Recent economic data from the first quarter of 2026 highlights a robust trajectory for the Chinese mainland, with GDP growth reaching 5%. This growth is underpinned by a significant surge in industrial profits among major enterprises, which climbed 15.5% year-on-year to reach 1.696 trillion yuan ($248 billion). Of particular note is the high-tech manufacturing sector, where profits soared by 47.4%, alongside strong performance in equipment manufacturing and a positive shift in producer prices after years of deflationary pressure.
Despite these positive indicators, Western commentary continues to echo the narrative of "overcapacity." However, a closer analysis suggests that this static diagnosis—which relies on snapshots of factory utilization, inventory levels, and export volumes—fails to capture the dynamic industrial evolution currently taking place in the world's largest industrial economy.
What is often mischaracterized as overcapacity is, in reality, a transitional overlap of "industrial vintages." The Chinese mainland is currently navigating a period where older, lower-productivity fixed capital from previous investment waves continues to operate, leading to intense price competition—a phenomenon known locally as neijuan, or involution. Simultaneously, newer capacities focused on green energy, digitalization, and high-tech innovation are scaling up rapidly.
While this interregnum can be messy and create short-term challenges for some players, it represents a purposeful, demand-led structural transformation. By phasing out obsolete capacity in favor of high-efficiency, sustainable technology, the economy is effectively raising its long-run productive potential and strengthening its position in the global market.
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Why a static view of China's production capacity leads to misjudgment?
cgtn.com
