Fu Xiangsheng, Vice President of the China Petroleum and Chemical Industry Federation: “Overcapacity” cannot be summed up in a single phrase!

In recent times, corporate surveys, peer‑to‑peer exchanges, and forums with foreign‑invested enterprises have all focused on the issue of overcapacity. The key questions on everyone’s mind almost invariably center on whether overcapacity actually exists, how to prevent it, and how to address it. In fact, there are established criteria for determining overcapacity, yet assessing and concluding whether capacity is excessive remains a complex task. While it is relatively straightforward to judge whether a specific product suffers from overcapacity, reaching such a conclusion for an entire industry is considerably more challenging—especially in sectors that encompass tens of thousands, or even hundreds of thousands, of distinct products, where it is far from feasible to reduce the issue to a simple label of “overcapacity.” So, how should we determine whether overcapacity exists? How should we interpret this phenomenon? And what measures can be taken to prevent and resolve it?

Fu Xiangsheng, Vice President of the China Petroleum and Chemical Industry Federation, has shared several personal reflections on this topic, which we offer for the consideration of those who are following and pondering it, in the hope that they may provide you with some inspiration.

First, what is meant by overcapacity?

“Production capacity,” in its literal translation, refers to the ability to produce goods, while “overcapacity” means that the capacity to produce exceeds the capacity to consume. Seen in this light, one might readily interpret “overcapacity” as a situation where production capacity—the supply of goods—outstrips the market’s ability to absorb those goods. This is a straightforward, literal understanding; however, such an interpretation tends to be rather crude and simplistic, and it does not fully capture the realities of contemporary economic development. Moreover, it fails to reflect the true relationship between supply and demand in today’s society.

Second, how should we view overcapacity?

First, viewed from the broader context, a market economy is inherently an economy of surplus. Only in such an economy can the market’s regulatory function operate to its full potential; only then does competition have fertile ground; and only under these conditions can survival of the fittest prevail, creating both the necessity and the room for continuous improvement. Seen in this light, a reasonable degree of surplus lays the groundwork for high‑quality development and opens up space for optimization. Thus, in developing a market economy, a certain level of excess—both in products and in market supply—is a normal phenomenon, and there is no need for undue alarm.

Secondly, from a developmental perspective, an economy characterized by overcapacity is itself a product of development. In short, “without development, there can be no overcapacity.” Many of us still vividly recall the era of scarcity, when purchasing even the most basic goods required ration coupons: cloth coupons for clothing, oil coupons for cooking oil, and meat coupons for meat. Young couples wishing to buy a bicycle had no choice but to stand by helplessly if they lacked the necessary coupons. Thus, that period did not suffer from overcapacity, because it was a time of underdevelopment—a time of food and clothing shortages, and a historical journey from poverty and backwardness toward prosperity and strength. Consequently, today’s overcapacity is both a stage in the development process and its outcome; it reflects a transition from underdevelopment to development, and from unbalanced growth toward high‑quality development—perhaps an inevitable phase in this evolution. Achieving such a rapid shift from a shortage economy to one of overcapacity within such a short span is an accomplishment that has drawn worldwide attention.

More than a decade after the launch of reform and opening-up, our daily lives bid farewell to various rationing coupons; incomes steadily improved, and with the renminbi alone we could purchase the goods we needed and the consumer products we loved. No longer would tragic separations—tears streaming down faces—occur because of a single bicycle‑purchase ticket. Over forty years of reform and opening-up, social supply has grown immensely, and everyday necessities now abound. Yet at a time when people no longer fret over being unable to buy what they want, we are confronted instead with overcapacity in certain sectors. When everyone is no longer troubled by scarcity but overwhelmed by an abundance of choices, we must view today’s overcapacity objectively. This is the good news brought to the Chinese nation by the Party Central Committee’s reform and opening-up policy and its focus on economic development; it is the result of the Party’s ongoing deepening of reforms, of making development the top priority for governing the country and rejuvenating the nation in the new era, and of the Party’s efforts to promote high‑quality economic growth—good news for each of us living in this new era. It also reflects the institutional strengths of our country and our capacity to pool resources and accomplish great undertakings. Such a transformation—from extreme scarcity to an astonishingly rich and diverse supply—could scarcely be achieved anywhere else in such a short span of time. Therefore, as we face overcapacity in certain sectors, we must first recognize, with objectivity and rationality, that this is both a consequence and an achievement of development—an accomplishment that has drawn attention from both developing and developed nations and that will go down in the annals of human progress.

