What are the consequences of a planned economy? The example of China and its solar energy sector provides an excellent answer to this question. At the end of the first half of 2025, the six largest manufacturers of solar cells and panels reported combined losses of 20.2 billion yuan ($2.8 billion), which is twice as much as in the same period last year. Five of the six companies recorded a further increase in losses.
China accounts for about 90% of global solar cell production capacity. However, production rates significantly exceed demand. In 2024, Chinese factories produced 588 GW of solar cells, while domestic demand was 277 GW and external demand was only 174 GW. Thus, production exceeded aggregate demand by almost half. According to Goldman Sachs estimates, the capacity utilisation rate for solar module production in China is only 54%, demonstrating the inefficiency of investments and significant oversupply.
In Chinese discourse, the term ‘involution’ is used to describe this situation — excess production that provokes price competition and industrial deflation. As a result, companies are forced to lower prices at the expense of profitability, leading to mounting financial losses.
The crisis in the industry is largely due to the government’s strategy of accelerated development. Beijing viewed solar energy as a priority area and encouraged companies to make large-scale investments, including through cheap and preferential lending. Additional pressure was exerted by regional authorities interested in demonstrating high growth rates. According to analysts, this policy led to a significant increase in debt. China’s total public and corporate debt reached about 300% of GDP.
The example of China demonstrates what happens when an economy is driven not by demand but by a plan, when the market inevitably responds to capacity expansion at any cost with overproduction, deflation and crisis.
