Why is China prone to overcapacity?

1. In the past, most industries were in the growth stage, and the rapid growth of market demand led to a fast industry growth rate, attracting new capital to participate in competition. Existing enterprises in the industry continued to expand, resulting in an overall increase in production capacity.

2. Local governments sell land with loose fiscal policies, and in order to achieve political achievements, they are prone to implementing investment promotion policies that do not consider costs, which indirectly lowers the entry threshold for the industry;

3. The real estate industry has flourished for 30 years, effectively driving high domestic GDP growth and triggering optimistic expectations for the future. High investment in various industries has caused false market prosperity;

4. The growth rate of disposable income of the people cannot keep up with the growth rate of investment, that is, consumption growth is slower than investment growth. Once consumption is downgraded, production capacity will immediately become relatively surplus;

5. Countrymen are too industrious to have time to think. As long as there is a business in the society that makes money, they immediately rush to the top, and the final result is chicken feathers;

6. There is no obvious economic or financial crisis domestically, the speed of capacity reduction is slow, and there are also many zombie enterprises unable to exit competition due to employment pressure in some places. If a new round of economic growth cycle comes, these enterprises without technology, no market, and only production capacity will be resurrected.

7. In the final analysis, the fundamental reason for overcapacity is the profit effect leading to overinvestment, which is the repeated construction of people’s expectations for a better future. Short term results are obvious, but in the long run, it evolves into value destruction.