Therefore, we must approach and assess today’s overcapacity in an objective manner. Even if certain products already exhibit signs of overcapacity, this has not yet become a pressing issue. Entrepreneurs, industry peers, domestic and foreign enterprises, and the broader public are all concerned about the topic of overcapacity because they have observed early warning signs and manifestations in some sectors. Their focus is inherently precautionary, as they seek ways to avoid or prevent the emergence of overcapacity. In the present era—marked by high‑quality economic development—we have a responsibility to view overcapacity objectively, confront it squarely, and thoughtfully explore and rigorously study strategies for addressing it. This is precisely the mission entrusted to our generation. If we ignore or turn a blind eye to this issue today, in just a decade or so it could escalate into a problem that inflicts massive losses and waste; at worst, it might even jeopardize the realization of our goals to become a leading industrial and economic power.

Third, how do we determine whether overcapacity exists?

“Production capacity” refers to the ability to produce goods, while “overcapacity” occurs when actual production exceeds market demand. A simple benchmark for assessing overcapacity is the capacity utilization rate. This metric serves as a key indicator for analyzing and determining whether overcapacity exists, particularly in the manufacturing sector, where it directly impacts firms’ production costs. What is the “capacity utilization rate”? It is the ratio of actual output to installed capacity, calculated as: Actual Output / Design Capacity × 100%. For example, if a facility has a design capacity of 10 million tons of crude oil processed per year, and it processes 8.5 million tons in a given year, its capacity utilization rate is 85%. Similarly, if an electric‑vehicle production line has a design capacity of 500,000 vehicles per year and produces 450,000 vehicles in a year, its capacity utilization rate is 90%. The same principle applies to other products.

So, at what level of capacity utilization does overcapacity begin to emerge? Operational experience—both domestically and internationally—suggests that around 80% serves as a useful benchmark. Generally, a capacity utilization rate between 75% and 90% is considered reasonably balanced; if it exceeds 90%, market volatility could lead to supply shortages. Conversely, when utilization falls below 80%, it typically signals the onset of overcapacity. This provides a relatively straightforward reference point and decision‑making framework. Another approach involves comparing a product’s installed production capacity with actual market demand: if installed capacity has consistently lagged behind demand for several years, resulting in persistent supply shortages, there is no overcapacity. By contrast, if installed capacity far outstrips multi‑year market consumption, this points to excess capacity. A broader indicator worth considering is the ratio of installed capacity to global consumption. For certain products, installed capacity may already account for more than 60%, or even over 80%, of annual worldwide demand—signaling not merely domestic overcapacity. Moreover, if such imbalances persist amid international competition, firms may face heightened trade disputes.

Of course, simply concluding that a product suffers from overcapacity based on a single benchmark or indicator is bound to be overly simplistic and potentially biased. Analyzing and determining whether overcapacity exists is a complex task, as it can be localized or systemic, short‑term or long‑term, confined to a single product or pervasive across the board; it is intertwined with economic cycles yet also cyclical in nature, and in some cases arises because a particular product fails to meet downstream customer needs or because its downstream applications have not yet been fully developed. Assessing overcapacity for an individual product is relatively straightforward, whereas evaluating an entire industry is far more intricate and challenging. For industries with high product concentration—such as steel and coal—it is somewhat easier, since such sectors essentially resemble a single product. By contrast, for a highly complex industry characterized by a sophisticated product mix—particularly one with thousands of major products and tens of thousands, even hundreds of thousands, of sub‑categories—determining whether overall, aggregate overcapacity exists is understandably extremely difficult. This underscores the need to approach the analysis and judgment of overcapacity with pragmatism and objectivity, relying on rigorous, comprehensive analyses, thorough research, and scientifically sound assessments.

