China faces a resurgence of industrial overcapacity, mirroring challenges addressed by former Premier Zhu Rongji in the late 1990s. Back then, Zhu's "grasp the large, let go of the small" policy streamlined state-owned enterprises, paving the way for WTO accession. Today, lossmaking industrial businesses have doubled their share, reaching nearly 25% last year, across sectors from steel to autos.

The automotive sector exemplifies the issue, with production capacity potentially double domestic sales. While 47 smaller EV brands compete for market share, leading companies dominate. Unlike past state rescues, such as the nearly $1 billion bailout of Nio in 2020, cash-strapped local governments may struggle to support failing firms.

Analysts suggest consolidation, akin to Zhu's reforms, could preserve assets and jobs while reducing the number of companies. Aggressive export growth has served as a temporary release valve, with Chinese auto exports surging over 60% year-on-year. However, rising protectionism and global investment in Chinese manufacturing facilities suggest this strategy is not a long-term solution, with potential reckoning anticipated within 18 months.