Structural dilemma of China's chemical industry: Capacity reductions are no match for weak demand and global countermeasures

China's chemical industry is caught in a structural dilemma: on one hand, the government is aggressively promoting an "anti-involution" capacity reduction campaign, yet on the other, industry profits continue to slide and the capacity expansion cycle has yet to be fully cleared. According to data released by the National Bureau of Statistics in November 2025, the total profits of industrial enterprises above a designated size increased by 1.9% year-on-year in the first ten months, but profits in the chemical raw materials and chemical products manufacturing sector fell by 5.4% to approximately $43 billion. Cinda Securities research indicates that the chemical product price index has declined for three consecutive years, with a cumulative drop of nearly 36%, directly eroding corporate profitability.

Root cause of overcapacity: mismatched investment cycles and demand

Cinda analyst Zhang Yansheng attributes the profit squeeze to two major forces: persistent overcapacity in key chemical markets, and weakening demand due to an economic slowdown and prolonged downturn in the real estate sector. CITIC Securities' basic chemical data shows that fixed asset investment in China's chemical industry surged from 2021 to 2024. Although the growth rate of projects under construction slowed in 2025, total assets continue to rise, indicating that the capacity expansion cycle has not fully ended. This investment inertia stems partly from local governments' reliance on tax revenue and employment—even as the central government calls for capacity reduction, local implementation is often fraught with hesitation.

Short-term effects and long-term limitations of the anti-involution policy

In March 2025, China's leadership proposed an anti-involution policy, urging companies to control production and stop building new factories. Initially, positive signals emerged in certain market segments: according to S&P Global Commodity Insights' Platts data, caprolactam (a nylon intermediate) prices rose about 5% in November, as major producers agreed to cut output by 20%. The industry prosperity index compiled by the China Petroleum and Chemical Industry Federation also rose for two consecutive months from 98.43 in August to 99.79 in October (below 100 indicates contraction, above 100 indicates expansion). However, in November, the index fell back to 97.21.

Qiu Dengke, Secretary-General of the Guangdong New Energy Industry Association, noted: "Anti-involution is easier said than done. In sub-sectors dominated by thousands of small and medium-sized enterprises, almost no producer is willing to voluntarily cut production and cede market share." Trade associations' appeals have received limited response, and local governments, concerned about tax revenue and employment, are reluctant to strictly enforce severe capacity reduction measures.

Exports facing global countermeasures

Looking ahead to 2026, Qiu believes the fundamentals are unlikely to improve. The real estate market remains weak, while foreign governments and companies are becoming increasingly wary of the surge in Chinese chemical product exports. He expects anti-dumping investigations and localized procurement requirements to rise further. Chinese chemical products, leveraging cost advantages, are flooding global markets, sparking concerns from multiple trading partners including the EU and India, and the risk of trade friction is increasing.

New energy materials: concerns behind brief growth

Not all areas are bleak.Not all sectors are bleak. Chemicals and materials used in electric vehicles, stationary energy storage, photovoltaics, and high-performance fibers continue to see robust growth. China's National Chemical Information Center estimates that demand for such advanced materials will grow by more than 8% in 2025. However, Qiu Dengke warns that even these emerging fields can hardly escape the shadow of structural problems. "The capacity of new energy chemical materials is expanding rapidly. Without strict, even punitive government measures to curb blind investment, this sector will soon fall into overcapacity."

Such concerns are not unfounded. In the past few years, China's photovoltaic and lithium battery industrial chains have repeatedly gone through cycles of "explosive growth → severe oversupply → price wars → industry reshuffling." Now the new materials segment of the chemical industry is repeating the same pattern: companies swarm in, investment scales surge, while demand growth may slow in the future.

China's Chemical Positioning Amid Global Supply Chain Restructuring

From a broader perspective, the problems facing China's chemical industry are not only cyclical but also structural. Global supply chains are undergoing "China+1" or "de-risking" adjustments, with multinational companies seeking to diversify production bases, and chemical capacity in India, Southeast Asia and elsewhere expanding rapidly. China's chemical exports face not only trade barriers but also the rise of competitors. Meanwhile, domestic industrial upgrading requires higher-value-added fine chemicals and specialty materials, but current overcapacity is concentrated mainly in basic chemicals and general materials.

In the coming years, China's chemical industry needs to shift from "scale-driven" to "innovation-driven" growth, breaking through difficulties through technological upgrading and differentiated competition. Anti-involution policies will be hard to take effect in the short term, but in the long run, the interplay between market clearance and policy guidance will determine the industry's direction. New energy materials may provide growth momentum, but repeated low-level investment will only accelerate the next round of overcapacity.

• References:
• Chemical & Engineering News, "China’s chemical makers face headwinds despite push to cut capacity" (2026)
• Original URL: https://cen.acs.org/business/Chinas-chemical-makers-face-headwinds/104/web/2026/01