Fourth, the impact of overcapacity.

Under market‑economy conditions, a moderate degree of overcapacity fosters competition and the survival of the fittest, thereby promoting high‑quality economic development. However, severe overcapacity can adversely affect industries and the broader economy, leading to losses and waste in extreme cases. One direct consequence of serious overcapacity is that production exceeds market demand: at a mild level, newly built production facilities fail to operate at full capacity, reducing investment returns and falling short of expected yields; at a more severe level, oversupply drives product backlogs and rising inventories, tying up working capital, increasing financial costs, and eroding profitability. In even worse scenarios, firms engage in price wars, intensifying market involution and fostering destructive competition—undermining fair competition, disrupting market order, and potentially forcing plants to shut down or entire enterprises to go bankrupt, resulting in substantial losses.

Since the advent of capitalism—particularly during its primitive phase, before the rise of Keynesianism—economic crises and global depressions triggered by chaotic competition, coupled with the greed of capital and capitalists and severe overcapacity, have inflicted staggering losses, set economies back, and wrought profound harm and shock upon society and the general public. The lessons of these episodes are profoundly instructive. Less than a century ago, the Great Depression of 1929–1933 plunged the world into a catastrophic economic collapse, unleashing devastation of immense scale and leaving an extraordinarily far‑reaching legacy. At the time, agricultural capitalists destroyed vast quantities of so‑called “surplus” produce, even burning tons of wheat and corn as fuel and dumping copious amounts of milk into the Mississippi River—turning it into a “Milky Way”—rather than using these resources to provide relief to the tens of thousands of unemployed and homeless. In retrospect, the “overcapacity” generated under that primitive capitalist system was not genuine; it stemmed from the capitalists’ rapaciousness and their miserly wages—just three to four dollars per week—for workers. Child laborers fared still worse, toiling from five in the morning until eight at night for even lower pay. With such meager incomes, it was impossible to absorb the massive surge in output brought about by rapid industrialization; thus, the “oversupply” of that era was, in fact, a symptom of insufficient market purchasing power.

History is a mirror; we should draw profound lessons from it, issue early warnings, and explore ways to prevent and resolve overcapacity.

Fifth, how can excess production capacity be addressed?

Judging from the current situation, some products have experienced overcapacity following rapid development, while in industries characterized by complex product structures and a wide variety of offerings, “structural overcapacity”—that is, pronounced structural imbalances—has emerged. China’s economy remains at an important stage of development, a critical period as it transitions from a major economic power to an economic powerhouse, and also a pivotal phase in moving from middle-income to high-income status. In such a crucial stage and period, how can we simultaneously achieve high-quality economic growth and effectively prevent and resolve excess capacity? Perhaps addressing “three key relationships” is what we need to thoughtfully consider and rigorously examine.

First, it is essential to strike the right balance between “reasonable quantitative growth” and “effective qualitative improvement.” This reflects the CPC Central Committee’s call for high‑quality economic development. To prevent the emergence of new overcapacity during the development process, we must thoroughly understand and earnestly implement this directive from the CPC Central Committee and the Central Economic Work Conference. We need to move away from the traditional development paradigm that prioritized “quantitative expansion” and instead place “qualitative enhancement” at the forefront. This entails not only optimizing existing capacity but also ensuring that any new investment and incremental projects subordinate their “quantitative growth” to the overarching goal of “qualitative improvement.”

