Author: Hu Caimei, Deputy Director of Department of Finance Industry
Editor’s Note: Excess capacity is a symptom of imbalanced supply and demand. The re-balance of supply and demand can be realized by transforming and upgrading traditional industries, developing emerging industries, using new factors to form new productivity.
Recently, both traditional industries and emerging industries represented by iron and steel, coal, petrochemicals, nonferrous metals, optic fibers, carbon fibers, wind power, polycrystalline silicon and lithium batteries are suffering from excess capacity. Eliminating excess capacity will probably become the major task of China's economic work in the following two to three years or even longer. If we can correctly understand excess capacity and identify the breakthrough points of eliminating it, we can remove the obstacle to economic growth.
Excess capacity is the logical outcome of the economic cycle and the process of market clearing. Since the 1980s, the U.S. has suffered from serious excess capacity three times. After the World War II, Japan was also hit by excess capacity in its economic cycles. This round of excess capacity in China is serious because of the overlapping effect of twice economic overheatings in 2004-2007 and 2009-2010 and the effective demand shortage caused by the slow performance of the global economy.
Excess capacity is a symptom of imbalanced supply and demand. On November 10, 2015, at the 11th Meeting of the CPC Central Committee Financial & Economic Leadership Panel, General Secretary Xi Jinping of the CPC Central Committee pointed out that “it is necessary, while properly expanding the total demand, to enhance supply-side structural reform and focus on improving the quality and efficiency of the supply system”.
By undertaking supply-side reform, we can transform coarse, disorderly and failed supply into intensive, orderly and effective supply. In other words, by transforming and upgrading traditional industries, developing emerging industries, using new factors to form new productivity, we can realize the re-balance of supply and demand.
As a result, the 2016 Economic Work Meeting of the CPC Central Committee made arrangements to eliminate excess capacity. China established special funds to provide subsidies for local governments and enterprises in their efforts to eliminate excess capacity. On January 27, 2016, the Executive Meeting of the State Council put forward measures to give financial support to industrial upgrading and development, and proposed loans for “zombie enterprises” to support excess capacity elimination.
Aside from supply-side reform, another major means of eliminating excess capacity is to expand external demand. The “Belt and Road” initiative provides an opportunity to eliminate excess capacity through international capacity cooperation in such fields as iron, steel, cement and plate glass.