not necessarily the views of CGTN.

China's Ministry of Commerce recently issued a position paper addressing the "overcapacity" debate surrounding Chinese industries. The document focuses on four frequently conflated relationships: industrial subsidies and overcapacity, trade surpluses and overcapacity, economic imbalances and overcapacity, and market competition and overcapacity.

These distinctions matter because "overcapacity" is increasingly used as a catch-all explanation for China's manufacturing strength. Yet from an economic perspective, large production capacity, strong exports or falling prices do not by themselves prove that capacity is excessive.

Overcapacity is fundamentally a relative concept. It should be assessed against demand, cost and the time horizon concerned. Temporary excess supply may emerge during a business-cycle downturn. Structural overcapacity is more serious: high-cost or obsolete capacity remains in the market despite being unable to operate efficiently. A third case, however, is forward-looking capacity created in fast-growing industries in anticipation of future demand. Treating all three as the same problem obscures more than it explains.

This is especially important in an open economy. Efficient production is organized for markets, not for national borders. A country producing more aircraft, semiconductors or automobiles than it consumes domestically is not necessarily suffering from overcapacity. It may simply be participating in international specialization according to comparative advantage.

Four misconceptions

The first misconception is to equate industrial subsidies with overcapacity. 

Subsidies can certainly distort investment when they are poorly designed. But they can also address market failures, including underinvestment in research and development, learning spillovers and environmental externalities. The real question is therefore not whether a subsidy exists, but what it is designed to achieve, how it is implemented and whether it creates measurable distortions. A policy instrument and a market outcome are not the same thing; a causal link between them must be demonstrated rather than assumed.

The second misconception is that a trade surplus proves excess production. 

At the macroeconomic level, external balances reflect many factors, including the relationship between national saving and investment, exchange rates, fiscal conditions, demographics and industrial competitiveness. At the sectoral level, exports are a normal outcome of specialization. If producing more than domestic consumers buy were sufficient evidence of overcapacity, many of the world's leading exporting industries – from aircraft and pharmaceuticals to automobiles and semiconductors – would have to be described in the same way.

The third issue concerns economic imbalance. 

Here, legitimate concerns should not simply be dismissed. China has good reasons of its own to strengthen domestic demand and household consumption as part of its economic rebalancing. But a macroeconomic imbalance and industrial overcapacity are analytically different questions. Weak consumption, high savings or changing investment patterns may affect the current account, but they cannot by themselves establish that a particular Chinese industry has built inefficient excess capacity. The appropriate remedies are also different. Macroeconomic rebalancing requires macroeconomic policies; inefficient industrial capacity requires competition, restructuring and effective exit mechanisms.

The fourth misconception is perhaps the most important: intense competition is not synonymous with overcapacity. 

Competition inevitably produces entry, expansion, price pressure, consolidation and exit. In emerging industries, firms often invest ahead of demand because nobody knows with certainty which technologies or business models will prevail. Some investments will fail. Others will drive down costs and accelerate innovation. This process can look wasteful from a static perspective, but it is also how markets discover more efficient producers.

Transparent rules, multilateral solutions

China's renewable-energy industries illustrate why a dynamic perspective is needed. There is little doubt that some segments, particularly solar manufacturing, have experienced periods of supply-demand imbalance and severe pressure on prices and profitability. Recognizing this does not validate the much broader claim that China's clean-energy competitiveness is simply the product of "overcapacity."

Global demand for clean technologies is still expanding rapidly. The International Energy Agency expects around 4,600 gigawatts of renewable power capacity to be added worldwide between 2025 and 2030, almost double the expansion of the previous five years, with solar PV accounting for nearly 80 percent. Global electric car sales exceeded 20 million in 2025, representing one in four new cars sold, while emerging markets are becoming an increasingly important source of growth.

This raises a basic question: against what demand should "excess" capacity be measured? If the world is attempting to accelerate decarbonization while emerging economies continue to industrialize, assessing tomorrow's clean energy capacity solely against today's demand in a handful of mature markets risks confusing investment for transition with wasteful duplication.

None of this means that every unit of industrial capacity is efficient. China itself has an interest in addressing disorderly competition, local protectionism, repetitive low-quality investment and barriers to the exit of inefficient firms. Trading partners are also entitled to raise concerns about specific subsidies or practices when there is evidence of trade distortion.

But those concerns are better addressed through data, transparent rules and established multilateral mechanisms than through an ever-expanding definition of "overcapacity." Turning normal competition, trade surpluses and comparative advantage into evidence of economic wrongdoing risks replacing economic analysis with political labeling.

The greater danger for the global economy may therefore not be having too much efficient manufacturing capacity, but having too little global market in which that capacity can compete. In a world facing a costly energy transition and increasingly fragmented supply chains, preserving open markets and effective competition is likely to do more for global welfare than building new walls around national industries.