Chinese industrial assets rose about 22% in 2021–22, leaving many factories with more capacity than demand, according to a Federal Reserve Bank of Dallas analysis by Scott Davis and Brendan Kelly.
How the boom unfolded
Scott Davis and Brendan Kelly of the Federal Reserve Bank of Dallas trace the origins of China's latest investment cycle to the years after the 2008 global crisis. Real estate led the way for much of the period, then peaked in 2021. When housing investment stopped expanding, capital didn't vanish. Instead, investment shifted into industry and machinery.
The authors show that the reallocation was uneven. Across 39 industrial sectors, asset growth during 2021–22 varied from a 4% contraction to as much as 70% growth. On average, industrial assets rose 22% over that two‑year span. Nineteen sectors had above‑median growth and added assets at roughly 32% on average; the remaining 20 expanded by about 12%.
Those high‑growth sectors overlap heavily with areas promoted under the Made in China 2025 initiative — advanced manufacturing and technology‑focused industries. That targeted push helped channel investment into capital‑intensive production even as final demand failed to keep pace.
Overcapacity and price pressure
The most visible aftermath has been falling producer prices.
As supply outpaced demand at prevailing prices, firms faced margin pressure. That, in turn, produced a cycle of disorderly price competition the authors label 'involution' — where firms undercut each other and industry health erodes.
Profitability slipped. Many domestic firms reported mounting losses. At the same time, investment continued to flow into physical assets rather than into upgrades that would raise efficiency or into services that might absorb labour and capital.
How finance helped keep the cycle alive
Davis and Kelly point to the role of credit allocation in sustaining the boom. Banks and other lenders showed what the authors describe as 'zombie lending' — rolling over loans rather than recognising losses.
That behaviour kept unprofitable plants operating and delayed the market‑driven reallocation of resources.
When lenders avoid taking write‑downs, the result is muddled incentives. Firms that should downsize or exit can instead hang on. New investment then flows into capacity that can’t be absorbed, and the banking sector carries a growing stock of loans to low‑return projects.
Winners, losers and the uneven picture
The investment spike was not uniform. Sectors chosen for strategic upgrading — robotics, specialised equipment, semiconductors and other higher‑end manufacturing — saw the biggest asset jumps. Lower‑growth parts of industry expanded much more slowly.
The authors note the policy tilt is a factor: government priorities and subsidies channelled funds into chosen segments. That helped build capabilities. It also raised the risk that some of the added capacity won’t find buyers at profitable prices.
On the losing side are firms in exposed segments that face both falling prices and squeezed demand. Their losses show up in firm‑level balance sheets and in the wider producer price index. The squeeze ripples through suppliers, service providers and local employment.
Policy response and the 'anti‑involution' effort
Beijing hasn't been passive. The report refers to an anti‑involution campaign aimed at curbing the most damaging forms of overcapacity and disorderly competition. That includes measures to curb inefficient investment and to encourage consolidation where markets are fragmented.
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Industrial assets grew 22% in 2021–22, leaving significant risks of underused capacity, weaker producer prices and a likely need for policy‑driven consolidation.
This article was created with AI assistance.
