China Has Too Much Productive Capacity. The World Should Be Asking a Different Question
A Response to Michael Froman’s “The Next Global Economic Crisis Could Be Made in China”
China's extraordinary productive capacity is now being described as a potential threat to the global economy. Michael Froman's widely discussed Foreign Affairs article warns that China may have produced so much that the world can no longer absorb it.
The warning deserves to be taken seriously. But it leaves a much more important question unanswered: How did productive capacity itself become a potential economic crisis?
The warning is serious.
China produces enormous quantities of electric vehicles, batteries, solar panels, steel, machinery and other manufactured goods. Its trade surplus reached almost $1.2 trillion in 2025. Its manufacturing capacity has reached a scale without historical precedent.
And now, according to a widely discussed Foreign Affairs article by Michael B. G. Froman, the world may be approaching the point at which it can no longer absorb China's output.
The argument is simple.
China has built too much capacity.
Domestic consumption is not sufficient to absorb it.
The world cannot continue absorbing the exports.
Protectionism will increase.
Chinese factories will lose markets.
Investment will fall.
Firms will fail.
Employment will suffer.
And the consequences could spread throughout the global economy.
There is considerable substance to this argument.
But there is a question beneath it that deserves much greater attention:
How did productive capacity itself become a potential economic crisis?
If the factories exist, the workers exist, the technology exists, the energy exists, the materials exist and the ability to produce exists, why should the inability to sell everything profitably make those resources an economic threat?
Perhaps the problem is not that China has too much productive capacity.
Perhaps the problem is that the economic system has too little capacity to put productive resources to work for human welfare.
China Built Something the World Said Was Difficult
Before asking what is wrong with China's industrial capacity, we should ask how China created it.
Within a few decades, China built:
- the world's largest manufacturing base;
- enormous industrial ecosystems;
- high-speed rail networks;
- ports and logistics systems;
- energy infrastructure;
- shipbuilding capacity;
- advanced supply chains;
- electric-vehicle and battery industries;
- solar manufacturing;
- technological and engineering capabilities on a continental scale.
The conventional explanations are familiar.
China had cheap labour.
China exported.
China saved.
China attracted foreign investment.
China benefited from globalisation.
All of these contributed.
But none adequately explains the sheer scale and speed of the transformation.
China treated productive capacity as something that could be deliberately built.
Public institutions, state-directed finance, infrastructure, industrial policy and long-duration investment were coordinated to create capability before immediate commercial profitability necessarily justified it.
China accumulated something more fundamental than financial wealth.
It accumulated productive power.
Factories.
Machines.
Ports.
Railways.
Power systems.
Supply chains.
Engineering knowledge.
Industrial skills.
Organisational capability.
And the ability to reproduce all of them at extraordinary scale.
That distinction matters.
Debt Does Not Make the Factories Disappear
Much of the criticism of China focuses on debt.
China has accumulated enormous financial liabilities. Local governments have financial problems. State-owned banks have extended large amounts of credit. Some investments have undoubtedly been poor.
All of that deserves examination.
But debt is a financial measure.
Productive capacity is a real economic reality.
If one country borrows to inflate property prices and another uses financial resources to build ports, railways, factories, power generation, transport systems and technological capabilities, their financial statements may both contain enormous liabilities.
The financial numbers alone cannot tell us what the economy has actually created.
Some Chinese investment will prove wasteful.
Some factories may never operate at economically sensible utilisation rates.
Some projects may have been built for political reasons rather than genuine need.
That does not turn the productive capacity that was created into an illusion.
The relevant question is not simply:
How much debt did China accumulate?
It is:
What real productive capability did China acquire, and what can that capability now do?
That is a much more meaningful economic question.
Overcapacity or Preparedness?
There is another possibility that is often missed.
What the West calls overcapacity may partly have been preparedness.
China may have understood earlier than many other countries that geopolitical openness would not last indefinitely.
It built industrial depth before:
- technology restrictions hardened;
- supply chains began fragmenting;
- strategic competition intensified;
- and access to foreign markets became less certain.
From that perspective, building capacity ahead of immediate demand was not necessarily irrational.
Industrial power depends on repetition, learning, coordination, logistics and scale.
You cannot build a complete industrial ecosystem overnight when a geopolitical crisis arrives.
