Research Of The "Chinese-style" Overcapacity From The Supply-side Perspective

Since the 1990s China has been plagued by "the chronic illness of overcapacity" in the development process. From the "Tenth Five-Year" Plan onwards, Chinese government included overcapacity control as a focus in macroeconomic regulation and control and constantly adopted a variety of measures to rectify. However, not only has the overcapacity been fundamentally resolved, but it shows a growing trend and has been caught in a weird cycle that "the more control, the more expansion". After the end of the 2008 international financial crisis, China’s macroeconomic situation underwent a fundamental change and turned into a "new normal" pattern of continued decline in economic growth. With the slowdown in economic growth, industrial overcapacity becomes more prominent and has become an important obstacle to economic transformation and upgrading and structural optimization, continuously aggravating the systemic risk in macroeconomic development. As stated in the "Guidance on Resolving the Contradiction of Serious Overcapacity" issued by the State Council at the end of 2013, "serious overcapacity has increasingly become a source of outstanding contradictions and problems in China’s economic operation"; " if China fails to promptly take measures to resolve the matter, it is bound to exacerbate the vicious market competition, resulting in many problems such as expansion of industry loss, corporate employee unemployment, and increase in banks’ bad assets, exacerbation of energy resource bottlenecks, deterioration of ecological environment, and so on, directly endangering the healthy development of industries, and even affecting the improvement of people’s livelihood and the social stability"; therefore, governments at all levels should be" fully aware of the importance and urgency to resolve the contradiction of overcapacity." In this context, it appears significant to make in-depth study of the root causes of domestic overcapacity and to find and develop effective methods to resolve the overcapacity.This paper attempted to study the problem of overcapacity in China. Unlike the existing literature, this paper based on the relevant principles and theories of Western economics and supply-side school studied China’s overcapacity from a more novel perspective, i.e. the supply side. This paper took full account of China’s current situation where its macroeconomic development has entered a "new normal" state, and thus has some real meaning and significance to the practical work on resolving overcapacity.In this paper, methods such as case study, combination of standard research and empirical research, etc. were used, attempting to build the research on the basis of rigorous theoretical analysis and robust empirical research. The full text was divided into six chapters.Chapter I is Introduction. The main contents include research background, research methods, and research significance, structural arrangements, research framework, and innovations and limitations.Chapter Ⅱ provides some basic judgments on the "Chinese-style" overcapacity. For the proposition of overcapacity, there is some controversy in academia and more plausible arguments and judgments about China’s overcapacity, and even a lot of confusions exist at the policy level in China. On the basis of absorbing the research results of extensive domestic and foreign relevant literature and organically combined with the actual situation of overcapacity in China, this chapter made a comprehensive and detailed exposition on "Chinese-style" overcapacity and formed several basic judgments thereon to serve as foundation for the later analysis and study. The specific contents include literature review and analysis of overcapacity in five aspects:definition, identification, and measure, cause analysis, and countermeasures.Chapter III presents a new perspective to study "Chinese-style" overcapacity, i.e. the supply side. This chapter found after studying China’s overcapacity in the economic development process and macroeconomic regulation and control that although economic fluctuations at home and abroad have some impact on domestic overcapacity, the direct causes of overcapacity in China are blind investment and redundant construction, and these corporate behaviors are closely linked to China’s factor supply and supply efficiency. According to the supply theory of supply-siders, factor supply and supply efficiency are precisely the deep-rooted cores of the "supply side". The specific contents of this chapter include the study of the theoretical basis of overcapacity from the supply side (analysis and discussion of domestic and foreign supply theories), relevant literature review, and analysis of domestic overcapacity from the supply side.Chapter IV illustrates factor market distortions and overcapacity. Factor supply is an important connotation of "supply side", which is a prerequisite for production and supply. China’s factor supply is in a twisted state, for which the root cause is factor market distortion, so this chapter studied the relationship between factor market distortions and China’s overcapacity. The impact of factor market distortions on the overcapacity in China is mainly reflected in two aspects: First, factor market distortions will produce distorting incentives in corporate investment decisions, and thus lead to blind investment and redundant construction; Second, factor market distortions will also