Overcapacity In China Is A Big Problem.

Under the extensive mode of development in the past 20 years, many manufacturing industries, which are vital to the economy and exports, are facing extremely serious overcapacity.

Along with the current slowdown in China, the production capacity will continue in the medium term, and the "one belt and one way" strategy may help China solve this problem from a long-term perspective.

At the same time, exports of these overcapacity industries have returned to pre crisis levels and continue to grow.

In order to ease the pressure on the domestic market, trade partners are increasingly using trade relief. This trend should not change in the short term.

The reasons for overcapacity include excessive investment, insufficient demand, technological progress, external shocks (such as financial crisis) and so on.

In 2013, China's Guiding Opinions on resolving the serious contradiction of excess capacity also summed up the reasons for overcapacity, such as blind investment, low industrial concentration, distortion of factor prices, and local investment policy.

This article will focus on three main reasons for overcapacity in China: the investment driven growth model, the distortion of corporate investment incentives and the massive stimulus after the financial crisis in 2008.

First of all, at the macro level, China's economy has maintained rapid growth in the past 30 years, with an average annual growth rate of 9.8% in the 1978-2014 years GDP.

In the half year after 2001, investment is the first driving force for GDP growth.

In 2009, the GDP growth rate was 9.2%, the investment contribution rate was 86%, while the export contribution rate was -42%.

Specifically in the investment field, China's fixed assets investment mainly went to manufacturing and real estate in the past 2003-2014 years, with an average annual investment growth of 25% and 24% respectively.

A large number of investment poured into the basic industries such as iron and steel, cement, flat glass, chemical industry, textile, metal, paper and so on, which made the capacity of these industries increase rapidly. However, after the financial crisis, the market demand was sluggish, but investment still maintained a relatively fast growth rate, which eventually led to over investment.

Central and local governments play an important role in the investment driven growth mode of China. They formulate and implement policies that aim at economic growth, including five year plan, industrial strategy, and related financial, financial and trade policies.

These policies stimulate investment in some key industries that have significant impact on economic growth and employment.

Local governments also have a strong incentive to expand investment, even in the face of overcapacity and over investment.

Secondly, on the industrial level, China's strong economic growth has strengthened market confidence, and both state-owned enterprises and private enterprises will expand capital investment as an important part of their development strategy.

But the huge scale of China's market and the pition to market economy have increased the difficulty of market coordination.

In addition, Chinese enterprises tend to invest in new competitive industries, which also lead to over investment.

In China's current fiscal system and government officials' assessment mechanism, local governments are competing to attract investment to increase local GDP, taxation and employment.

A series of preferential measures, such as subsidies, land, energy, raw materials and financial support, all push enterprises to expand investment.

Some local governments even set up bankruptcy exit barriers to help enterprises.

Restructuring to ensure investment and employment in their respective jurisdictions.

Therefore, the support of local governments distorts the investment behavior of enterprises.

The dominant position of state-owned enterprises in manufacturing and real estate industry has also led to excessive expansion of capacity.

China's state-owned enterprises not only undertake economic functions, but also assume political functions, including stabilizing employment and preserving and increasing the value of state-owned assets.

Therefore, state-owned enterprises usually get subsidies or credit support to expand investment.

Very low.

Again, after the financial crisis in 2008, the Chinese government implemented a large-scale stimulus plan for steady growth, forming a large number of public infrastructure investment (mainly concentrated in the pportation and power industry).

This further stimulates the rapid recovery and expansion of the upstream industries, such as steel, cement and metal.

In addition to fiscal stimulus, the government has adopted credit expansion and interest rate reduction policies to stimulate economic growth.

Subsequently, the government also promulgated the "ten major industrial restructuring and revitalization plan" to promote the growth and employment of ten key industries, including iron and steel, shipbuilding, textile, light industry, nonferrous metals, equipment manufacturing, petrochemical, automotive, electronic information and logistics.

The plan has introduced a number of supporting policies, including government funds, credit support, tax relief and so on.

These stimulus policies have played an important role in stabilizing China's economy, but no doubt also exacerbated overcapacity.

Data show that 2002-2014 years, cement, flat glass, coke,

The output and capacity of the six industries, iron and steel and electrolytic aluminum, have maintained a sustained growth.

Among them, the capacity growth of cement, flat glass, coke and chemical fiber industry has surpassed the increase of actual output.

The rapid expansion of production capacity shows that the new capacity is increasing every year, so the problem of overcapacity in these industries is becoming more and more serious.

In the same period, the capacity growth of steel industry was slower than that of output.

However, in 2012, the capacity utilization rate of the steel industry was only 72%, but in 2013 and 2014, 27 million tons of pig iron and 47 million tons of crude steel capacity were still added.

Investment in iron and steel industry has dropped markedly, and investment in October decreased by 13.63% (mostly steel rolling) in 2015.

Then, in 2015, nearly 3000 new projects were built, and China's crude steel output still accounted for more than half of the world's total output.

China's largest Steel Corp are also actively looking for opportunities to expand at home and abroad.

The capacity utilization rate of the electrolytic aluminum industry is the lowest among the seven overcapacity industries, compared with 71.9% in 2012.

Since the financial crisis in 2008, electrolytic aluminum has experienced a rapid growth. The average annual output increased by 16.6% in 2010-2014, and its capacity increased by 1 million 100 thousand tons.

The rapid growth of production and production capacity is also reflected in exports: the average annual growth of the export of aluminum and aluminum is 23.4%.