China Implements Industrial Reforms to Curb Overcapacity, Reshape Global Markets

China's industrial sector is undergoing a significant transformation in 2025 due to a sustained overcapacity crisis impacting key industries such as steel, aluminum, electric vehicles, and solar panels. The Chinese Communist Party (CCP) is intensifying efforts to curb 'involutionary competition'—destructive price wars and overproduction—favoring state-owned enterprises (SOEs) through consolidation and regulatory reforms aimed at aligning supply with demand and environmental goals. While steel production has been deliberately cut to meet carbon neutrality targets, aluminum output has grown due to its role in electrification, illustrating uneven regulatory impacts. Despite some recovery in steel mill profitability following output cuts and lower raw material costs, the overall industrial sector faces deflationary pressures with the Producer Price Index falling 3.6% year-on-year, driven by weak domestic demand, persistent global trade tensions, and shifting supply chains toward ASEAN to bypass tariffs. Government interventions, including fiscal stimulus, interest rate cuts, and targeted subsidies for high-tech sectors, have so far had mixed effects, sometimes exacerbating overcapacity problems. For global investors, these developments signal a recalibration of China's industrial landscape that will reshape global supply chains, commodity demand, and regional manufacturing hubs.