China’s production is in a tough spot, but it won’t collapse, and possibly not even change. The impact is unevenly spread, and Beijing is quite happy with it.
After the real estate sector, the auto sector, the largest industry in the country and the world, shows signs of an impending collapse. Meanwhile, the European Chamber of Commerce, which has traditionally been sympathetic to the Beijing government, warns of widespread industrial oversupply as the key economic issue.
Brands are fire-selling vehicles at half price, reports Reuters (see here). “Government policies that prioritize production targets over market demand have led to overinvestment by carmakers. The resulting glut of vehicles has created lose-lose transactions throughout the sales chain, and spawned a variety of unusual practices,” writes the agency.
The “European Business in China Position Paper 2025/2026” states that: “While consumption in China is actually growing, a key issue is that manufacturing output has increased even faster. Involution, expanding inventories, pressure on profit margins, decreasing asset utilization, and the push to export are all natural results of this mismatch.”
To fix the issue, factories should shut down, but that would cause urban unemployment to rise sharply. Currently, the official data reports an urban unemployment rate of 5.3%, which is slightly higher than forecasts. However, some economists believe the actual figures are much higher. Many workers who migrated to the cities in recent years have now returned to the countryside. Only local urban residents are entitled to city services. A rural resident can move to the city for work, but if they lose their job, it’s easier to go back to the countryside.
Furthermore, shutting down factories would influence prices, causing them to rise. With increasing domestic unemployment and higher prices, both internal and international consumption could be impacted, especially since Chinese exports often benefit from price advantages.
Export remains a primary source of growth. In the first half of 2025, China’s exports increased by 7.2% year-on-year to reach 13 trillion yuan (US$1.8 trillion), according to official data released in July 2025. This growth was driven by strong demand from Southeast Asia and other Belt and Road countries, with notable increases in exports of mechanical and electrical products, integrated circuits, and automobiles.
Trade surplus in the first half of the year was roughly $586 billion, setting a record high for that period and a 34% increase from the previous year, despite ongoing US tariff pressures and a decline in trade with the US. At the end of the year, it could be well over $1 trillion, an enormous amount that tilts global trade.
The stock market performance has also been excellent. It is on pace for its best year since 2020, with the MSCI China index rising about 28% in 2025 (in USD) – almost twice the growth of the global stock market. The Chinese stock market is not an accurate representation of the Chinese economy.
Therefore, tinkering with industrial production and prices could be tricky.
At the same time, China has a closed market and a non-fully convertible currency. This gives the government plenty of room for intervention to stabilize the economy, and it will prevent a national collapse.
However, total debt continues to accumulate. The budget deficit, as estimated by international organizations, greatly surpasses the growth rate, thereby increasing the total debt-to-GDP ratio. Fitch projected an 8.8% budget deficit for 2025 with an expected economic growth rate of 4.8%.
In this tough situation, Beijing might have little room to act.
The political mood in China has become quite positive. Chinese officials believe they are making progress in trade talks with the US, avoiding the harshest tariffs, and that their September 3 military parade has discouraged the US military from getting too close to China.
Beijing may feel that US President Donald Trump is causing a global political and economic upheaval, and by doing little, they think they are in the best position to benefit from it. The recent thaw with India, following a row between the US and India, could be proof of it.
