Former Chairman of the China-EU Chamber of Commerce, Joerg Wuttke, has warned that China’s overcapacity issue is reaching a critical point, teetering on the edge of collapse. Wuttke, who is currently a partner at the Washington DC consulting firm Dentons Global Advisors-Albright Stonebridge Group, has been living and working in China for over thirty years. He is known for his outspoken criticism of Beijing’s economic policies and is regarded as one of the most influential foreign business leaders on Chinese affairs.
In an article published by the “Neue Zürcher Zeitung” (NZZ) on Monday, Wuttke revealed that the leadership in China has long been aware of the unsustainability of its supply-side economic policies. As far back as 2009, the State Council identified overcapacity as a “prominent issue” and emphasized the need to mitigate its negative impact. However, Beijing has continuously postponed discussions on this issue, resulting in overcapacity problem now approaching a critical point that is difficult to resolve.
Wuttke stated that due to weak domestic demand and escalating foreign protectionism, the market space for many industries in China will further shrink. Meanwhile, local governments are increasingly running out of funding sources, putting further pressure on the profit margins of many companies, with a significant portion already operating at a loss.
He warned that unless there is a significant revival in domestic demand, an abrupt disappearance of trade tensions, or local governments find new sources of financing in the short term, these pressures could lead to the closure of thousands of Chinese companies.
Among the numerous industries in China, tens of thousands of inefficient “zombie enterprises” rely on local government support to sustain operations. Even as the support structure for maintaining overcapacity is collapsing, China’s industrial production has remained unchanged without showing a reasonable decline.
Meanwhile, the external environment is deteriorating further. Not only the United States and the European Union but also countries from Brazil to Turkey to Indonesia and other global southern nations are imposing tariffs and trade barriers on Chinese exports.
Wuttke cautioned that the closure of overcapacity will be an extremely painful process. Market consolidation will inevitably lead to a wave of business bankruptcies, a rise in unemployment rates, and potentially spark social unrest.
He pointed out that the collapse of the Chinese real estate industry since 2021 has set a precedent for this crisis. One crucial lesson from the real estate sector is that issues of excessive investment and overproduction will only worsen over time, and delaying action will exacerbate the impact of economic downturn.
“The longer these problems are concealed, the less effective policy measures will be in mitigating the destructive impact of economic decline,” he said.
He mentioned that Zhu Hongren, former Chief Engineer of China’s Ministry of Industry and Information Technology, issued a warning about severe overcapacity back in 2012, but no one listened. Instead, Beijing has been employing a strategy of procrastination.
Wuttke confirmed that during his tenure as Chairman of the China-EU Chamber of Commerce, reports were released in 2009 and 2016 emphasizing the severity of the overcapacity issue and proposing solutions. “Unfortunately, these recommendations were not adopted,” he said.
He speculated that perhaps the ultimate solution to the industrial overcapacity issue will mirror that of the real estate problem, where after speculation and excessive investment, adjustment will ultimately be driven by market ‘gravity.’
“I am not sure how this process will unfold, as different industries and regions will be affected differently,” Wuttke wrote. “The message I want to convey is simple – the pressure of declining demand is increasing, while the options to support overcapacity are dwindling… China’s overcapacity issue has now reached its limit.”