Can over­ca­pac­ity be avoided by fore­sight?

China Daily (Hong Kong) - - VIEWS -

The task of re­duc­ing over­ca­pac­ity, one of the five ma­jor goals of sup­ply-side struc­tural re­form, will con­tinue to face chal­lenges next year. Since re­duc­ing over­ca­pac­ity re­lates to struc­tural ad­just­ment, which is a long-term process, over­ca­pac­ity can hardly be re­duced in one stroke.

Mak­ing the mat­ter more com­plex is the fact that in­dus­tries in­volved in re­duc­ing over­ca­pac­ity are pil­lar in­dus­tries that played a key role in China’s rapid eco­nomic growth.

So over­ca­pac­ity re­duc­tion and solv­ing the prob­lems re­sult­ing from over­ca­pac­ity de­mand spe­cial at­ten­tion. Over­ca­pac­ity can be re­duced in a short time by ad­min­is­tra­tive mea­sures, but the rea­sons be­hind over­ca­pac­ity can­not be elim­i­nated overnight. They could again cre­ate over­ca­pac­ity in some in­dus­tries, lead­ing to sim­i­lar eco­nomic prob­lems in the fu­ture.

Over­ca­pac­ity re­lates to not only a spe­cific stage of the de­vel­op­ment cy­cle, but also an econ­omy’s de­vel­op­ment pat­tern. First, lo­cal govern­ments in China pay too much at­ten­tion to GDP scale to get “higher scores” for their politi- cal per­for­mances de­spite the fact that they re­flect nei­ther the qual­ity of eco­nomic growth nor peo­ple’s well-be­ing.

Sec­ond, af­ter en­ter­prises rise to a cer­tain level and scale, lo­cal govern­ments of­fer some pref­er­en­tial poli­cies to them and thus trans­form them into busi­ness en­ti­ties “too big to fail”. In fact, when such en­ter­prises face a se­vere cri­sis, lo­cal govern­ments tend to help them over­come it in­stead of leav­ing them to fend for them­selves.

Third, many State-owned en­ter­prises have only “soft re­stric­tions”, be­cause they en­joy strong sup­port from govern­ments. As a re­sult, many SOEs be­come low on ef­fi­ciency: many SOEs carry out projects with­out con­sid­er­ing their eco­nomic con­se­quences, be­cause they know the govern­ments are al­ways there to bail them out of trou­ble.

Fourth, the au­thor­i­ties rely too much on eco­nomic stim­u­la­tion. A slightly faster or slower eco­nomic growth is nor­mal — in ac­cor­dance with the law of eco­nomic de­vel­op­ment. But the govern­ments more of­ten than not try to stim­u­late the econ­omy, lead­ing many a time to over­ca­pac­ity.

Fifth, na­tional in­dus­trial poli­cies may pro­pel lo­cal govern­ments to de­velop cer­tain in­dus­tries in the short term. And some lo­cal govern­ments and en­ter­prises do use fraud­u­lent means to get in­dus­trial sub­si­dies from the cen­tral gov­ern­ment, lead­ing to over­ca­pac­ity in cer­tain in­dus­tries.

De­vel­oped mar­ket economies face the prob­lem of in­dus­trial over­ca­pac­ity, as well. But their sound mar­kete­con­omy sys­tems pre­vent them, in most cases, from us­ing ad­min­is­tra­tive mea­sures that lead to over­ca­pac­ity.

The core of mar­ket econ­omy is sound mi­croe­co­nomic in­di­vid­u­als or en­ti­ties, which en­joy clear prop­erty rights and are sub­jected to laws. This means en­ter­prises use their own money to do busi­ness, mak­ing them sen­si­tive to over­ca­pac­ity. And since they are aware of the risk of over­ca­pac­ity, they do not in­vest ex­ces­sively to pro­duce goods whose de­mand is not sus­tain­able in the long run and, in­stead, seek to in­vest in other ar­eas.

More­over, many mar­ket econ­omy mech­a­nisms such as merg­ers, re­or­ga­ni­za­tions, and declar­ing bank­ruptcy could solve the over­ca­pac­ity prob­lem for many en­ter­prises at an early stage. Merg­ers, in essence, are re­dis­tri­bu­tion of so­cial re­sources based on the prin­ci­ple of mar­ket and ef­fi­ciency. By declar­ing bank­ruptcy, an in­di­vid­ual or an en­ter­prise sets so­cial re­sources free for re­use by oth­ers, which is also a so­lu­tion for the en­ter­prises that can­not sur­vive in the mar­ket.

Eco­nomic down­turn in more ways than one elim­i­nates out­dated in­dus­trial

over­ca­pac­ity, which is a re­flec­tion of the mar­ket. This phase will force en­ter­prises to in­no­vate and up­grade, be­cause only bet­ter and more ad­vanced prod­ucts can cap­ture the mar­ket again.

To avoid the eco­nomic prob­lems re­sult­ing from over­ca­pac­ity, en­ter­prises have to take mul­ti­ple mea­sures. And if ad­min­is­tra­tive mea­sures are used to cor­rect the mar­ket, the gov­ern­ment should make more ef­forts to im­prove the mar­ket econ­omy mech­a­nism so as to pre­vent over­ca­pac­ity.

The au­thor is a pro­fes­sor of eco­nomics at Ren­min Uni­ver­sity of China.


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