In the course of optimizing existing assets, it is essential to effectively implement this year’s upcoming “large-scale equipment upgrading and renovation” initiative, fully seize this new policy opportunity, and proactively adopt new technologies, processes, and equipment—particularly green, low‑carbon, and digital‑intelligent solutions—to enhance enterprise production and operations, modernize management practices, and accelerate transformation and upgrading. Furthermore, we must diligently enforce the industrial policies on innovation-driven development, green and low‑carbon initiatives, energy efficiency, and other areas that have been formulated by macro‑management authorities and already issued, thereby reducing material consumption, energy use, and emissions from commissioned production facilities and substantially improving their operational quality and intrinsic safety levels—achieving a qualitative leap.

New projects must strictly comply with existing industrial policies on “capacity replacement” or “reduction‑based replacement,” while also comprehensively factoring in energy efficiency, water‑use efficiency, carbon emissions, and ecological‑environmental requirements. By rigorously and scientifically implementing these policies and tightly controlling the approval process for new projects, we can ensure that “reasonable quantitative growth” unequivocally supports “effective qualitative improvement.”

Second, it is essential to strike the right balance between developing the domestic market and expanding into international markets. The domestic and international markets are mutually interdependent, mutually supportive, and mutually reinforcing. Although in recent years international competition has grown increasingly fierce, the economic environment has become ever more complex, and protectionism has resurged amid calls for “decoupling” and “supply chain disruption,” the trend toward globalization remains irreversible, and international cooperation continues to be the dominant paradigm.

The 20th National Congress of the Communist Party of China reaffirmed that China upholds its fundamental national policy of opening up to the outside world and adheres to an open strategy of mutual benefit and win-win cooperation, continuously creating new opportunities for the world through China’s new development and jointly fostering new drivers of global growth. General Secretary Xi Jinping has also repeatedly emphasized: “We deeply recognize that humanity is a community with a shared future, in which we are interdependent. When the world prospers, China will prosper; when China prospers, the world will be even better.” At this stage of development, in order to prevent and resolve overcapacity, we must ground ourselves in the unified domestic market, orient ourselves toward global market demand, and, on the basis of sound and rational planning, strategically design and deploy industrial chains, product chains, and innovation chains, while striking a proper balance between expanding both domestic and international markets.

In the domestic market, the primary focus is on deepening supply-side structural reform, addressing the mismatch between upstream products and downstream demand, and, in particular, enhancing the quality and stability of existing products through innovation, bolstering the market supply capacity of high-end products via innovation, and creating new market demand through innovative approaches.

Expanding into international markets requires both deepening engagement in the Belt and Road Initiative and RCEP regions, as well as embracing comprehensive openness and international cooperation, so that China’s production capacity, Chinese manufacturing, and Chinese innovation can better serve consumers. To prevent and resolve overcapacity, it is essential to simultaneously strengthen both domestic and international market development.

Third, it is essential to manage the relationship between government and the market effectively. To prevent and resolve overcapacity, enterprises should abandon the traditional development model that prioritized “scale at all costs” and equated size with strength—relying on heavy investment and sheer expansion—and instead embrace a new development philosophy and set of requirements suited to the current era and stage. Their primary objectives should be to strengthen and optimize their core competencies. Moreover, companies must move away from the conventional approach of merely “adding” without “subtracting,” pursuing quantitative growth at the expense of quality. On the basis of rigorous analysis of their core businesses and strategic positioning, they should accelerate the building of world-class enterprises through a balanced mix of growth strategies—addition, subtraction, multiplication, and division—thereby laying a solid foundation for enduring success over the long term. This constitutes the cornerstone for preventing and addressing overcapacity. Of course, the relationship between government and the market must also be properly managed: the government should both guide a shift in development thinking through performance‑based evaluation systems and employ industrial policies to curb the expansion of inefficient and ineffective capacity, expedite the phasing out of outdated production facilities, and impose scientifically calibrated limits on the addition of low‑level capacity. At the same time, it should adopt a holistic planning approach, set appropriate scale targets, and establish comprehensive, science‑based benchmarks for energy efficiency, water efficiency, carbon emissions, and other key indicators, thereby ensuring prudent control over the proliferation of substandard capacity.

