Abstract: Recently, a popular viewpoint among U.S. officials regarding Chinese manufacturing is that there has been excessive investment in the Chinese manufacturing sector, leading to widespread "overcapacity." We first outline three basic facts: (1) Manufacturing fixed asset investment does not fully translate into production capacity; (2) There is no clear correlation between the growth rate of capacity and overcapacity; (3) The growth rate of capacity and the increase in export share are not directly related. Therefore, it is difficult to find direct evidence in the data to support the U.S. narrative.
We further decompose China's manufacturing investment at the industry level and find that although the growth rate of fixed asset investment in China's manufacturing sector is relatively fast, the growth rates of fixed asset investment in most industries are not high, and capacity expansion is not significant. The substantial increase in manufacturing investment is driven by a few industries, primarily the "New Three" sectors, which only account for a small part of the manufacturing sector. Therefore, using the performance of the "New Three" industries to suggest that there is excessive investment and overcapacity in China's entire manufacturing sector is a misleading generalization.
We also empirically analyze the investment behavior and cash flow situation of these industries, concluding that the investment behavior in most manufacturing industries has begun to respond to cash flow performance, indicating that market forces are at play. Finally, based on the above research conclusions, we propose three policy insights.
