Overcapacity has become a major challenge that hinders the healthy growth of China's economy. Particularly at this crucial stage of economic transition, addressing domestic overcapacity is more important than ever. Recently, the government issued the "Guiding Opinions on Resolving the Contradictions of Severe Overcapacity," setting clear goals and measures for the next five years to tackle overcapacity in key sectors such as steel, cement, electrolytic aluminum, flat glass, and shipbuilding. The document outlines eight key tasks tailored to the specific characteristics of each industry. Notably, it sets strict targets: eliminating 15 million tons of ironmaking capacity, 15 million tons of steelmaking capacity, 100 million tons of cement (including clinker and grinding), and 20,000 tons of flat glass by the end of 2015.
In general, a capacity utilization rate above 85% is considered reasonable, while developed countries like those in Europe and America typically set their benchmark between 79% and 83%. As a result, China often uses 80% as the threshold for identifying overcapacity. Currently, the steel, cement, electrolytic aluminum, flat glass, and shipbuilding industries are identified as the most affected. According to incomplete data, the current utilization rates are below this standard—steel at around 70%, cement and flat glass at about 74%, and electrolytic aluminum and shipbuilding between 70% and 75%. This clearly indicates that these sectors are in a moderate overcapacity phase.
Overcapacity is not entirely abnormal in a market economy; moderate levels can even be beneficial for development. In mature markets like those in Europe and the U.S., overcapacity is usually addressed through self-regulation and market forces, with the survival of the fittest being the norm. However, in China, the situation is different. Excessive administrative intervention has crippled market mechanisms, and local governments often prioritize GDP growth over long-term sustainability. When industrial revitalization plans are introduced, localities rush to secure projects, leading to a surge in new capacities. This has resulted in many industries moving from under-capacity to overcapacity within just a few years.
The consequences of this approach have been severe. Local officials often push for rapid expansion, leaving behind high inventory levels and inefficient enterprises. When these firms struggle, local governments step in with subsidies and protection, but this only delays necessary adjustments. Over time, this leads to systemic inefficiencies that negatively impact the broader economy.
This model, known as "Chinese-style overcapacity," has been driven by a performance evaluation system that ties local success to GDP growth. Since 1992, this mechanism has been reinforced, pushing local governments to focus heavily on economic output. As a result, market forces have been sidelined, and local authorities have acted independently, exacerbating the problem.
To address this, the author suggests three key steps. First, reducing the emphasis on GDP in local performance evaluations is essential. Second, strengthening market mechanisms and ensuring long-term regulatory frameworks will help restore balance. Finally, establishing stronger accountability systems can prevent reckless decision-making at the local level. Only through these reforms can China effectively tackle its overcapacity challenges and move toward sustainable development.
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