China may therefore have considered it safer to possess more productive capability than immediately necessary than to discover later that it had become strategically dependent on others.
The West sees overcapacity.
China may see preparedness.
Both interpretations can contain some truth.
But Let Us Accept the Strongest Criticism
We should not romanticise China's industrial policy.
Some of its capacity may genuinely be excessive.
Demographic conditions have changed.
China's working-age population has peaked.
Its population has begun to decline.
The property boom has ended.
Some infrastructure needs have been substantially met.
Domestic demand for some manufactured products cannot grow indefinitely.
If China can produce 25 million electric vehicles while domestic demand is only around 12 million, it is reasonable to ask whether all that capacity is economically justified.
But even here, something important is being confused.
Commercial overcapacity is not the same thing as excessive real resources.
A factory may be unable to sell its entire output profitably.
That does not mean the factory, its machinery, its workers and its technological capability have no social value.
The distinction is fundamental.
What Does “Overcapacity” Actually Mean?
Suppose a country has the capacity to produce 100 units of something.
Its population currently purchases 60.
Foreign markets purchase another 20.
Twenty units of capacity therefore remain unused.
The conventional economic conclusion is:
There is 20 units of excess capacity.
But what has actually become excessive?
The factory?
The workers?
The machines?
The technology?
The materials?
Or merely the purchasing power available through the existing market structure?
These are not the same thing.
If the real resources are available, the question should not immediately become:
How do we destroy the excess capacity?
It should become:
What is the most useful way of deploying the resources that already exist?
That is a fundamentally different question.
The World Has a Strange Problem
Here is the paradox.
At one end of the world, countries are worried that China can produce too much.
At the other end, billions of people still lack adequate:
- housing;
- healthcare;
- education;
- transport;
- energy;
- sanitation;
- infrastructure;
- food security;
- environmental protection;
- and dignified economic opportunity.
The world therefore has, simultaneously:
enormous productive capacity
and
enormous unmet human needs.
How can both be true?
If the world genuinely lacked productive resources, the contradiction would be easy to understand.
But it doesn't.
There are people willing to work.
There are factories.
There are machines.
There are engineers.
There are materials.
There is technology.
There is land.
There is accumulated knowledge.
There is enormous productive capability.
Yet the economic system can still tell us:
There isn't enough demand.
That should make us stop.
Demand Is Not the Same as Need
A person may need a house without possessing the purchasing power to buy one.
A village may need a hospital without having the financial capacity to commission one.
A country may need renewable energy infrastructure without having the budgetary space its government believes it requires.
A worker may desperately need employment while an economy simultaneously has productive capacity that is not fully utilised.
The absence of purchasing power does not prove the absence of need.
A market measures effective demand. It does not measure human need.
That distinction becomes critical when an economy has substantial unused resources.
If productive resources exist but remain idle because people or governments cannot mobilise sufficient financial demand, then the financial system is determining whether real resources can be used.
That is precisely where we need to rethink the relationship between money and the real economy.
What China Has Not Yet Solved
China's extraordinary production story has another side.
China has demonstrated that a nation can mobilise resources at civilisational scale.
But its domestic consumption remains relatively weak.
Households save heavily.
People worry about healthcare, education, housing, employment and old age.
Social insecurity encourages precautionary saving.
So China has a remarkable paradox of its own:
extraordinary productive capacity alongside insufficient domestic consumption.
The answer cannot simply be to tell Chinese households to spend more.
Confidence does not come from propaganda.
People spend when they feel secure.
If essential aspects of life remain financially precarious, saving becomes rational.
Universal access to healthcare, education, elder care, food security, transport, housing support and other essential services can reduce that insecurity.
Then consumption becomes less dependent on individual financial resilience.
The objective is not merely to stimulate consumption.
It is to make the benefits of production available to society.
What Should Other Countries Do?
This is where the discussion becomes much more important than China.
Other countries should not respond to China's productive capacity simply by trying to find new foreign markets for their own production.
Nor should they respond by entering an endless race to produce more and sell more.
They should ask a much more fundamental question:
What real resources do we have that are not being fully used?
And behind that question lies an even more fundamental principle:
The objective of economic policy should be to maximise real wealth - not financial balances, not foreign-exchange reserves, and not the size of a trade surplus.
