The State Council recently issued the "Guiding Opinions on Resolving Severe Overcapacity in Production Capacity" to actively and steadily address the issue of overcapacity in key industries such as steel, cement, electrolytic aluminum, flat glass, and shipbuilding. This policy is aimed not only at resolving existing overcapacity but also at guiding the adjustment of other sectors facing similar challenges. It represents a significant step for the new government to balance economic growth, structural adjustment, and industrial transformation, marking a crucial phase in shifting China's development model toward more sustainable and high-quality growth.
Overcapacity has long been a major challenge in China’s economy, with far-reaching negative effects on efficiency and competitiveness. When industries are over-supplied, companies often operate at low or even unprofitable levels, leading to fierce competition among firms. Export-oriented enterprises may resort to price-cutting strategies, which can trigger trade disputes internationally. From a global and long-term perspective, addressing overcapacity is essential for maintaining economic health and stability.
This issue is not new. Since the 1990s, overcapacity has repeatedly emerged as a recurring problem, often following periods of excessive investment. While governments have tried to regulate it, the cycle of overinvestment and overcapacity has persisted, making it a complex and challenging issue. To truly resolve this “hard problem,†it is necessary to understand its root causes—many of which stem from both market forces and government intervention.
In a well-functioning market economy, overcapacity typically leads to natural market corrections, with weaker firms exiting the industry. However, in China, overcapacity is not solely driven by market forces. Government policies, often influenced by GDP targets, have encouraged excessive capacity expansion, undermining the market’s ability to self-regulate. As a result, many industries have become stuck in a cycle where overcapacity persists despite regulatory efforts.
To tackle this, the State Council’s guidance emphasizes a multi-pronged approach: respecting market rules, implementing differentiated policies, and addressing both symptoms and root causes. The plan includes tightening macro-control, curbing blind expansion, and using measures like “digesting, transferring, integrating, and eliminating†excess capacity. It also calls for institutional innovation and a shift in government functions to support industrial upgrading.
While government intervention in certain sectors can be useful, overreliance on it risks stifling market mechanisms. In the Shanghai Free Trade Zone, a negative list model has shown promise by reducing administrative barriers and allowing private capital to play a greater role. This approach allows the market to self-correct without unnecessary interference, suggesting that a more market-driven strategy could be more effective in addressing overcapacity.
Ultimately, the solution lies in reducing excessive government involvement in the micro-economy and letting market forces take the lead. The government should focus on creating a fair and transparent environment, enforcing regulations on environmental standards, safety, and quality, rather than directly controlling investment. Encouraging mergers and acquisitions, rather than forced closures, would help industries adapt and evolve naturally.
In short, while the government has a role to play, the key to solving overcapacity lies in fostering a competitive, efficient, and self-regulating market system.
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