China's Overcapacity Crackdown: A Structural Shift for Equity Investors

China's economy has long been plagued by overcapacity in key industries, from solar panels to steel, which has fueled deflationary pressures and stifled profit margins. But a new era of regulatory discipline is now reshaping the landscape. JPMorgan's latest analysis suggests that targeted crackdowns on excess production in sectors like solar, steel, and electric vehicles (EVs) could catalyze a long-overdue margin recovery—and create opportunities for investors willing to navigate the risks.

The playbook is clear: Reduce overproduction to stabilize prices, prioritize quality over quantity, and align industries with Beijing's “high-quality growth” agenda. The result? A structural shift that could finally put an end to the era of “race-to-the-bottom” pricing. Let's break down the sectors, the winners, and the risks.

Sector Breakdown: Solar, Steel, and EVs Leading the Turnaround

Solar: Cutting Output to Boost Margins
China's solar industry, once synonymous with cutthroat competition, is now under pressure to slash production. Solar glass manufacturers have committed to reducing output by 30% starting this July, while polysilicon producers are facing stricter environmental regulations. The goal? To eliminate surplus supply and allow prices to stabilize.

This is a win for firms like JinkoSolar (JKS) and Trina Solar, which have been battered by overcapacity-driven price wars. With supply tightening, these companies could see gross margins rebound from their current lows (below 15% for some players).

Steel: Emissions Limits and Output Cuts
Steel mills, another poster child for overcapacity, face dual pressures: emissions cuts and production caps. JPMorgan highlights that Beijing's push to reduce carbon intensity will force smaller, less efficient mills to shut down, leaving the door open for leaders like Baoshan Iron & Steel (SHA: 600019) to capture market share.

The result? Higher utilization rates and better pricing power. Baoshan's EBITDA margins, currently around 12%, could climb toward 18% if capacity utilization improves to 80% from today's 74%.

EVs: Trade-Ins and Subsidies Drive Consolidation
The EV sector is a mixed bag. While overcapacity remains an issue—BYD's aggressive pricing has squeezed smaller competitors—the government's CNY 300 billion (US$43 billion) in subsidies for 2025 could tip the scales.

Firms like CATL (SZ: 300750), the world's largest EV battery maker, stand to benefit as industry consolidation reduces price wars. Meanwhile, trade-in programs for older vehicles could boost demand for newer models from CATL's clients, including Tesla and domestic brands.

The Rise of Premium Consumer Firms: A Demand-Side Shift

The overcapacity crackdown isn't just about supply—it's also reshaping consumer behavior. With lower-tier industries trimming excess capacity, capital is flowing toward sectors where demand is resilient: healthcare, premium consumer goods, and rural infrastructure.

• Anta Sports (HKG: 2020): A leader in mid-to-high-end sportswear, Anta has capitalized on China's “premiumization” trend. Its focus on urban millennials, who prioritize quality over price, has kept revenue growth steady at 8-10% even as broader retail sales lag.
• China Resources Beer (HKG: 291): Urban consumers are shifting from mass-market beers to premium and craft alternatives. China Resources' shift to higher-margin products has boosted its EBIT margins to 35%, well above industry averages.

Risks: Tariffs and Trade Tensions

The road isn't without potholes. U.S. tariffs on Chinese goods, which now average 20%, could rise further to 60% if trade tensions escalate. This would hit exporters like CATL and Baoshan harder. Meanwhile, consumer confidence remains 30% below pre-pandemic levels, a drag on discretionary spending.

Geopolitical risks also loom. The U.S. “Biosecure Act” threatens to disrupt China's biopharma exports, while domestic anti-corruption campaigns have shaken healthcare firms like Aier Eye Hospital.

But JPMorgan argues that the structural tailwinds—improved margins, policy support, and undervalued stocks—outweigh these risks. The MSCI China Index trades at a 30% discount to its five-year average, offering a margin of safety.

Conclusion: The Case for Chinese Equities in 2025

The overcapacity crackdown is more than a regulatory blip—it's a tectonic shift. By forcing industries to focus on quality over quantity, Beijing is laying the groundwork for a more sustainable economic model. For investors, this means:

1. Overweight cyclical sectors: Solar, steel, and EVs could see margin recoveries as supply tightens.
2. Buy premium consumer stocks: Anta, China Resources Beer, and healthcare plays like Qingdao Haier Biomedica (medical cold storage) offer resilience and value.
3. Monitor policy signals: Subsidies, trade-in programs, and infrastructure spending will be critical catalysts.

The risks are real, but the valuation case is compelling. As JPMorgan strategist Tai Hui noted, “This isn't a bet on China's GDP—it's a bet on companies that can thrive in a lower-growth, higher-quality world.”

In 2025, the question isn't whether China's overcapacity era is ending—it's whether investors will act before the rally begins.

Investment recommendation: Consider overweight positions in CATL, Baoshan Steel, and Anta Sports, with a 12-month price target of US$120 for CATL (vs. current ~US$95). Diversify with healthcare plays like Qingdao Haier Biomedica for defensive exposure.