Deepening market reforms will help reduce overcapacity

The government vowed on Tuesday to accelerate efforts to reduce excess production capacity, a task that tops the central economic agenda. This is not the first time the central authorities have expressed their resolve to press ahead with the formidable task.

Still, policymakers should drawfrom the past lessons of corporate restructuring to ensure that reducing the overcapacity will not produce undesired sideeffects as before.

XiaNong, a senior official with the National Development and Reform Commission, China’s top market regulator, said in the steel sector, 47 percent of the targeted excess capacity has been reduced and the pace will be accelerated in the coming months. It indicates that the capacity-cutting pressure has become heavier, triggering rising concerns that the government may fail to accomplish one of the key tasks it has set for this year.

Such concerns are understandable, but unfounded. The real concern is not whether the task will be accomplished, but how it will be achieved.

This is not the first time the country has attempted to reduce excess production capacity. At the start of this century, China made a similar move because of the serious over-supply in sectors such as cement, steel and aluminum.

However, after the onset of the 2008 global financial crisis, China launched a massive stimulus package to anchor the economy. Although it played a decisive role in stabilizing growth, much of the stimulus went to fixed assets and construction. China’s steel and cement production increased dramatically in the following years as the burgeoning economy drove up demand for relevant products and, in response to that surging demand, the local governments encouraged more production.

China remains a mixed economy, with governments playing an important role in making and implementing economic development plans.