Analysis On The Formation Mechanism Of Overcapacity In China Under The System Of Transition

Since 1997,the first time that overcapacity was put forward in China; overcapacity has plagued the economic growth.With the frequency of occurrence and general characteristics, overcapacity in China is significantly different from other countries. Apparently, the literatures abroad, which considered the imperfection of market led to overcapacity, are difficult to clearly explain the situation in China. Some domestic literatures focused the reasons of special system, but they are mostly limited to qualitative analysis. Thus the point of this paper is quantitative methods on the basis of qualitative analysis, and then the formation mechanism of over-capacity in the existing system can be more clearly drawn.Overcapacity has been accompanied with China’s economic growth, since the early 1990s. Under the common influence of government and market, the degree of excess is different. The more serious periods are the 1990s, from 2002 to 2006 and 2008 when the economic crisis happened to now. The three times of overcapacity have their own characteristics and special reasons, but they all happened in the period of high economic growth, and have led to the decline of profit margin in industries. So it is obvious to find the three common reasons:The industrial policies formulated by central government has a direct effect to the overcapacity; local government affects the industrial layout and production level by the control of local economy;property rights and management system of state-owned enterprises weaken the role of the market.As the main roles in the common reasons is central government, local government and state-owned enterprises, this paper establishes two decision models of normal enterprises and state-owned enterprises to attain the final equilibrium of capacity. Central government, local government and normal enterprises interact with each other in the decision model of normal enterprise. The process begins from the industrial policies formulated by central government. Then local governments make the taxes or subsidies plan under financial incentives and promotion system. Enterprises decide the level of capacity according to the local policies and market situation. When significant overcapacity occurs, central government would enact the suppressive policies to eliminate backward production capacity. If the industries turn down under the suppressive policies, the central government would relax policies. Thus a cycle has completed. In this process a Game is existed in the three roles, and the resulting Nash equilibrium is a state of overcapacity which is higher than the full market. As the managers don’t have the ownership of state-owned enterprises, they consider output as their decision target besides profits. At the same time the managers is close to government, so they have a great advantage in terms of resources. Both lead to the excessive growth of the capacity of state-owned enterprises.In view of accessibility of data and accuracy of conclusion, this paper uses non-parametric frontier method to calculate the capacity utilization in the empir-ical analysis. Calculate the CU of 25 industries from 1991 to 2010 to prove the overcapacity. And it is more clearly to find out the performances and characters in the three significant periods of overcapacity. Then the paper carries on the empirical analysis of all provincial CU and the various effect factors according to the formation mechanism. The random effects panel data analysis demonstrates the eff-ect of the intervention of local governments and state-owned enterprises. The role of central government, although there is no direct test, has been indirectly proven through the behavior of local governments.On the basis of the conclusions of the theoretical and empirical analysis, there are three policies to improve the situation of overcapacity. Improve the industrial policy and exit mechanisms. Improve fiscal and tax systems and officials promoting and appraisal systems, regulate the behavior of local governments. Speed up the system of property rights and the reform of state-owned enterprises. Improve factor market and financial and credit system.