Beijing targets “appropriate surplus capacity” in emerging industries

China's policymakers are fine with overcapacity – if it's in the right sector.

In fact, in “emerging” sectors, Beijing is actively encouraging overcapacity. According to the macro planner's (NDRC) annual report:

• "In emerging industries, we will allow appropriate surplus capacity and encourage competition and innovation."

Beijing's plan for “future” industries is just as interesting. In these industries where the technological landscape is still largely undefined, there's no mention of capacity at all – as you might expect.

What’s striking, though, is that Beijing will aim to instantiate parallel, competing technological pathways into the technological development layer itself – before capacity even exists. The 15th Five-Year Plan (FYP) says Beijing will:

• “Explore multiple technology paths...[and] establish mechanisms for growing investment in future industries and sharing risk."

Just to be clear, Beijing is not okay with overcapacity in traditional industry. In “mature” sectors where the returns from scale have been exhausted, the FYP and NDRC report outline a playbook of:

• Standards-led elimination of backward and low-efficiency producers
• Market-based mergers and consolidation toward fewer, stronger players
• Hard sector-specific production controls in the worst-affected industries

Get smart: Achieving “appropriate” excess capacity will be a balancing act.

• Policymakers want intense competition that drives innovation, not "involution."

Get smarter: Chinese leaders are unapologetically cultivating a pipeline of battle-hardened, technologically advanced Chinese firms in the industries that will define the next industrial cycle and beyond.

• This will trigger (even more) alarms in capitals and boardrooms around the world.