The issue of overcapacity has become a significant challenge that hinders the sustainable growth of the Chinese economy. Especially during this crucial phase of economic restructuring, addressing domestic overcapacity is essential for long-term stability and development. Recently, the government issued the "Guiding Opinions on Resolving the Contradictions of Severe Overcapacity," setting clear goals and guidelines for reducing overcapacity in key sectors such as steel, cement, electrolytic aluminum, flat glass, and shipbuilding over the next five years.
The policy outlines eight major tasks tailored to each industry’s specific characteristics, emphasizing a more strategic approach to managing excess capacity. Notably, it sets concrete targets: eliminating 15 million tons of ironmaking, 15 million tons of steelmaking, 100 million tons of cement (including clinker and grinding capacity), and 20,000 tons of flat glass by the end of 2015. These figures highlight the urgency and scale of the problem.
In general, an 85% capacity utilization rate is considered healthy. In developed economies like those in Europe and North America, the ideal range is between 79% and 83%. Therefore, China often uses 80% as a benchmark for determining whether an industry is overcapacity. According to recent data, the steel, cement, electrolytic aluminum, flat glass, and shipbuilding industries—identified as the most affected—are all operating below this threshold. Steel utilization is around 70%, cement and flat glass at about 74%, while electrolytic aluminum and shipbuilding are within a 70% to 75% range. This indicates that these industries are currently in a moderate overcapacity stage.
Moderate overcapacity is not always negative; in fact, it can be beneficial in a market-driven economy. In countries like the U.S. and Germany, where market mechanisms are well-established, overcapacity is typically addressed through natural competition and innovation rather than heavy state intervention. However, in China, excessive government involvement has distorted market dynamics, leading to inefficiencies and misallocation of resources.
Historically, local governments have prioritized GDP growth, often at the expense of long-term sustainability. When national industrial revitalization plans were introduced, localities rushed to secure projects, even in sectors already suffering from overcapacity. This led to a surge in new capacity, which quickly turned into overproduction. As a result, many industries found themselves overbuilt within just a few years, creating a cycle of inefficiency and Waste.
Local governments have often used subsidies and protective policies to keep struggling enterprises afloat, but this only delays necessary adjustments and deepens systemic problems. The lack of market discipline has resulted in a bloated industrial landscape with high inventory levels and poor operational efficiency.
This phenomenon, referred to as “Chinese-style overcapacity,†has been driven by a combination of flawed incentives, weak market mechanisms, and excessive local intervention. Over time, this model has led to serious economic imbalances. Experts argue that resolving this issue requires a fundamental shift in how local performance is evaluated, moving away from a sole focus on GDP growth.
To address the problem, three key steps are needed: first, reducing the emphasis on GDP in local assessments to encourage more balanced development; second, strengthening market mechanisms to allow supply and demand to guide industrial growth; and third, improving accountability to prevent reckless investment decisions. Only through these measures can China move toward a more sustainable and efficient economic model.
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