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Work Tirelessly to Eliminate Excess Capacity

By Dr. HU Caimei

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 to different degrees. Eliminating excess capacity will probably become the major task of China's economic work in the following 2-3 years or even longer. As a matter of fact, if we can correctly understand excess capacity and identify the breakthrough points of eliminating it, we can remove the barrier obstructing economic growth.

Excess capacity is not a new phenomenon. It is the logical outcome of the economic cycle and the process of market clearing. Since the 1980s, the USA has suffered from serious excess capacity three times. After World War II, Japan was hit by various occurrences of excess capacity in its economic cycles. This round of excess capacity in China is serious because of the overlapping effect produced by the two instances of overheated economic development in 2004-2007 and 2009-2010, and because of the shortage of effective demand caused by the slow performance of the global economy.

Excess capacity is a symptom of imbalanced supply and demand, which is caused by factors on both the supply and demand sides. On November 10th, 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 and forming 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 also established special funds to provide subsidies for local governments and enterprises in their efforts to eliminate excess capacity. On January 27th, 2016, the Executive Meeting of the State Council formulated measures to give financial support to industrial upgrading and development, and proposed phasing-out loans for “zombie enterprises” to support the elimination of excess capacity. A campaign designed to eliminate excess capacity and focused on supply-side reform at its core has been kicked off. 

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 and steel, cement and plate glass.

(April 04,2016)