The State Council recently issued the "Guiding Opinions on Resolving Severe Overcapacity in Production Capacity" to address the growing issue of overcapacity in key sectors such as steel, cement, electrolytic aluminum, flat glass, and shipbuilding. This policy aims not only to tackle these specific industries but also to guide the resolution of overcapacity in others. As part of the new government's broader strategy, this move reflects a coordinated effort to promote steady economic growth, structural adjustment, and industrial transformation, laying the foundation for an upgraded Chinese economy.
Overcapacity has long been a pressing challenge in China, with far-reaching negative impacts on economic development. It leads to inefficient production, unhealthy competition among companies, and even international trade disputes due to low-price strategies by export-oriented firms. From a global and long-term perspective, addressing this issue is crucial. The government must take decisive action to implement effective measures that help reduce overcapacity and restore market balance.
This problem is not new. Since the 1990s, overcapacity has repeatedly emerged as a chronic issue, often triggered by excessive investment. While governments have tried to regulate it, the cycle of overcapacity has persisted. Policies may temporarily curb the problem, but they often lead to more severe imbalances later on. To truly resolve this "difficult problem," it’s essential to identify its root causes.
In a mature market economy, overcapacity naturally leads to market adjustments—inefficient firms exit, and the industry stabilizes. However, in China, overcapacity is not purely a market-driven phenomenon. Excessive government intervention, coupled with the pressure to boost GDP, has distorted industrial policies. This has led to misaligned investments and weakened the market’s ability to self-regulate.
To address this, the State Council’s guiding opinions emphasize a balanced approach: respecting market rules, implementing differentiated policies, and tackling both symptoms and root causes. It calls for stronger macro-control, improved supporting policies, and a focus on innovation and institutional reform. Although the plan highlights the role of the market, the government still plays a significant role in shaping the outcome.
While government control over project approvals can help restrict overcapacity, it risks limiting market forces. In many cases, the government still manages the market, which can lead to unintended consequences. For example, when the government replaces market mechanisms, the result can be a backlash from the market itself—overcapacity being just one of the outcomes.
A more effective solution is to reduce government interference in the micro-economy and let market forces work. The Shanghai Free Trade Zone’s negative list model offers a useful example. By removing unnecessary approvals, it encourages private investment and allows the market to self-regulate. Even if overcapacity arises in certain areas, the market will eventually find a way to adjust without government intervention.
That said, the government should not be entirely hands-off. It needs to shift from administrative controls to regulatory oversight, focusing on environmental, energy, and safety standards. For overcapacity industries, the government should foster a fair trading environment, enabling mergers and acquisitions to drive industrial restructuring, rather than relying solely on administrative orders to close down or relocate businesses.
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