Real wealth is what people can actually use and enjoy: food, housing, healthcare, education, infrastructure, skills, productive capability, and the time and quality of life that these make possible.
Currency, foreign-exchange reserves and financial claims are nominal measures. They are not wealth in themselves.
At the aggregate level, the real-resource position can be expressed simply:
Real Wealth = Domestic Output + Imports − Exports
Domestic production adds to the real resources available to a country. Imports add to them. Exports are real goods and services given to the rest of the world.
The purpose of exports is therefore not to accumulate financial claims. It is to obtain imports.
As Warren Mosler has put it:
“The purpose of exports is to get imports.”
This changes the question completely.
A country does not become richer merely because it accumulates foreign-exchange reserves or because its exports exceed its imports. The relevant question is what happens to the real resources available to its people.
Where there is unemployment or underemployment, unused industrial capacity, available materials, technological capability and unmet social needs, the first task should be to deploy those resources.
Not necessarily to maximise exports.
Not necessarily to maximise GDP.
Not necessarily to maximise factory utilisation.
To maximise human welfare.
Build what people need.
Employ those who want to work.
Improve infrastructure.
Raise living standards.
Expand healthcare and education.
Improve housing.
Restore the environment.
Develop energy systems.
Strengthen communities.
Increase productive capability where genuine needs remain.
And where production has already reached a level at which further material production contributes little to welfare, there is no economic law requiring us to keep producing more simply because we can.
The purpose of productivity is not to make human beings work more. It is to make it possible for human beings to live better.
If a society has built enough productive capacity to meet its material needs, the dividend from further productivity need not always be another factory, another export market or another increase in GDP.
It can be time.
Time for family.
Time for community.
Time for culture.
Time for celebration.
Time simply to live.
For a fuller discussion of real wealth, exports, imports, exchange rates and foreign-exchange reserves, see: Free Trade Agreements, Exports, Exchange Value of Currency and its downward movement.
An Economy Is Not a Factory
This point is often forgotten.
The purpose of an economy is not to keep factories busy.
The purpose of an economy is not to maximise GDP.
The purpose of an economy is not to maximise exports.
The purpose of an economy is not even to maximise employment.
The purpose of economic activity is human welfare.
Employment is important because work provides income, dignity, participation, skills and purpose.
But if productivity allows society to meet its needs with less human labour, then the benefit of that productivity should not be defeated by inventing unnecessary work merely to preserve employment statistics.
That would be absurd.
The Future Should Not Be “Work, Work, Work”
This is perhaps the most important lesson hidden inside the overcapacity debate.
Suppose an economy becomes extraordinarily productive.
Suppose technology, machinery, organisation and knowledge allow the same amount of useful output to be produced with fewer hours of human labour.
What should happen?
Should society manufacture additional wants indefinitely simply to keep everyone working?
Or should part of the productivity gain become time?
A successful economy should eventually give people more:
leisure.
More time with family.
More time for children.
More time for community.
More time for art.
More time for learning.
More time for sport.
More time for celebration.
More time simply to live.
The objective cannot be:
Work more so that we can produce more so that we can consume more so that we can work more.
That is a circular economic treadmill.
The objective should be:
Produce what society genuinely needs, use our productive capacity fully where useful, increase productivity, and allow the resulting productivity dividend to become both higher living standards and more freedom from necessary work.
This Changes the Meaning of Full Employment
Full employment should not mean that every person must be kept continuously occupied in economically measurable work.
It should mean that anyone who wants meaningful and productive work should have the opportunity to participate.
As productivity rises, the amount of necessary work can fall.
That is not an economic failure.
It is an achievement.
The freed time can become part of the wealth of society.
A society that has enough productive capacity to meet its needs but still insists that everyone must work longer and harder simply to keep the economy growing has misunderstood the purpose of productivity.
And This Brings Us Back to China
China may indeed face a problem of excess commercial capacity in particular sectors.
It may need to restructure industries.
Some firms may need to disappear.
Some investments may prove to have been mistakes.
Some capacity may never be economically justified.
But the existence of excess commercial capacity does not establish that China has too many real resources.
Indeed, China's experience may be revealing something much more profound.
It has demonstrated that a nation can build productive capacity on a scale that conventional economic thinking once regarded as almost unimaginable.
