In recent years, excess production capacity has become a chronic disease affecting China’s economic development. The Decisions of the Third Plenary Session of the Eighteenth CPC Central Committee proposed establishing a sound long-term mechanism for preventing and resolving overcapacity as well as increasing the weight given to overcapacity and other indicators in the government performance evaluation system. To solve the problem of overcapacity it is necessary to get to the root of its causes and establish measures to prevent and resolve it.
Since reform and opening up, China has experienced three instances of relatively severe overcapacity, which greatly harmed the economy, the financial system, and the environment. They also seriously affected the quality of China’s economic growth, made it more difficult to make adjustments to the economic structure and carry out industrial upgrading, and even affected social stability. The reasons for overcapacity are relatively complex, including irrational economic structure, improper investment-consumption ratio and ambiguous industrial policy. To resolve overcapacity, the key is to create long-term mechanisms to get the market to play a decisive role in the allocation of resources.
Focus on Adjusting the Structure of Aggregate Demand
Aggregate social demand includes both investment and consumption demand. The structure of demand determines the industrial structure, and adjusting the structure of demand is a prerequisite for managing overcapacity and adjusting the industrial structure. To gradually increase consumption, the investment rate should be lowered, which will provide a positive environment for reining in overcapacity caused by investment demand and promote industrial restructuring and upgrading, as well as push industries with production overcapacity toward producing consumer products, service sector restructuring or industrial upgrading.
Vigorously Improve the Market System
The focus must be on deepening market reforms regarding basic industries and factors of production, including land, mineral resources, labor, and finance, as well as giving full play to the decisive role of the market in allocating resources. Looking at the direction of future reforms, the key to reforming basic industries is to relax access to create a competitive market structure, as well as to have effective regulation of natural monopolies. The key to reforming the land market is to establish a land system in which the rights over state-owned land and rural collective construction land are equal, there is a unified market, and value-added income is shared equitably. Reform of the finance market should aim to relax entry for financial institutions, promote interest rate liberalization, establish a multi-level capital market, strengthen the finance market’s support for SMEs and the reorganization of property rights, and improve the competitiveness and efficiency of the real economy.
Relax Market Access
Creating a market environment of fair competition between state-owned and private enterprises would give full play to enterprise micromechanisms and entrepreneurs. Pushing on with streamlining administrative procedures and microeconomic deregulation will help to create a market environment of fair competition. There needs to be reform of state-owned enterprises, especially the complete separation of state capital ownership and business ownership. Allowing enterprises to compete fairly in the market is the basis for promoting enterprise innovation, as well as the basis for resolving overcapacity.
Reform the Fiscal and Taxation System and Tax Structure
There is a need to optimize the government evaluation system, promote local fiscal transparency, and further urge local governments to make the transition from a development-oriented government to a public service-oriented government. Fiscal and taxation reform should drive the reallocation of financial resources through optimal adjustments to powers of office and promote the development of main local taxes, such as real estate tax and excise tax, and the levying of environmental taxes. It is necessary to alter the means by which local governments attract investment and their tendency to place too much emphasis on industrial development. Improvements should be made to government accounting systems, a balance sheet of government assets should be drawn up, and there should be greater transparency in local financing and limits on the size of local debts. It is necessary to promote reform of transparency in local finance to urge local governments to focus efforts on creating a healthy environment and provide public services.
Create a Sound Property Rights System
The government should reform the ecological and environmental protection management system and prevent high energy consumption, high levels of pollution, and the overdevelopment of poor quality industries. A balance sheet of resources and the environment should be drawn up that clearly sets out the carrying capacity and its measurement criteria of resources and the environment and establishes a red line for the ecological environment. Outgoing evaluations of resources and environment should be carried out for leading cadres to establish a lifelong accountability system of damage liability. Market-based mechanisms to promote environmental protection should be introduced, the principles of paying for using resources users and whoever pollutes pays should be implemented, and resource and environmental costs for enterprise production and operation should be raised. It is necessary to promote the establishment of regional cooperation mechanisms on emissions as well as trading systems for energy saving, carbon emissions, emissions rights, and water rights, and to improve the interregional ecological compensation and payment system.