Candid comments at the 19th May G7 finance ministers’ meet and the immediate angry response of China about the deleterious effect of China’s overcapacity and dumping products at ridiculously low prices have once again drawn world attention to this issue. The Chinese state’s role in encouraging the creation of surplus capacity to sustain its export-dependent economy is now finally drawing serious attention from advanced economies as well as substantive action to protect their manufacturing base and employment opportunities from Chinese economic depredation.

There are some eternal cause-and-effect relations in any economy; one of those is that in the long run, consumption centres expect investment; countries would like their domestic consumption to be a source of employment too to prevent US-like debt-based consumption; that is one reason imports are taxed and exports are encouraged. Rich countries, which were obviously large consumption centres, however, seeking lower-wage locations, invested first in Japan and then in China, shifting employment opportunities and wealth to those countries. They have been paying the price for this greed in terms of loss of industrial base, loss of employment and unwitting transfer of technology that was developed over decades with huge investment.

It was not an unmixed blessing for the producing countries either; production involved pollution and wages had to be kept low to remain competitive. Democratic Japan let the wages rise in response to prosperity-driven demand and lost its competitive edge. The Chinese market being state-controlled, wages could be kept low, resulting in the world’s production shifting there. China, however, paid a price; it has suffered perennial low domestic consumption and export dependence.

State-support in China has contributed to the overcapacity situation. The Chinese have been producing a lot but consuming a smaller part of it while dumping the rest on the world. This is clear from the Chinese savings rate which has hovered between 45 to 50 percent of its GDP during the past 20 years. China’s GDP represents 18 percent of the global figure but its savings comprise 28 percent of global savings. China’s share in global manufacturing is more than 30 percent but its share in global household consumption is below 13 percent, with the huge surplus in manufacturing capacity dedicated to exports.

A study by the Centre for Strategic and International Studies found that China spends roughly 5 percent of its GDP on industrial subsidies, the total amount representing 10 times the industrial subsidies of the US, Brazil, Germany and Japan taken together. All this data shows that the situation where China produces more than the global demand and then resorts to dumping is not incidental to its economic growth but a geoeconomic strategy to destroy the industrial base in the rest of the world. The problem is compounded by the lack of transparency in the Communist state; yet, such studies do indicate that since 2000, more than $1.5 trillion has been pumped in by the Chinese state in equity investments alone in industries that the Party considers important. Simultaneously, overcapacities created with government help lead to excessive competition and ever-falling prices; the unavoidable next step is compromises in quality.

Faced with dumping, the importing countries have started to look for ways to reduce dependence on China and to diversify their sources. Everybody realises that the Chinese overcapacities cannot be wished away; they cannot be expected to blow up their factories, particularly when there is high youth unemployment. Yet, the frustration of the importing countries is apparent in the reported statement of Jens Eskelund, president of the EU Chamber of Commerce in China at a panel discussion, “EU-China trade relations, partnership or sinking ship?” He blurted, “It is neither a sinking ship nor a partnership – it’s a 400-metre-long giant container ship loaded with 24,000 containers going to Europe and coming back almost empty.”

At the G7 finance ministers’ meeting in Paris on 19th May, the US Treasury Secretary talked of his prescient warnings that a flood of Chinese exports would damage European economies. Japan also blamed China for the trade imbalance and added that there is broad agreement about China being unwilling to correct it.

China reacted strongly to these sentiments on the same day with an article in the Party mouthpiece - Global Times. It blamed the importing countries for their own “weak industrial competitiveness, insufficient investment, and an imbalanced consumption structure” and pointed to the American “excessive consumption and large deficits” and to European “underinvestment and weak industrial competitiveness.” For its domestic situation, China admits neijuan or involution, the over-competition that leads to excess capacity. When it came to foreign trade, however, the article flatly said, “The ‘China overcapacity’ does not exist and should not be used as a pretext for political manipulation.”

Neither side will change; China has tried to increase domestic consumption with repeated stimulus packages without success. The West will not do anything to reduce its high consumption. The only solution, from the Western point of view, is to increase investment. China has a lot to spare and the high consumption in the West is providing the gravitational pull.

The world is witnessing a never-before boom in Chinese investment in the West; in 2025, there was an 18 percent increase over the previous year. In the EU and UK, the increase was spectacular; a whopping 67 percent, driven by mergers and acquisitions that witnessed 89 percent growth. FDI in China has been falling continuously with a big drop of 24.7 percent in 2024 followed by a fall of 9.5 percent in 2025 and of 7.3 percent in Q1 this year.

It may be argued that Chinese investments may not be the silver bullet for the EU’s Chinese-surplus-capacity problem. China’s foreign investments often result in an increase in Chinese exports of intermediate goods. Moreover, large investments abroad may weaken the Renminbi and boost Chinese exports. Lastly, it leaves the Chinese overcapacity untouched and the Chinese may be tempted to dump at an even lower price.

These doubts may not be well-founded. The increased imports of intermediate goods cannot match the import value of finished goods, value-addition making the difference. The possibility of the Chinese currency weakening proportionately is also remote because, unlike the West, the value of the Renminbi is not fully determined by the market, as the Bank of China oversees a “managed floating” exchange rate. As for the surplus capacity in China remaining intact and resulting in increased dumping, we are witnessing increased permanent closure of production units in China both due to lack of overseas demand as well as shifting of production to other countries.

An unexpected spin-off for the US could be that the fact of China getting more heavily invested in the West would work at cross-purposes with its efforts for de-dollarisation. These efforts, as it is, are not seeing much success particularly when 84 percent of China’s external debt in foreign currencies continues to be in dollars.

China’s foreign investment through official channels is only part of the story; senior Party leaders and bureaucrats have been increasingly transferring their assets abroad because of Xi Jinping’s penchant for purges even at the highest levels of the Party and the military and also because of economic uncertainties. In 2023, 13,800 high-net-worth individuals had left the country, a 28 percent increase over the previous year; the illegal annual outflow of wealth is estimated to be up to $4 trillion. While it is true that some of this wealth is used to strengthen Chinese influence abroad, a large part of it is invested in other countries but remains outside the official FDI data.

The spurt in Chinese foreign investments, whether made legally or otherwise, is following the gravitational pull of consumption, prosperity and financial security and is likely to have the unintended effect of reducing China’s trade balance with the West in the coming years. / DAILY WORLD /

(R N prasher is a former IAS officer. The views expressed are his personal.)