China Is Fighting Overcapacity for Its Own Domestic Reasons

In the summer of Davos, Chinese Prime Minister Lee Qiang rejected Western allegations that China is immersing the world with overpowered supplies, preferably China is not “sufficiently stupid” to support exports. This may be true – but even smart Chinese economic advisers scratch their heads in the country’s intentions. Chinese leadership is fighting a battle against excessive ability, but as part of a local account, not to pressure trade.

China is a huge country, and for all party’s speech, sometimes, there was sometimes a country, especially economically. On July 30, one day after the conclusion of the Chinese negotiators of their talks with their counterparts in the United States in Sweden, the Chinese Political Bureau reaffirmed that the campaign that unites its national market will be a key to improving discipline in the market and reviving it in “unorganized competition”. During the sofa in party language, the message directly refers to the dynamics that produce the results that reject international trade partners. Local governments are competing to support the same industries, and companies are fighting each other in a spiral of price wars and excessive investment.

Chinese officials and scientists frame this problem through a concept that was seized that had taken its own life: NiganOr “engagement”. Originally, a social term used to describe the recession in agricultural societies despite the high inputs of employment, Niguan has become viral in China’s public discourse in 2020, where young people use its frustration through academic competition and the place in the workplace that gives little bonuses. Recently, this term has been adopted by officials and government media to describe economic behaviors – and confirms low prices, and the same sectors with excessive ability, and the race to the bottom in seeking to analyze the returns.

The central political system in China and the unified legal framework should make, in theory, integration from top to bottom not only possible but relatively clear. In practice, things are very different. Beijing is controlled by a relatively small central bureaucracy, and the extensive discretionary power of provinces is delegated to economic planning, implementation and organization. With the continued concentration of performance standards and functional prospects on local GDP, officials became actual competitors, as they directed resources to interrelated industrial initiatives and set up commercial barriers of the local production shield from external integration.

Economic losses for both are real and important. The inclined rules often tend to a stadium towards companies with local communications, which inhibits the expansion of the regional and corrosion efficiency. A recent study found that local companies are approximately 40 percent more vulnerable to winning government purchasing contracts compared to non -local competitors, even when the latter provides great value.

Another analysis from Beijing University estimated that crossing regional borders can impose commercial frictions equivalent to approximately 20 percent definitions. Scientists have noted that the elimination of such barriers can raise the gross domestic product of China by up to 2.3 percent, or nearly half of the country’s growth rate in 2024.

Chinese President Xi Jinping has repeatedly threw the unified market as an essential matter for progressing in the 2020 “double trading” strategy, which seeks to enhance internal blood circulation – the movement of goods and technology – as a buffer against the global supply chain disorder.

However, concrete progress is still out of reach. Since the launch of a national campaign in 2022 to reduce local protectionism, market organizers have discovered an increasing number of cases every year in which local governments prefer their hometown companies through discriminatory purchasing bases, repeated inspections, unprecedented support, and other obstacles that prevent entry. In May, the higher market organizer acknowledged that although enforcement is enforced, local protectionism is still continuing and continues to re -invention in new forms.

The aspirations of reform in Beijing collide with the local political and financial incentives that have formed the political economy of China long before the market reform in the 1980s. In the Mo era mobilization campaigns like the Great Jump forward, the output targets are often replaced by economic reality. DENG Xiaoping decentralization increased it is necessary by launching fierce competition between local governments to attract investment and expand production. Over time, an implicit social contract appeared: local leaders were enabled to develop their economies by almost any means, as long as they maintain stability and avoid political red lines.

The reformers have accidentally shipped the local, which now frustrates national integration. The regional authorities, and the municipal governments, are not only organized but also investors, real estate owners and their economies. For decades, they made great power, land allocation, project approvals to care for local heroes and stimulate growth in the short term, which are activities that are not only tolerated but are often celebrated. With measurable measures such as GDP growth, job creation, and local revenues that are still paying promotions, officials have every incentive to guard the grass.

This extremist structure has produced incentives a generation of adult officials in chasing a short -term return that can be quantitative. It has pushed the economic miracle in China and took over the state with a tremendous mobilization capacity. But he left the system inappropriate for more complex and long -term challenges.

When Beijing calls for a transformation, whether it is a curb of environmental damage, curbing in excessive amount, relaxing the abundance of property, or unifying the markets, local officials often knock, and think that political returns rarely outweigh the risks. A former municipality also admitted to one of the authors, provided that his identity was not disclosed:[These calls] You may be in the long run, but anyone actually pays them will not be present to see the benefits. He sows trees for someone else’s shades, and he will just fool. “Without constant pressure from top to bottom, the system is struggling for the axis even when the logical basis is clear.

