China’s industrial overcapacity is now viewed not just as a source of global disinflation, but as a growing geopolitical threat, according to Capital Economics.
While recent U.S. inflation data show tariffs under President Trump are starting to lift prices (Capital Economics expects core goods inflation to reach 4.4% by year-end), the far more significant development is unfolding in China, said the firm.
“The real action in global goods inflation – or, more precisely, disinflation – is unfolding not in America, but in China,” the analysts wrote.
Capital Economics explained that China’s export prices have plunged over 20% since their pandemic-era peak, reducing goods prices in advanced economies by around 0.4 percentage points.
They added that factory gate prices for consumer durables are falling at their fastest pace since the 2009 financial crisis. But this isn’t due to productivity gains.
“Vicious price wars are raging across Chinese industry as firms fight to maintain market share and offload excess capacity,” Capital Economics explained.
The analysts believe Beijing is trying to end what it calls “disorderly competition,” but the problem is said to be structural.
Capital Economics says China’s investment-heavy growth model, where investment still accounts for roughly 40% of GDP, is leading to “chronic overcapacity, wafer-thin margins and ever-diminishing returns.”
With consumption weak and real estate in decline, excess capacity is reportedly flooding global markets.
“One estimate suggests as many as 30% of China’s manufacturers are now losing money,” sustained only by local government support and soft loans, commented Capital Economics.
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“What was once an engine of global growth is fast becoming a source of geopolitical friction,” Capital Economics concluded, warning that China’s current model now threatens global economic stability and order.
