Evaluation of Overcapacity with an Innovative Definition
It has been called for years to manage overcapacity, yet only leading to unsatisfactory results.
The western theories of overcapacity cannot be simply applied in China. The strategies proposed by the previous research on overcapacity have failed to meet their objectives. A small portion of problems have been solved at the cost of generating more confusion.
The data of overcapacity provided by enterprises have severe ambiguity and uncertainty, lacking reliability.
Overcapacity cannot be concluded just according to idleness of equipment, reduction of product price, diminution in enterprises’ profits, and decrease in investment expenditure. Overcapacity is primarily induced by over-investment; thus, over-investment is the starting point to manage overcapacity.
Overcapacity comes from the voices of the government officials and SOEs’ leaders. The former has the motivation for pursuing rent-seeking, whereas the latter often attempts to maintain monopoly and to repel competition.
The traditional definition of overcapacity neither considers the time series of the market demand, nor eliminates outdated capacity that has to be discarded; therefore, this definition exaggerates overcapacity with a great possibility.
The definition of innovation can better depict the development of overcapacity. Take the steel as an example. Before 1991, China’s steel capacity was almost equal to the market demand. Between 1992 and 1994, the shortage of the steel capacity attracted local governments to invest heavily in production of steels. During 1995 and 1998, China’s steel capacity was at a proper level. From 1999, steel’s capacity had long been in shortage; accordingly, the investment in and production of steels had stepped into a fast growing track. After the 4 trillion yuan stimulus package in 2008, steel’s capacity has been improved greatly. Affected by the control policy on China’s real estate market in 2011, the steel’s capacity changed into surplus from shortage. In 2013, the steel’s capacity reached 69,970,000 ton, and the steel industry stagnated.
Overcapacity can be classified into three basic categories, weak link surplus, local surplus, and periodic surplus. The overcapacity of steels, cement, and flat glass belongs to the weak link surplus, the overcapacity of raw aluminum belongs to the local surplus, and the overcapacity of ship building belongs to the periodic surplus. Different strategies have to be adopted for different categories of overcapacity.
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