Xi Jinping Warns of Economic Risks from AI and EV Overinvestment

In a rare and pointed address at the Central Urban Work Conference in Beijing on July 17, 2025, Chinese President Xi Jinping cautioned against the nationwide surge in investments in artificial intelligence (AI) and electric vehicles (EVs), highlighting concerns over redundant investments leading to overcapacity and deflationary pressures.

President Xi's remarks, prominently featured on the front page of the People's Daily, mark a strategic shift in China's economic policy. By questioning the necessity of every province developing AI and EV industries, he underscores the risks of unchecked investments and emphasizes the need for economic sustainability and prudent debt management over mere GDP growth.

The Central Urban Work Conference is a high-level meeting convened by the Communist Party of China to address urban development issues. Such conferences are rare and signify the importance of the topics discussed. The July 2025 conference focused on the rapid urbanization and industrialization trends across China's provinces, particularly the aggressive investments in emerging sectors like AI and EVs.

President Xi expressed concern over the homogeneous pursuit of AI and EV industries by various provinces. He questioned the necessity of every province developing these sectors, warning that redundant investments could lead to overcapacity and deflation. Xi criticized local officials, referred to as "three pats officials," for making reckless decisions without accountability. He emphasized the importance of economic sustainability and prudent debt management over the mere pursuit of GDP growth.

China's rapid expansion in the AI and EV sectors has led to significant overcapacity. For instance, the EV industry has an annual production capacity of about 20.2 million units, while projected deliveries are expected to surpass 11 million units, utilizing approximately 55% of the total capacity. This overproduction has triggered intense price wars among manufacturers, leading to shrinking profit margins and deflationary pressures in the economy. The average profit per vehicle has dropped to merely 15,000 yuan ($2,089), significantly lower than international competitors like Toyota.

In response to these challenges, the Chinese government has initiated several measures:

• Regulating Competition: On July 16, 2025, China's cabinet, led by Premier Li Qiang, announced plans to regulate "irrational" competition in the EV industry. The government aims to promote high-quality development through cost investigations, price monitoring, and both short- and long-term regulatory measures.

• Promoting Rational Competition: A senior Chinese official, Che Jun, emphasized the need for "rational competition" in the EV industry. He discussed this issue with auto industry leaders, including representatives from major Chinese automakers BYD and BAIC Group.

• Stabilizing Key Sectors: China plans to roll out action plans aimed at stabilizing growth in the machinery, automotive, and electrical equipment sectors. The measures are designed to support qualitative upgrades and ensure steady quantitative growth in these key manufacturing sectors.

The overinvestment in AI and EV sectors has broader social and economic implications:

• Employment Concerns: The intense competition and price wars have led to financial instability among manufacturers, potentially resulting in job losses and economic uncertainty for workers in these industries.

• Global Trade Tensions: The overcapacity has led to an influx of Chinese EVs into global markets, prompting concerns from major economies about unfair competition and potential trade disputes.

• Deflationary Risks: The price wars and overproduction contribute to deflationary pressures, affecting not only the automotive sector but also related industries like steel and battery manufacturing.

China has faced overcapacity issues in various industries before, such as steel and solar panels. However, the current situation in the AI and EV sectors is notable due to the scale of investment and the strategic importance of these industries in China's economic planning. The government's proactive stance in addressing these issues reflects lessons learned from past experiences and a desire to prevent similar economic disruptions.

President Xi Jinping's recent remarks highlight a critical juncture in China's economic development, emphasizing the need for strategic planning and sustainable growth in emerging industries.