Some Western nations have been touting the so-called "overcapacity "problem of China in recent years, alleging that China's "excess capacity" in the new energy sector has disrupted and threatened the international market. Consequently, protectionist measures have been adopted against some Chinese products, such as electric vehicles.
The term overcapacity refers to a scenario in which production capacity of an industry exceeds market demand and expected levels, indicating a disequilibrium in the market's supply-demand relationship. However, it should be noted that demand is a highly volatile factor that is very susceptible to influence by macroeconomic fluctuations stemming from changes in investment and consumer behavior.
There have been numerous misconceptions surrounding the concept of overcapacity. In fact, overcapacity is often not the result of excessive supply but rather cyclically weak and insufficient demand. Consequently, insufficient demand usually necessitates macroeconomic adjustments — not just supply-side adjustments to reduce production capacity, but also demand-side policies aimed at expanding the market and aggregate demand.
For instance, market entities often anticipate demand for certain industries and products based on fundamental factors such as medium- to long-term income levels and consumer preferences. When these expectations of future market demand are considered, it becomes clear that industries in China like wind power, photovoltaics, EVs and...
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