There has been no shortage of complaints about Chinese overcapacity in recent years. Beijing’s commitment to driving exports and widening its trade surplus, by any means necessary, has undermined the manufacturing aspirations of advanced economies such as the United States and those in Europe, as well as developing countries in Africa, Asia, and Latin America. There is more of a global consensus about the nature of the challenge than ever before, but it has had little effect on Chinese policy.

Now, the problem is morphing into a qualitatively new and more dangerous one: the world’s ability to absorb Chinese overcapacity is approaching a breaking point. And if that breaking point comes, the consequence could be a global economic crisis at a time when governments are particularly ill equipped to manage the fallout.

Over the past two decades, China has established the largest trade surplus in recorded history. In 2025, it reached nearly $1.2 trillion, growing at three times the rate of global goods trade. This paradigm has been strategically beneficial for China and disinflationary for the rest of the world in the short run, but it is politically and structurally unsustainable—creating an increasing and underappreciated risk to the entire global economy.

China’s remarkable path of economic development over the last several decades has been made possible by a benign international environment in which other countries were eager to accept low-cost manufactured goods in exchange for efficient supply chains and consumer welfare. But that international environment has turned toxic. The political appetite for accepting the deindustrialization and critical dependencies that come with the flood of Chinese imports is finite and shrinking. As these trends continue, protectionism is likely to rise, cutting off Chinese manufacturers’ market access and thereby short-circuiting Beijing’s strategy, introduced in 2020, of “dual circulation,” which promotes both domestic economic self-sufficiency and continued engagement in international markets.

But the problem goes well beyond political backlash. It is a problem of arithmetic. When the Chinese economy was substantially smaller, a strategy based on driving export growth at two or three times the rate of overall global economic growth was possible because there was sufficient global demand to absorb its exports. Today, however, China has a much larger economy and cannot continue on this trajectory without eventually running out of customers. Put simply, Beijing has outgrown its economic model.

When the Chinese export machine stalls, the reckoning will be most painful for China. But a material slowdown in its economy would send shock waves around the world, especially among China’s major trading partners, not only in the Asia Pacific but also in countries elsewhere whose economies have become intertwined with China’s. The United States would not be immune to the shock, but it would be the only actor with the economic and institutional capacity to stabilize the global economy.

The surest way to avoid this costly chain of events is a preemptive and gradual rebalancing of the Chinese economy. This has long been China’s best path toward more sustainable growth, and a route the United States has advocated for years. But whereas in decades past it was a smart choice, now it is a necessity.

ABSOLUTE DISADVANTAGE

China now accounts for roughly 30 percent of global industrial production, and by 2030, it is expected to reach 45 percent, according to a 2024 UN report. With the exception of the U.S. economy immediately after World War II, there is no historical precedent for such a concentration of industrial power. Measured as a share of global GDP, China’s current manufactured goods surplus is greater than the combined surpluses of Germany and Japan at any point during the 1980s.

This manufacturing surplus reflects a concerted policy choice. The Organization for Economic Cooperation and Development has estimated that 60 percent of China’s gains in global manufacturing market share have been driven by government subsidies. Perhaps the most significant, if implicit, subsidy is Chinese manufacturing firms’ access to Beijing’s state-directed financial system, which channels vast credit to prioritized sectors, enabling Chinese firms to expand without the same concern for profit and return as their international peers. The result is a self-defeating race to the bottom, in which firms cut prices below cost, accept razor-thin or negative margins, and continue building to chase greater market share. Nearly 30 percent of Chinese industrial firms operate at a loss, up from 20 percent before the COVID-19 pandemic. In sectors with the fastest investment growth—largely those prioritized under Chinese leader Xi Jinping’s “Made in China 2025” initiative, which seeks to foster Chinese self-sufficiency in advanced industries—that number is as high as 34 percent. Rather than allowing failing firms to exit, local governments prop up unprofitable companies to preserve employment and tax revenue, and state-owned banks roll over debt for insolvent borrowers. This system, in addition to a persistently undervalued renminbi that makes exports cheap, allows Chinese firms to charge up to 30 percent less than their peers based elsewhere.

These price wars and overcapacity have negative effects not only abroad but also at home. The Chinese word for this phenomenon is neijuan, translated as “involution,” a term used to refer to excessive competition that pushes Chinese companies to the brink for ever-diminishing returns. Firms invest more to produce more to export more at lower or negative margins, subsidized by local governments whose own fiscal health depends on the factories’ staying open. The result is an industrial machine that cannot stop and cannot slow down—but that, owing to the limits of demand, cannot keep going.

China’s trade surplus could, in effect, collapse on itself.

A crisis is not inevitable. China’s economy is resilient, and at least on paper, its leadership has signaled a recognition of the problem and an interest in taking steps to address it. The Chinese Communist Party adopted an anti-involution campaign in 2025, and its 15th Five-Year Plan, for 2026 to 2030, promotes consumption, particularly in rural areas. The CCP has also taken modest steps to strengthen its social safety net, with the goal of reducing the incentive for households to save instead of spend.

But China’s leadership remains unwilling to make the most important change: fundamentally reorienting the country’s growth strategy toward a more sustainable model. Beijing has, in general, continued to suppress domestic consumption, with the goal of maximizing industrial output in strategic and low-value sectors alike. The result is what the economist Yasheng Huang calls an “absolute advantage” economy: a country that competes simultaneously with the United States when it comes to artificial intelligence, electric vehicles, and electronics, and with the poorest nations in Africa when it comes to the manufacture of textiles, apparel, and household baubles. This defies any historical precedent, not to mention the basic economic logic of comparative advantage that most other countries follow. Even governments that pursued mercantilist development strategies, such as those in South Korea and Taiwan, relinquished low-value-added manufacturing as domestic wages rose.

Beijing is reluctant to change course because its export-led growth model is both an economic grand strategy and a political project. Dual........

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