produce distorting incentives in corporate exit from the market, preventing enterprises exiting from the market, and thus leading to the curing of overcapacity. For the links between factor market distortions and overcapacity, this chapter explained by a case study of the polysilicon industry, and also conducted an empirical test, which using fixed effects modeling of panel data tested the 1992-2013 data on 28 Chinese industrial manufacturing industries and found that factor market distortions had a significant impact on China’s overcapacity. The specific contents of this chapter include the definition, present situation and cause analysis, and measure of factor market distortions, as well as analysis and empirical test of the mechanism of factor market distortions forming overcapacity.Chapter V presents technological progress and overcapacity. Supply efficiency is another important connotation of "supply side". This chapter hence studied China’s overcapacity mainly from the perspective of supply efficiency. Since the constituting basis of the macro-supply efficiency is corporate production efficiency at micro level, while technological progress is the key to improving enterprise productivity, this chapter specifically analyzed and studied the links between technological progress and domestic overcapacity. The impact of technological progress on China’s overcapacity can also be analyzed from two aspects:First, in the formative stage of overcapacity, Chinese enterprises’ status quo of low technological level and lack of innovative capacity has an impact on enterprise investment decisions, which easily lead to low-end redundant construction, structural overcapacity, and other problems; Second, in the resolving stage of overcapacity, enterprises’ low technological level and lack of innovative capacity not only restrict the export trade, but also hinder the industrial restructuring and upgrading, thus slowing down the digestion of overcapacity. To prove the links between technological progress and overcapacity, this chapter using the fixed effects modeling of panel data tested the 2000-2013 data on 28 Chinese industrial manufacturing industries. The results of the modeling showed that the impact of technological progress on overcapacity was significant. The specific contents of this chapter include the definition and the status quo of technological progress, China’s path finding for technological progress, analysis and empirical test of the mechanism of technological progress affecting the overcapacity.Chapter VI gives conclusions and recommendation. This chapter first summarized the main work and conclusions of this paper, and then on this basis proposed a focus on supply management in order to resolve overcapacity, while making specific suggestions for China in strategic adjustment from demand management to supply management; in the meantime, proposed for the analysis in Chapter IV and Chapter V specific countermeasures for China to speed up factor market reforms and technological progress, and finally, proposed prospects for the future research directions.In summary, this paper made in-depth study of China’s problem of overcapacity from the perspective of the supply side and obtained the following conclusions:(1) overcapacity in fact is one of the specific embodiments of structural imbalances existing in the supply side of the national economy, which can be analyzed specifically from two aspects of factor supply and supply efficiency.(2) local governments applied distorted incentives through factor market distortions in enterprises’investment decision-making and exit from the market, thus leading to overcapacity and curing of overcapacity, and to this end, it is of great significance to accelerate factor market reforms and solve factor market distortions in order to resolve China’s overcapacity.(3) technological progress has a certain impact on overcapacity in both the formative stage and the resolving stage, based on which, speeding up scientific development and technological progress and improving the technological level and innovation ability of enterprises has positive effects for resolving China’s overcapacity.This paper probably made the following innovations:1) studied and analyzed the controversies one by one that exist in the research of China’s overcapacity and summarized the essential features of "Chinese-style" overcapacity combined with the historical experience and the current situation of China’s overcapacity; 2) established the basic framework for the analysis of overcapacity from the supply side and also proposed Intermediation Countermeasures based on the supply side. Combined with China’s macroeconomic policies, this paper made a comprehensive review of the history of China’s overcapacity and found that overcapacity is one of the concrete manifestations of structural imbalances existing at the supply side of national economy and accordingly proposed a viewpoint of studying China’s overcapacity from the supply side. The specific research concentrated on two aspects:factor supply and supply efficiency; 3) Took advantage of the panel data on China’s manufacturing industry established a fixed effects model and made an empirical test. Proposed a view that factor market distortions will directly boost the overcapacity, and found that lack of technological innovation is one of the main initiators of China’s overcapacity, accelerating technological innovation is of great significance to resolve the overcapacity.