If government macro‑regulation is indispensable, then establishing a market‑based adjustment mechanism is equally important and pivotal. In the course of industrialization and economic development, developed countries have relied primarily on market forces to manage fluctuations in production capacity. The demand for any new product follows a trajectory—starting small and gradually expanding—while corresponding production capacity grows step by step in tandem. A balance emerges between capacity and market demand, with the pace of capacity expansion ultimately determined by price. When capacity falls short and supply cannot meet demand, prices rise, incentivizing firms to invest and expand output; conversely, when excess capacity leads to oversupply, prices decline, reducing firms’ profits and the rate of return on investment, thereby weakening their incentive to add new capacity. At that point, a new equilibrium is established among capacity (supply), product prices, and consumption (demand). Should new market demand emerge or novel applications be developed, rising price signals once again spur firms to expand capacity, re‑establishing a new equilibrium. The reverse also holds: if capacity expands faster than the growth in market consumption, a situation of oversupply arises, driving prices lower. In more severe cases, serious overcapacity can trigger sharp price declines, prompting older facilities—those commissioned earlier, employing outdated technologies, operating with lax management, or facing higher costs due to inferior raw materials or logistics—to shut down or even exit the market. At this juncture, the price mechanism once again takes effect, restoring a new balance among capacity, product prices, and consumption levels.

During its rapid industrialization, the United States addressed overcapacity primarily through market mechanisms, with enterprises playing the central role—namely, by relying on mergers and reorganizations among firms. For example, steel magnate Andrew Carnegie acquired a steel mill and dispatched a trusted lieutenant to serve as its new plant manager. Before departing, the manager asked, “What do you expect me to do once I’m there?” Carnegie replied earnestly, “Your primary mission in taking charge of this plant is to shut it down as quickly as possible.” This may sound simplistic or even harsh—and perhaps impractical elsewhere—but at the time, it was indeed one of the industry’s most effective strategies for alleviating overcapacity and curbing disorderly competition. Another well-known figure, oil tycoon John D. Rockefeller, likewise built his oil empire and achieved monopoly over the U.S. refining sector through extensive mergers and reorganizations. However, Rockefeller’s oil trust was later dismantled under the nation’s antitrust laws, giving rise to the global “Seven Sisters” configuration of the oil industry. In this process, too, a substantial amount of inefficient, unproductive, and outdated capacity was eliminated.

Some historical experiences and lessons can offer us valuable insights, while others serve as useful models for emulation. Since the beginning of the new century, multinational corporations have ceased relying on large-scale greenfield investments and capacity expansions to grow stronger; instead, they have focused primarily on their core industries, intensifying mergers and restructurings within their sectors to consolidate their global market positions and secure substantial profits—practices that are well worth our consideration. Of course, we cannot simply copy them wholesale. In China, preventing and resolving overcapacity requires both robust government macro‑regulation and effective market‑based mechanisms; we must ground our efforts in national conditions, conduct thorough analyses tailored to different industries and products, and, as our economy transitions from size to strength and as we strive to ensure high‑quality development in the new stage, formulate fresh ideas and concrete measures to address overcapacity. Only then can we ensure the smooth achievement of our goals for a new type of industrialization and provide solid, powerful support for advancing Chinese‑style modernization.

The above are some insights and reflections drawn from recent corporate surveys and exchanges with foreign‑invested enterprises. I have briefly organized them, though they are by no means exhaustive—there may well be omissions or oversights. My hope is that this piece will spark dialogue and shared learning among readers, fostering mutual inspiration as we collectively ponder and explore strategies to prevent and resolve overcapacity, thereby making a tangible contribution to the great rejuvenation of the Chinese nation.

Source: China Chemical Industry News