As China pushes to sustain growth amid a sluggish real estate sector and weak household consumption, it is doubling down on industrial policy—flooding its economy with manufacturing investment. Yet this strategy, once credited with lifting hundreds of millions out of poverty, is now revealing diminishing returns, growing international tension, and a mounting risk of structural deflation.
Across cities like Tangshan, once known primarily for steelmaking, new industrial parks promise transformation into hubs of electric vehicles, robotics, and AI components. Yet many of these state-of-the-art facilities sit underutilized. In one such zone, an FT visit revealed only a handful of occupants: a toll system manufacturer, an auto parts supplier, and an ammunition case factory. Empty showrooms and weed-strewn courtyards now symbolize the deeper issue at hand—unproductive investment.
Xi’s “New Quality Productive Forces”: Ambition Meets Saturation
President Xi Jinping has championed the development of “new quality productive forces,” including EVs, batteries, and solar panels, as the pathway to China’s next economic leap. But the zeal with which local governments have implemented this directive—often with the aim of hitting GDP targets—has created excess capacity. Xi himself recently questioned whether “all provinces” truly need to chase the same sectors, expressing rare frustration with a phenomenon known as neijuan: a vicious cycle of internal competition that erodes profits and efficiency.
State-led capital expenditure remains high, with manufacturing investment rising 7.5% in 2025 following a 9.5% jump in 2024. Yet, economists warn that this is inflating GDP optics while depressing profitability and inflating corporate debt. Factory output continues to climb even as demand falters—a classic setup for deflationary pressure.
The Global Fallout: Echoes of a New “China Shock”
This domestic imbalance is fast becoming a global concern. International trading partners fear a repeat of the 1990s–2000s “China Shock”, when an influx of low-cost Chinese exports upended global manufacturing. Today, similar dynamics are playing out, especially in advanced sectors. The U.S., EU, India, and Brazil are ramping up trade barriers to shield domestic industries from artificially cheap Chinese goods.
In an unusual public shift, Qiushi, the Communist Party’s theoretical journal, acknowledged the problem of overcapacity last month. While Beijing has responded with measures to stabilize prices and issued guidance to curtail subsidy-driven price wars, the underlying incentives remain misaligned.
Inefficiencies in the System: Fixed Investment Without Returns
Research from the China Center of the Conference Board found that in lower-tier cities like Tangshan, investment comprised up to 58% of GDP—far above China’s national average of 40%, and nearly triple that of OECD economies. Much of this investment is misallocated: buildings that are counted as fixed assets stand empty, while labour productivity and total factor productivity stagnate.
In sectors from toy manufacturing to aerospace parts, razor-thin or negative margins are now common. Some factories take on loss-making orders just to retain staff. Government subsidies for upgrading equipment have supercharged production, but demand has not kept pace.
Reform Dilemma: Central Mandates vs. Local Realities
While Beijing signals a shift toward “fair competition” and has begun limiting below-cost pricing, enforcement is difficult. Many of the newly overbuilt industries are private enterprises, not state-owned giants that were easier to manage during the previous wave of supply-side reforms (2012–2016).
A core challenge lies in how local governments compete for capital and prestige. Efforts to establish a unified national market and reduce fragmented protectionism are underway but face resistance. Without social safety nets to cushion economic transitions, municipalities fear unemployment and GDP contraction, and thus hesitate to shut down outdated or underperforming plants.
The Structural Risk: Deflation and Social Strain
As China’s manufacturing muscle expands beyond what domestic and global markets can absorb, prices continue to fall. This undermines bank profitability, discourages new investment, and tightens already fragile household budgets. Analysts warn that deflationary pressures may become structural unless deep reforms—especially in welfare and consumption policy—are undertaken.
China’s long-term aim remains moving up the value chain. Top-tier cities like Shanghai and Shenzhen have made strides in services and innovation-led growth. But for dozens of interior cities still tethered to infrastructure spending and industrial buildouts, the path forward is murky.
Conclusion: More Factories, Fewer Returns
China’s pivot toward high-tech manufacturing was meant to spur productivity and reduce reliance on traditional sectors. Instead, it risks becoming a new chapter in the same story: state-driven overcapacity, chasing quantitative growth over qualitative outcomes. Without recalibrating its growth model—toward innovation, consumption, and efficiency—Beijing may find that even the most advanced factories cannot manufacture sustainable prosperity.