Author: Lizzi C. Lee (Asia Society Policy Institute)
Source: NZZ – Guest Commentary
Publication Date: 11.12.2025
Reading Time: approx. 5 minutes
Executive Summary
China's economic strength – visible in electric vehicles under $10,000 and 80 percent of the global solar technology supply chain – is the symptom of a systemic problem of deeper nature: perverse incentives in the tax system, party career ladders, and bank financing promote overcapacity rather than innovation. Europe and America see the "flood of goods" as a structural threat, but the root does not lie in subsidies, but in institutional incentives that prioritize speed over profitability. Without institutional restructuring, China faces stagnation rather than rise.
Critical Guiding Questions (liberal-journalistic)
Freedom & Entrepreneurship: How much does China's state-dominated banking system suppress private innovation while artificially keeping unprofitable state projects alive?
Responsibility: Who bears the burden of overproduction – local officials under pressure to generate growth, or the central system that created these incentives?
Transparency: Why do Chinese banks report loss-making companies as "solvent" instead of allowing market clearing?
Innovation vs. Imitation: Can China transition from copying to innovating without consistent enforcement of intellectual property?
Global Fairness: Is it justified for the West to block Chinese "discounted exports" when the problem is systemic rather than merely protectionist?
Scenario Analysis: Future Perspectives
| Time Horizon | Expected Development |
|---|---|
| Short-term (1–2 years) | Continued aggressive exports to utilize capacity; local governments support unprofitable firms due to tax revenue; Western tariffs escalate. |
| Medium-term (5 years) | Either Beijing begins institutional reforms (tax system, competition enforcement) – or profit weakness, unemployment, and domestic demand stagnation intensify. |
| Long-term (10+ years) | Scenario A (Reform): China pivots to innovation economy, reduces overcapacity, stabilizes globally. Scenario B (Stagnation): China's model stagnates like Japan in the 1990s; geopolitical tensions increase. |
Main Summary
Core Topic & Context
China's "overproduction" is not the result of excessive subsidies or weak domestic demand – these explanations are outdated. Instead, the roots lie in three institutional perverse incentives: (1) the tax system rewards production over consumption, (2) party cadres are evaluated on growth and employment, (3) state banks prefer safe, state-backed projects over risky private innovation. Together, these perverse incentives create a cycle: overcapacity → low margins → price wars → weakened demand → more overcapacity.
Key Facts & Figures
- China produces electric vehicles under $10,000 and controls ~80% of the global solar supply chain
- Value-added tax split: 50/50 between central and local government, collected at production location (not consumption location) – incentivizes overproduction
- Real estate bubble (2021/22): Burst and forced local governments to focus even more intensely on industrial capacity
- Private financing channels: Sharply declined over the past 5 years due to regulatory uncertainty; state replacement funds fail due to bureaucratic hesitation
- ⚠️ Exact share of unprofitable "zombie firms" not specified in text
Stakeholders & Affected Parties
| Beneficiaries | Losers | Neutral Actors |
|---|---|---|
| Local Chinese officials (short-term) | Private Chinese companies (capital access) | Western consumers (cheap goods) |
| China's factory workers (jobs) | Western competitors (price & market loss) | Global markets (flooding) |
| Western consumers (cheap EVs) | Chinese middle class (weak demand) | – |
Opportunities & Risks
| Opportunities | Risks |
|---|---|
| Rapid decarbonization: Cheap Chinese green technology could accelerate global climate goals | Job losses in the West: German solar industry & automakers under pressure |
| Innovation through competition: If Beijing enforces patent protection & antitrust law, copying could be punished and originality rewarded | Chinese stagnation: Profit weakness leads to chronically low private demand & stagnant income growth |
| Global price stability: Competition from Chinese capacity suppresses inflation | Geopolitical tensions: Trade blockades, tariffs, decoupling tendencies intensify |
Action Relevance
For Western policymakers:
- Tariffs alone do not address the systemic cause; multilateral governance (IP protection, competition law) required
- Monitor: Does Beijing implement genuine institutional reforms or only treat symptoms?
For China:
- Critical: Without restructuring the tax system, bank financing, and party official incentives, stagnation like Japan in the 1990s threatens
- Necessary: Consistent enforcement of intellectual property and antitrust law to punish imitation and reward innovation
Quality Assurance & Fact-Checking
- [✓] Central claims about tax system and bank financing comprehensible
- [✓] Electric vehicle prices and solar market share plausible (external sources confirm)
- [⚠️] Share of unprofitable companies / exact capital outflow volumes not specified
- [✓] Real estate bubble 2021/22 and regulatory tightening documented
- [⚠️] Claim about "dangerous caution of banks" based on structural logic, not current data
- Bias check: Liberal perspective evident (emphasizes systemic incentives over conspiracy; respects rational entrepreneurship; criticizes state distortion)
Supplementary Research
- Bloomberg / Reuters: "China's oversupply crisis deepens in 2025" – current capacity statistics
- IMF World Economic Outlook (Dec. 2024): China's growth forecast & debt ratios
- WIPO Global Brand Report 2024: Chinese patent filings vs. Western (partially contradicts innovation shortage thesis)
Related Content:
- /en/?search=Export – Global export dynamics
- /en/?search=China – Additional China analyses
Source Directory
Primary Source:
Lee, Lizzi C. (2025): "Unprofitable? No Problem! – How Fatal Perverse Incentives in China's Economy Lead to 'Overproduction.'" Neue Zürcher Zeitung, 11.12.2025.
https://www.nzz.ch/meinung/chinas-wirtschaftliche-staerke-ist-auch-ergebnis-fataler-fehlanreiz-ld.1915422
Supplementary Sources:
- Foreign Affairs: Lee, Lizzi C. – Original publication (English)
- McKinsey Global Institute: "China's Financial Sector 2024 – State of Play"
- Rhodium Group: "China Oversupply Monitor" (continuously updated)
Verification Status: ✓ Facts checked on 12.12.2025
This text was created with the support of Claude (Anthropic).
Editorial responsibility: clarus.news | Fact-checking: 12.12.2025