Can overcapacity be avoided by foresight?

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 political 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.

With the sharing economy becoming a trend across the world, its development in China is both promising and controversial. The sharing economy first made its mark in China in 2011; today it has entered what many consider its golden development period. Regarding the sharing economy as one of the core directions of new economy, this year’s GovernmentWork Report vowed to help its development.

The sharing economy has penetrated into 10 major domestic sectors and more than 30 sub-sectors, including transportation, secondhand online transactions as well as peer-to-peer (or P2P) lending. In fact, in just a few years, sharing-economy companies worth $1 billion or more have emerged in China.

But the sharing economy also faces challenges. For instance, once sharingeconomy businesses become full-time vocations, will they deviate from their original goal of sharing and effectively using idle social resources?

Striking the right balance between innovative supervision and encouraging development is another difficulty the sharing economy faces. The merger between the two top domestic ride-hailing service providers Didi and Uber, which were also the market leaders of the sharing economy, had to face not only an antitrust investigation but also has been subjected to specific regulations in specific areas. The P2P lending market calmed down only after the strictest P2P financial regulation was issued.

Moreover, many sharingeconomy startups are forced into homogeneous competition for the lack of efficient profit-making models.

So, have the prospects of the sharing economy been overestimated? And how does one evaluate the value of the sharing economy and the revolution it may bring?

The sharing economy has great potential. It is not only a business model, but also a new socio-economic operation model. Through “Internet Plus”, the sharing economy tries to connect the idle social resources at low costs and an efficient manner.

Against the background of the Chinese economy’s new normal, the sharing economy aims to activate idle resources and use them to the maximum advantage. The development of the sharing economy will not only create newjobs and provide income for more people, but also help build a newgrowth pole for consumption. Hence, the sharing economy is expected to become a newengine of economic growth.

In 2013, the sharing economy accounted for 1.3 percent of the United Kingdom’s GDP, and the country is taking measures to increase the proportion to 15 percent in five years. In China, although the scale of the sharing economy has exceeded 1 trillion yuan ($144 billion), it still accounts for a small proportion of the country’s GDP, which means it still has enormous developing space.

Given China’s demographic dividends, the sharing economy has plenty of areas to explore. For instance, in 2015 the number of orders China’s top ride-hailing service provider Didi reached 1.43 billion, more than the total number of orders Uber has received since it was founded.

A broader development space for the sharing economy is sharing for enterprises and means of production, to cash in on the opportunities created by “Internet Plus” and the industrial upgrading in China.

The power of the sharing economy is also evident in the changes it has effected in social operation models such as life and working styles, enterprises’ organizations and cultural values. It allows individuals to engage in various fields to give full play to their talents and traditional enterprises to share talents and even turn into “virtual” enterprises. The sharing economy is also expected to reshape people’s idea of ownership of materials and enhance trust and cooperation among individuals.

To meet the challenges it faces and resolve its conflicts with traditional industries and existing systems, the sharing economy has to chart a novel path for itself while respecting the rule of law, which in turn will help it to fulfill its potential of building a connection between the old and new economic engines in China. The author is a senior researcher of Tencent Research Institute.

CAI MENG / CHINA DAILY