Now the world is asking:
Who will buy everything China can produce?
Perhaps we should ask a more fundamental question:
Why does an economy need someone with sufficient purchasing power to buy everything it is capable of producing before that productive capability can improve human life?
The Real Constraint Is Not Money
This is where the Resource Standard takes the argument beyond the debate about China.
A sovereign government issuing its own currency is not operationally constrained in the same way as a household or business.
Its meaningful constraint is not whether it can obtain its own currency.
Its constraint is what the economy can actually provide.
If there are available workers, materials, technology, land, machinery and productive capacity, government spending can mobilise those resources.
If those resources are already fully employed, additional spending can compete for them and create inflation.
That is the real boundary.
Not an arbitrary financial number.
Not a debt-to-GDP ratio by itself.
Not a budget deficit by itself.
Not the fear that the government will “run out of money.”
The real question is:
What resources are available, and what are we using them for?
That is the question that should govern economic policy.
China's Lesson Is Not That Every Country Should Copy China
This is not an argument that every country should reproduce China's political or economic system.
Nor is it an argument that every Chinese investment was wise.
China's experience demonstrates something narrower and more important:
A nation can deliberately build enormous productive capacity when it treats productive capability as a national objective rather than leaving its development entirely to short-term private profitability.
That achievement deserves to be understood.
But China's next challenge is equally important.
Once productive capacity becomes abundant, what is it for?
If it exists only to produce more goods for increasingly difficult markets, the economy can become trapped in a perpetual race for demand.
If it is connected to the welfare of the population, the same productive capacity can become the foundation for a much higher quality of life.
The World Has a Choice
The world can respond to China's industrial capacity with:
tariffs,
protectionism,
trade wars,
currency disputes,
industrial subsidies,
and a race between nations to capture markets from one another.
Or it can ask the deeper question.
Why does the world have to fight over markets when billions of people still have unmet needs?
Why should productive capacity be considered dangerous simply because private purchasing power cannot absorb all of it?
Why should countries with unemployed people and unused resources be told that they cannot use them because they lack the financial means to do so?
And why should rising productivity produce a demand for ever more work rather than an opportunity for more freedom?
The Great Economic Opportunity Hidden in “Overcapacity”
Perhaps the greatest irony is this:
The world may be approaching a crisis not because humanity has too few resources, but because it has acquired extraordinary productive resources without developing an equally sophisticated system for deploying them for universal welfare.
China's so-called overcapacity therefore deserves neither blind celebration nor automatic condemnation.
It deserves to be understood.
Some of it may be waste.
Some may be strategic preparedness.
Some may be capacity built ahead of future demand.
Some may simply be commercially unviable production.
But the existence of unused productive capability itself should not frighten us.
It should make us ask what else that capability could accomplish.
The real tragedy would be to destroy productive capacity while people remain in need, simply because the financial system cannot connect the two.
The Question the World Should Be Asking
China has built an extraordinary productive machine.
The West now worries that the world cannot absorb what that machine can produce.
China worries about domestic consumption.
Other countries worry about Chinese competition.
Governments worry about trade deficits, debt, inflation and fiscal space.
But beneath all these debates lies a much simpler question:
What is an economy actually for?
If the answer is to make people richer in financial terms, the debate will continue forever.
If the answer is to maximise production, the world will eventually drown in its own output.
If the answer is to maximise employment, we will eventually invent unnecessary work simply to keep people working.
But if the answer is human welfare, everything changes.
Then we use the resources we have.
We employ everyone who wants meaningful work.
We produce what people genuinely need.
We expand productive capacity when genuine needs exceed existing capacity.
We improve living standards.
We increase productivity.
And when productivity frees us from necessary work, we accept that freedom as one of the greatest achievements of economic progress.
We use the additional time for family, community, learning, creativity, recreation, leisure and celebration.
That is not economic decline.
That is what economic progress is supposed to make possible.
China may have built too much of some things.
But perhaps the world has made a much greater mistake.
It has built an economic system that can see productive capacity as a problem while human need remains everywhere.
The question is no longer how much the world can produce.
The question is whether we have the courage to organise what we can produce around human beings rather than around the financial system that we created to serve them.
That is the question China has now forced the world to confront.
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