Research On The Overcapacity Problem Caused By Local Government Behaviors In China

The international financial crisis makes China’s overcapacity problem in some industries emerged in2008, which is highly attached by the government, experts and scholars. For dealing with the impact of this problem and guiding the industries healthy development, the State Council approves and transmits the opinions of Development and Reform Commission. It’s pointed out the overcapacity problem in iron and steel, cement, plate glass, coal chemical, polysilicon and wind power equipment industries. Furthermore, it puts forward the relevant strategies and measures from the factors of environmental protection, land management, project approval for the issues. In fact, the overcapacity problem has been a focus of national macro-control, the relevant policies of suppression excess capacity problem promulgated by the state almost without interruption in recent years. However, the overcapacity problem still repeats. From the causes of overcapacity problem, the region’s economic development and corporations’investment decisions are affected by local government’s behaviors greatly. Therefore, the dissertation researches on overcapacity problem from the perspective of local government’s behaviors.This dissertation uses normative research method, empirical research method and case study method. It bases on the research methods of public choice theory, and combines with industrial organization theory, welfare economics, excessive competition theory, excessive entry theory, excessive investment theory, government intervention theory, government failure theory, etc. and further integrates the fiscal decentralization system and government officials’performance assessment system, studies on the mechanism of overcapacity which causes by local government behaviors, the game between local governments and among local government, central government and enterprises. It’s making China’s2005-2011listing corporations as research samples, using the panel data analysis method, combining with the fixed effect model and group inspection, discussing the relationship among local financial self-sufficiency degree, local GDP growth rate, state-owned enterprises and overinvestment. At the same time, the dissertation studies the overcapacity of electrolytic aluminum industry. Finally, it puts forward some specific suggestions to alleviate the overcapacity problem.Specifically, there are eight parts. The first part is introduction. It provides an overview of the research background, research methods and significance, analysis framework, innovations and deficiencies.The second part is literature review. The main contents include:defining the concept of overcapacity; summarizing the causes of overcapacity from the aspects of economic cycle, enterprises’ decisions and institutional factors; summing up the mitigation measures of overcapacity.The third part is theoretical basis of overcapacity and local government behavior. It Includes:excessive competition theory, excessive entry theory and excessive investment theory; public choice theory; the theory of government intervention and government failure.The fourth part is mechanism analysis of overcapacity caused by local government behavior. The reform of tax-sharing fiscal system, in1994, makes local governments own more power and increase the enthusiasm of local governments in economic development. At the same time, it also forms the competitions among local governments. Because of China’s highly centralized political system also exists in the financial system, local governments do not get the corresponding financial power, in other words, at present the most financial powers are still concentrated in the central, duties and responsibilities of the local governments actually do not match. That’s leading to the vicious competitions among local governments intensified, and then local governments have to find more resources out of the system. In order to win in the fierce competitions, the local governments may take land, resources and environment in exchange for local economic growth. By transforming the enterprises’ internal costs to other aspects, local governments intervene in the investment decisions of enterprises and the operational mechanism of market. Thus, the overcapacity problems in some industries exacerbate. On the other hand, local governments focus on the GDP growth rate excessively, also because of present government officials’ performance assessment system which takes GDP as the core. In the promotion game, only a limited number of local government officials can promote. The promotion of one local government official will directly reduce the other local government officials’ promotion chance. This political tournament mode has the features of zero-sum game. It will become a vicious competition which is only for political gains without regarding to economic and social costs. Therefore, the current government officials’ assessment and promotion system becomes one of the power that local governments intervene in enterprises’investment decisions excessively, and then leads to the industries’ overcapacity problem seriously.Transferring the enterprises’internal costs and risks to other aspects are the measures of local governments’intervention. In the matter of enterprises’internal costs externalization, it includes three aspects. The first approach is land benefit, due to local governments’dual nature and part of land’s fuzzy property rights, local governments could give subsidies to enterprises through the form of land benefit. The second approach is environmental conditions. The environmental supervision and management departments implement the dual management system. In other words, environmental protection department of the regions not only accept management of superior environmental protection department, but also accept local government’s management. In such system, environmental protection departments are affected by the local government a lot. The third approach is tax benefit, in the process of competition, local governments tend to use lower tax rate, less tax categories as preferential conditions to attract the investment of enterprises, so as to obtain the advantage in the market and resource competitions. At the risk externalization aspects, firstly, local governments which are the shareholders of city commercial banks have a strong control of the commercial banks, and can intervene in commercial banks’credit business. Secondly, policy loans’costs are often very low and the term of the loan is long, local governments could obtain loans from the policy bank by various means, and then directly or indirectly give them to enterprises. In addition, because of fuzzy property rights of land, local governments can provide substantial subsidies for business investment. The soft budget constraint of the financial system makes local governments to help enterprises transfer costs and risks. The costs of private investors are far less than the social costs. It makes enterprises’investment incentive structure and investment behaviors distort. Accordingly, there are some negative effects, including impact on the interests of residents, impact on the tax system, effects on the ecological environment and financial risk.The fifth part is the games in overcapacity. The theory analysis of local governments’ competition mainly uses game theory to explain the influence mechanism between local governments and among local government, central government and enterprises. The game between local governments, mainly including:intergovernmental fiscal competition and the official promotion game. The decision games among local government, central government and enterprises, mainly research that local government uses outside-the-system competition means to affect enterprises’investment decisions.The sixth part is empirical study and case analysis. In the empirical study, the dissertation uses the fixed effect model of panel data to analyze the data of listed corporations (2005-2011), and to research the enterprises’excessive investment behaviors which are affected by local governments from three aspects. It validates three hypotheses, including:there is a negative correlation between local financial self-sufficiency degree and corporations’overinvestment behaviors; there is a positive correlation between local GDP growth rate and corporations’overinvestment behaviors; there are excessive investments whether in local state-owned or state-owned enterprises. Therefore, it suggests that alleviate overcapacity problem which is caused by local governments’ intervention can mainly from perfect financial system, reduction effect of GDP growth rate, separation of enterprise from administration.In the case analysis, the dissertation makes electrolytic aluminum industry as an example research present industry overcapacity problem. Through the study of electrolytic aluminum industry overcapacity situation, it sums up characteristics and causes of industry overcapacity. Although the industry overcapacity situation is affected by the economic cycle fluctuations, but the institutional factors are the main reasons. It confirms the view once again.The seventh part is suggestions. Based on the above study, it puts forward some suggestions, including:accelerating the reform of the financial system; improving the financial system arrangement; inhibiting local protection acts; strengthening the supervision behaviors, etc.The eighth part is conclusion and prospect. It summarizes the main research contents of this dissertation, and proposes the future research direction.To sum up, the dissertation reveals the formation and growing mechanism of overcapacity from the aspect of local governments’behaviors, points out the fundamental reasons of present overcapacity problem, and puts forward some relevant suggestions. The main innovations of this dissertation include:pointing out the root causes of industry overcapacity problem; verifying the overinvestment causes by local government behavior; putting forward a new classification method of overcapacity.