Over­ca­pac­ity ob­ses­sion The mar­ket rather than the govern­ment should de­ter­mine which iron and steel en­ter­prises are to close down

China Daily (Hong Kong) - - COMMENT - ZHAO XIAO AND CHEN JIN­BAO

The elim­i­na­tion of iron and steel over­pro­duc­tion has been a key part of a cam­paign the govern­ment launched in 2010 to pro­mote its long-over­due in­dus­trial struc­tural ad­just­ment. That the govern­ment de­cides which steel en­ter­prises will be re­tained and which are to be closed down shows that China still uses ad­min­is­tra­tive means to de­cide the fate of its steel en­ter­prises. But what are the ef­fects of this? Ac­cord­ing to re­cent data from the China Iron and Steel As­so­ci­a­tion, from 2006 to 2012, China re­duced 76 mil­lion tons of crude steel pro­duc­tion much less than the ad­di­tional 440 mil­lion tons of crude steel man­u­fac­tured dur­ing the same pe­riod. As the con­struc­tion of some iron and steel en­ter­prises is still un­der way, China is ex­pected to wit­ness an ad­di­tional 110 mil­lion tons of iron pro­duc­tion and 130 mil­lion tons of steel pro­duc­tion over the next three years.

The govern­ment should re­flect on the use of ad­min­is­tra­tive means to re­duce over­ca­pac­ity in the iron and steel sec­tor, as it sim­ply re­sults in “the more mea­sures, the greater the ca­pac­ity”. In­stead, it should let mar­ket mech­a­nisms break what has be­come a vi­cious cir­cle.

From the per­spec­tive of mar­ket com­pe­ti­tion, some over­ca­pac­ity is not in­evitably a bad thing, given that mod­er­ate over­pro­duc­tion will not only in­crease the pres­sure on en­ter­prises to in­tro­duce tech­no­log­i­cal in­no­va­tions, it will also pro­vide the mo­ti­va­tion for in­dus­trial up­grad­ing. With ex­ces­sive ca­pac­ity in the mar­ket, all en­ter­prises will have to pro­mote tech­no­log­i­cal in­no­va­tions and struc­tural up­grad­ing to en­sure that they can im­prove the qual­ity of their prod­ucts or de­velop new prod­ucts to sharpen their com­pet­i­tive­ness edge and raise their re­turn ra­tio.

Ac­cord­ing to data pub­lished by the United States Fed­eral Re­serve, the rate of in­dus­trial ca­pac­ity uti­liza­tion in the US was 74.2 per­cent in 2008 and its in­dus­trial ca­pac­ity in­creased by 40.7 per­cent from 2002 to 2008. How­ever, its ac­tual in­dus­trial pro­duc­tion in­creased by just 4.4 per­cent dur­ing the same pe­riod.

In com­par­i­son, China’s ac­tual steel man­u­fac­tur­ing ca­pac­ity was 976 mil­lion tons by the end of 2012, com­pared with its ac­tual crude steel pro­duc­tion of 731 mil­lion tons, a 74.9 per­cent rate of ca­pac­ity uti­liza­tion. Th­ese in­di­cate that the US’ in­dus­trial ex­cess ca­pac­ity dur­ing the global fi­nan­cial cri­sis was even more prom­i­nent than it is in China to­day.

A mod­er­ate de­gree of over­ca­pac­ity is not a cause for con­cern. But, com­pared with the govern­ment, the mar­ket is more sen­si­tive to where the over­ca­pac­ity line lies. It has be­come com­mon in China for the govern­ment to put a strict ban on the start of new projects and work out a list of en­ter­prises to close down in or­der to re­duce over­ca­pac­ity. How­ever, the im­po­si­tion of an in­dis­crim­i­nate ban on new projects will pos­si­bly re­strict the en­try of new tech­nolo­gies.

Since 2010, the Min­istry of In­dus­try and In­for­ma­tion Tech­nol­ogy has pub­lished sev­eral lists of en­ter­prises that are to be elim­i­nated in the power, coal, steel, non-fer­rous met­als and tex­tile sec­tors. How­ever, the stan­dards for their elim­i­na­tion are mainly based on whether they are big en­ergy con­sumers and pol­luters, or whether they are be­low a given scale. Elim­i­nat­ing pol­lut­ing en­ter­prises and those that con­sume a lot of en­ergy is un­der­stand­able and de­sir­able, but the elim­i­na­tion of en­ter­prises based on scale is open to dis­cus­sion, as a small pro­duc­tion scale does not in­evitably mean low tech­no­log­i­cal and man­age­ment lev­els.

Some lo­cal gov­ern­ments, be­cause they want to ex­pand the lo­cal gross do­mes­tic prod­uct to pro­ject their per­for­mance, make en­ter­prises big­ger in or­der to pre­vent them from be­ing closed down be­cause the cen­tral govern­ment deems them too small. As a re­sult, those en­ter­prises with over­ca­pac­ity pre­fer to pon­der how to ex­pand their scale rather than work­ing hard for in­dus­trial up­grad­ing. Th­ese re­main the big­gest ob­sta­cle to the mar­ket-based re­duc­tion of over­ca­pac­ity. In­ter­na­tional prac­tices also in­di­cate that the use of ad­min­is­tra­tive means to deal with over­ca­pac­ity will not have any sub­stan­tial ef­fect.

To in­crease or re­duce ex­cess ca­pac­ity, mar­ket-based means are des­per­ately needed, such as merg­ers or re­or­ga­ni­za­tion among the en­ter­prises them­selves, to let those with a sharp edge thrive and drive out the less com­pet­i­tive ones.

What the govern­ment should do now is to cre­ate a good en­vi­ron­ment for mar­ket com­pe­ti­tion and give the mar­ket a big­ger role in the dis­tri­bu­tion of re­sources and the national struc­tural ad­just­ments. It should re­frain from act­ing as a judge to de­cide which en­ter­prises should be elim­i­nated and which ones re­tained. Zhao Xiao is a pro­fes­sor and Chen Jin­bao a re­searcher at the School of Economics and Man­age­ment, Bei­jing Univer­sity of Science and Tech­nol­ogy.

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