Beijing has long realized these problems. During the era of the former president, Jinto, efforts to integrate the “Green GDP” measures were made in staff assessments to balance the growth with sustainability. Xi also called for the “gross domestic product only” assessments, and broader standards that include environmental and social governance. However, studies indicate that economic growth is still the dominant determinant of promotions, a testimony to both institutional stagnation and political difficulty of dismantling a model, until recently, has provided growth in the main headlines that can match a few countries.

This phenomenon owes a lot of informal incentives baked in the political culture of China. For decades, promotions not only stop the growth goals, but to move in care networks where “promotion fees” and quarterly loyalties concern performance. Heavy business schedules generate rents and vision and Guanxi Officials are pushing up, rarely coinciding with clean reforms or environmental reforms.

In addition to the challenge is the financial distress that suffers from many local governments. The decrease in land sales and the burdens of escalating debt, as well as the heavy costs of the long years, made the local authorities increasingly desperate for revenues, and often protrudes on non -local companies through protective tactics.

Some issues arise at the top. Political documents are often highly vague, which provides flexibility for regional financial capabilities and widely changing economic structures. This leaves a wide latitude for local interpretation, but creates a set of unexplored requirements – from tax incentives to product certificates and environmental standards – with a little transparency or accountability.

No volume of political documents can solve the root problem if the structure of the basic incentives remains without prejudice. What is required is a solid institutional transformation that corresponds to local incentives with national goals. In China’s mixture of vertical power and horizontal independence, this will require a strong national organizer not only the responsibilities of censorship but real power in separation and enforcement.

Such a body is already present in the name: the state management to organize the market (SAMR), which was created in 2018. from the beginning, Samr has been granted a comprehensive portfolio, from reaching the market and combating monopoly to quality inspection and price supervision. In 2024, the central government has developed a newly reinforced fair competition for reviewing the mechanism of a fair competition, with its skills while examining the local policies of the items that spread the market, which is a basic column for the schedule of the unified national market business.

However, Samir’s ability to curb local governments is still limited. Recent estimates indicate that the number of employees responsible for reviewing fair competition and anti -monopoly enforcement is less than 100. Its tools – that is, policy coordination, guidance, and catalyst – puts the legal force binding to overcome firm interests. Since they are in parallel with local governments instead of above, they should rely on local offices or negotiate with other agencies, leaving without the authority to overcome established growth mindset.

Other countries have shown that the authorized national competition authorities can overcome fragmented ruling. One of the useful examples is the General Directorate of the European Union for Competition, which has the authority to investigate and punish member states for discriminatory practices or illegal government assistance. Over time, measures were taken not only against multinationals such as Google and Apple but also against strong governments such as Ireland and Italy.

Building such an institution in China will not be fast or easy. The competition system appeared in the European Union only after decades of negotiation between sovereign countries. Even in a uniform condition like China, re -calibration of the balance between the center and the location – especially when local incentives still prefer to grow above all – will meet the resistance. But without this step, Beijing risks the survival of those trapped in a cycle where reform depends on restraint for officials whose incentives indicate the opposite. The strong national organizer based on rules is not a magic country, but it is a basic starting point.

Implementation alone, however, is not enough. Reform must also be enhanced by positive incentives. One way forward is to link more central financial transfers to cooperation through provinces and organizational compliance. Police transfers barely novel. In the United States, federal funds are often considered the state’s compliance with national goals, from protecting the environment to educational standards. Beijing has already spent large transfer payments. In 2024, transport operations from a centers to the local 10 trillion yuan, or nearly half of the local financial revenues, exceeded. However, these funds are mainly designed to achieve equality of financial capacity or support for allocated tasks such as poverty reduction, not to reward organizational performance or cooperation through provinces.

Merging the targets of market unification into transport formulas requires clearer standards and political sensitive decisions on allocation, which can prefer the richer areas or more than reformist thinking at anotherwhere. But the idea is not applicable. The Ministry of Finance has experienced performance -based transportation in sectors such as environmental governance and rural health care.

These models can be expanded. Provinces that dismantle market barriers, compliance with coordination audits, or participate in judicial platforms via provinces, may receive additional money. To make such a trusted system, Beijing will need to invest in better data, clearer rules, and an institutional framework that makes compliance measurable and politically safe.

The goal is not to get rid of the local discretionary authority completely, but directing it towards the results that provide national integration. A unified market can not be truly built by FIAT alone. It should come out of a system in which the bonus of cooperation is bonus, punishing arbitrary, and companies can rely on rules instead of relationships to work across the border.