In recent months European diplomats have intensified their complaints about Chinese industrial overcapacity, fearing that their markets will be flooded due to low domestic demand and US tariffs. Yet it is now President Xi Jinping who has signalled his discomfort about China’s price wars, reasoning that are harming the margins of domestic manufacturers.

Xi is not doing this to satisfy the demands of disgruntled Western trade partners, but because the race to the bottom in which Chinese companies are involved threatens to harm what he values most: his country’s long-term technological and industrial development.

Speaking at a high-level economic meeting of the Central Financial and Economic Affairs Commission this week, Xi called out “disorderly low-price competition”. He avoided referencing “overcapacity”, a term often used by foreign diplomats, but it’s still a striking shift in tone.

China, thanks to its unmatched industrial muscle and capacity to scale manufacturing, has been able to dominate global markets, flooding them with cheap products in key sectors such as electric vehicles, solar panels, or steel. But what is seen in the West as the main success of Beijing’s industrial policy may now backfire.

The problem isn’t that cheap products swamp overseas markets, angering trade partners already wary of China’s industrial dominance. It’s that this cut-throat competition increasingly holds Beijing’s own economy hostage. If selling at or below cost becomes the main competitive advantage of every company, there are fewer incentives to innovate, improve quality, and invest in advanced production.

Xi may have tolerated overcapacity until now because of the view that China needs to maintain its dominance of global supply chains, despite internal costs. But Beijing is seeing now that endless price wars are hurting its ability to climb the value chain.

Chinese companies which invest in high-quality technology, and which therefore are of value to the state, can suffer the most in a race to the bottom. While these organisations are best equipped to prevail in the long term, they will have to pay a high cost as lowering margins slow down their innovation capacity.

For instance, in the electric-vehicle sector Chinese start-ups proliferated often thanks to local subsidies. However, due to their elevated number, they are squeezing profits, forcing many firms to sell at a loss just to keep factories alive. Given that only 6% of car sales in Europe are Chinese EVs, and America’s market is closed to them, in this sector it is China rather than the West which is now most seriously impacted by overproduction.

What Xi’s words mean is that not every company deserves to survive. To end the current overcapacity, China would need to both boost domestic demand and put an end to the structural incentives, often in the form of local subsidies, that allow uncompetitive players to survive far longer than market forces would otherwise allow. But escaping this dynamic will take time. The incentives to grab market share with cheap products are difficult to ignore for any company, and local political interests will resist painful consolidations that could leave many Chinese without jobs.

While the West envies China’s scaling capabilities and manufacturing export dominance, Beijing’s economy has serious structural problems. It needs to boost domestic consumption and consolidate a more mature industrial ecosystem higher up the value chain. Beyond the headlines about trade wars, Xi’s discomfort with overcapacity shows that every major economy wrestles with problems of its own making.

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Miquel Vila is a political consultant specialising in international affairs. He is also the executive director of the Catalonia Global Institute.

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