China now produces more than 30 percent of the world’s manufactured goods—surpassing the combined output of the United States, Germany, and South Korea. Some Chinese scholars argue the country should target 45 percent of global capacity, framing sheer scale as both a shield against U.S. pressure and a source of “narrative power” in the global economy.
Scale itself has become a strategic asset. Yet, the vastness of China’s productive capacity carries inherent risks. Overwhelming supply can destabilize trade relations, distort markets, and create systemic risks both domestically and globally.
At the heart of China’s industrial strategy is the Catalogue of Industrial Guidance, first introduced in 1993 and formalized under the Five-Year Plans. The catalogue categorizes industries as encouraged, restricted, or prohibited, gradually evolving into the backbone of Beijing’s industrial policy. Its 2024 edition, issued by the National Development and Reform Commission, lists 51 industries for encouragement, five restricted, and five prohibited.
Semiconductors—a sector of critical strategic importance—feature 16 sub-industries in the catalogue, covering areas such as ultra-thin substrate glass, compound integrated circuits, advanced packaging and testing, and silicon carbide single crystals. Iron and steel sectors are similarly detailed: high-efficiency ore beneficiation, low-carbon ironmaking, ultra-high-strength steel, and scrap steel recycling are encouraged, while inefficient small-scale blast furnaces and rolling equipment face restrictions or outright prohibition.
The catalogue’s influence extends beyond policy statements. Local governments channel subsidies, land access, and public facilities toward prioritized sectors. Financial institutions, including state banks and investment funds, provide preferential loans. Universities and ministries train students to supply the workforce for these targeted industries. This interlinked approach generates powerful economies of scale, reducing costs and strengthening China’s industrial ecosystem.
However, the same mechanism has inadvertently fueled overcapacity. Ambitious local governments and technologically inexperienced firms often expand into frontier industries, resulting in systemic overproduction. While traditionally considered industry-specific, China’s official industrial deflators indicate a broader phenomenon: since 2024, deflation has spread across most sectors, signaling that excess capacity has become pervasive.
Within domestic policy debates, the term “overproduction” is politically sensitive. Instead, analysts refer to “involution,” signaling competitive stagnation without acknowledging structural overcapacity. Yet empirical data suggest that overproduction is now a defining feature of China’s industrial landscape.
The consequences are significant. Overproduction depresses aggregate purchasing power and erodes export prices, a dynamic economists like Jagdish Bhagwati describe as “immiserizing growth.” Whereas earlier overproduction was cushioned by China’s booming real estate market, the property sector now offers no relief. Industrial policy, entwined with geopolitical rivalry, drives Beijing into a “chicken game” of expanding capacity even at the expense of national welfare.
Globally, the impact is evident. Chinese steel, solar panels, and electric vehicles flood markets from the U.S., Japan, and the EU to emerging economies in Vietnam, Indonesia, Mexico, and Turkey. Current World Trade Organization rules are insufficient to address the distortions caused by such scale. Analysts suggest three areas for reform: stronger scale-differentiated disciplines, recalibrated trade remedies, and international coordination on fair competition, particularly regarding cross-border mergers and acquisitions.
China’s catalogue-driven industrial policy has undeniably fueled growth, but it also generates structural distortions and intensifies global frictions. Scale has become both a strategic strength and a potential liability. The challenge now is not the existence of industrial policy, but how global governance can evolve to curb the risks of scale while maintaining open markets.
