“All the world’s advanced economies, including the U.S., the EU, South Korea, and China have set out plans to advance capacity in the domestic semiconductor industry,” says Lillian Li, vice president and senior credit officer at Moody’s.

In the U.S., the Biden administration plans to allocate $52 billion in incentives for the domestic semiconductor industry via a bill Congress is currently debating. The EU has committed $160 billion of COVID recovery funds to developing regional tech capabilities as it aims to boost the bloc’s share of semiconductor manufacturing to 20% of the global total by 2030. Meanwhile, chipmakers in South Korea, buoyed by government tax breaks, have committed $450 billion over the next 10 years to building chip capacity.

“These major investments could lead to overcapacity and inefficient investment allocation,” Li says, echoing warnings made by other analysts. In June, analysts at consultancy Bain & Company said building capacity would “hurt the economics” of suppliers, since each will likely run production lines below capacity once demand abates.

In April, industry analyst Daniel Nenni told Fortune there would be a glut unless “there is some big boom in semiconductor demand” beyond the current panic buying. The chip shortage began when automakers, surprised by consumer appetite for new cars in the pandemic, increased their orders for chipsets, pushing demand beyond supply and increasing lead times for deliveries. The squeeze on supply sparked panic buying as purchasing agents ordered more chips than they need in an attempt to secure stock. Once the panic subsides, the world could find itself with too many chips. But Li warns that China—the country most desperate to secure a domestic chip supply—could suffer a glut more easily than its peers.

According to a Moody’s report published Monday, China spent $35 billion on semiconductor development last year, up 407% from 2019. Beijing is spending billions to break China’s reliance on semiconductor imports, which were worth over $350 billion in 2020. The U.S. has used its dominance in the semiconductor industry to throttle China’s access to chips.

In May last year, the U.S. severed Chinese smartphone maker Huawei Technologies’ access to advanced chips, forcing the Shenzhen-based firm to pivot its business model away from smartphone sales.

But, Li says, Beijing’s push for semiconductor independence could lead to overcapacity in particular chipmaking sectors—such as memory chips—and leave companies with “less access to credit and government support” unprofitable, as total demand falls short of capacity.

But even chipmakers with strong government support are at risk of expanding too aggressively.

One of China’s most prominent memory chipmakers, Tsinghua Unigroup, is facing bankruptcy despite its close ties to the state. Motivated by Beijing’s directive to build chip capacity, Tsinghua Unigroup has racked up some $30 billion in debts as it raced to build chip factories. But chip factories, which cost up to $10 billion to build, take years to complete. The return on investment is slow. In November last year, Tsinghua Unigroup paused two new factory developments and defaulted on credit repayments as the company entered a cash crunch. One of the group’s creditors has taken the defaulting company to court and is pushing the chipmaker to file for bankruptcy and restructure.

“For China, developing domestic semiconductors has pros and cons,” Li says. “The advantages, such as avoiding geopolitical insecurities, are very apparent. But the risk of spurring overcapacity remains.”