Feng Lu: Fighting Against Excess Capacity: 1999-2009

 date:2009-12-29 source:BiMBA         

Fighting Against Excess Capacity: 1999-2009

Feng  LU

Professor, Peking University

Excess capacity is the phenomenon that idle capacities are higher than desired level in industrial sector. Idle capacity has justified functions such as accommodating demand fluctuations, increasing competition and enhancing social welfare. But too much idle capacity becomes excess capacity. In market economy, excess capacity is adjusted through price adjustment and market exit mechanism. In China, aggregate demand management policy play an important role on excess capacity, supplemented by industrial polices.

Excess capacity became an issue in China since 1990s. Chinese government has tried to control excess capacity several times in the last ten years. These controls have some achievements, but there are limitations as well. Firstly, it is difficult to diagnose excess capacity. For example, steel industry, regarded as having severe excess capacity, has a fairly high capacity utilization rate of 86% during 1995-2008. At the same time, the trend of steel price is rising since 2003. Secondly, China's demand on material grows fast in the last ten years. In a fast growing market, it is especially difficult to forecast future demand. Estimates in published government documents usually underestimated actual demands.

Solving excess capacity requires synthesized measures. Firstly, strengthen exit mechanism of market economy. Secondly, reform exchange rate regime and interest rate policy to adjust balance of payments and aggregate demand more efficiently. Finally, government should provide information and establish standards on technology, energy and environment. However, quantitative restrictions and investment intervention should be minimized

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