Research On Market Allocation Mechanism Of Chinese Manufacturing Investment And Capacity Under The Transition Economy

Is market economy is a normal phenomenon that the capacity is slightly larger than thedemand, and it is one of the dynamic response relationship between supply and demand. But theserious surplus production is probably a results of the combined action of market failure andgovernment failure, which will lead to low efficiency of resource allocation and high cost ofeconomic operation. A great achievement has been made in the development of Chinese economyin a short span of30years. Especially since the membership of WTO, Chinese economy hascreated "Growth Miracle", and its path choice is not the so-called good recipe for growth path outof "the Washington Consensus", but the Chinese own road explored from Reform practices. This isdifferent from a complete marketization advocated by western mainstream economics, and it is alsodifferent from the complete planned economic system, but it is a path proved in practice to besuitable for the huge later coming economy in China where reform is gradually deepening. It is anurgent proposition placed in the current academic research field to explore research of the industrialovercapacity problem based on the market perspective, and to grasp the formation mechanism ofsurplus production in China which is a huge economy with high-speed growth and know the relatedeffects between the surplus production capacity and macroeconomic variables.Since the1990s, with the China economic reform step by step, China bids farewell to the"shortage economy" and overcapacity appears gradually in different fields. Entering into thetwenty-first Century, overcapacity expands to the upstream raw materials industry from durableconsumer goods industry. With the Chinese sustained and high economic growth and rapidaccumulation of national wealth, the market mechanism strongly induces the industry investmentduring the demand expansion phase, and accompanied by large-scale investment coming one afteranother there appears surplus production capacity, then the government has repeatedly used macroregulation tools such as controlling the scale of investment and limiting the production, to producehighly-strength intervention in the market, but these tools have failed to make the productioncapacity investment slowdown, and also against the original will. Under the conditions of the continued and rapid growth of massive demand, the accelerated productivity gap causes the"revenge" growth of investment, then leads to double failure of market spontaneously regulationand government regulation, which has resulted in high cost of economic operation. Based on theview of the role of the market mechanism during the period of Chinese economic transition, thisarticle studies four issues. The first one is the dynamic adjustment characteristics of the entry ofinvestment and the exit of production capacity caused by dynamic demand under the specificmarket mechanism. The second one is the asymmetric features of the entry and exit of investmentinduced by the demand in the large-scale economy. The third one is the adjustment of investmentand production capacity under the correlation mechanism between upstream and downstreamindustries. The last one is the effects of the specific macro economy environment on theexpectations and investment behavior of the market entities. All of the above have been studied toprovide a theoretical basis for the new normal desirable industrial policy. Details are as follows:Chapter1introduces the research background and summarizes the significance of this study.Brief comments are made based on the review of the existing research on overcapacity and then thestandpoint of the paper is proposed. The research framework is put forward at the end of thissection.Chapter2is the basis of the theoretical analysis of the article. The basic characteristics ofChina’s economy transition has been summarized first in this chapter, and an overall analysis ofChina’s manufacturing investment and productivity in the configuration and the characteristics ofChina’s overcapacity has been made. The following issues have been studied with breaking theneoclassical microeconomics frame as a start. Capacity adjustment under the exogenous expansionof the market size as a persistent shock. Capacity adjustment under consideration of manufacturersexpectations and exit costs. Overcapacity forming is analyzed under the transmission mechanismbetween industry with simple mathematical models, under the circumstances that excess productioncapacity objectively existing in the imperfectly competitive market is transferred and amplified stepby step in the inter-industry chain. The investment behavior of firms during demand expansion andcontraction and the formation of excess capacity are analyzed under the specific situations ofindustry life cycle caused by frequent switching between supply and demand using model. Theseare the theoretical foundation for subsequent empirical study.With the example of iron and steel industry in chapter3, Based on building the theoreticalmodel containing demand dynamic gap with the quarterly data of iron and steel industry since2003, time-varying parameter model is used to test empirically the asymmetric adjustment mechanism ofthe productivity allocation under demand inducing. Thereby mechanisms of market regulation forinvestments and capacity configuration has been systematically studied both theoretically andempirically. The results show obvious asymmetric features in the formation and exit phases of ironand steel productivity, with demand inducing dynamics and its asymmetric periodic motion；self-correction mechanism of productivity under the situation of frequent switching between supplyand demand is limited; once the deviation from the equilibrium level of production capacity beyondits threshold adjustment mechanism itself, it is unable to restore equilibrium through marketregulation, leading to the extraordinary "trial and error" cost. Grasping accurately the above rules isthe premise of achieving market’s decisive role in the resource allocating process and at the sametime giving full play to government function.Chapter4calculates the capacity utilization rate of manufacturing industry with theproduction function method for2003-2011over China’s rapid economic growth. using a fixedeffects panel model with variable coefficients with the Chinese heavy industries market andinvestment quarterly data from2003till now, we find through empirical test that there aresignificant inter-industry differences in market demand inducing investment effects. Further studiesof the asymmetrical effect of the demand internal and external to investment using the VAR modeland impulse response function show that, domestic demand is the main reason affecting investment,and substantial growth of market demand for various industries induced a significant increaseinertia in investment. Demand growth stimulating effect on investment increasing is significantlystronger than the inhibition effect on investment decreasing of demand reduction. The mechanismof asymmetric investment induction determine the rapid growth of investment and huge stock ofproduction capacity in Chinese heavy industry. The current round of production overcapacity inmany heavy industries is the visual expression of the inducing mechanism under the conditions ofdemand reducing.Based on the industry association mechanism chapter5conducts a comprehensive analysis ofthe effect of the downstream industries development on steel investments during the selectedsample. Dynamic inducing elasticity of the downstream sector demand for investment in theupstream steel industry is estimated with varying parameter model. After a significant induction ofdownstream industries for steel investment is found, though there are significant differencesbetween the various sectors, the impact of downstream industries development on steel industry capacity utilization level is further analyzed as well as the impact on the steel industry generated byfluctuations in the downstream industry demand. Results show that： real estate industry’sdevelopment directly leads to heavy investment flowing into iron and steel industry. multiple effectof correlative mechanism between industries is the internal cause of overinvestment in iron andsteel industry. Solving the problem of excess capacity calls for integrating with the new era’sindustrial strategy so that market may play a decisive role in the resource allocating process andthat government function is giving full play to.Chapter6based on the theoretical predictions of macroeconomic environment effect on microinvestment behavior, index of listed companies market status is rebuilt with the sample of4830balanced panel data from690listed companies during the period2007-2013. we tested empiricallythe path and the result of the effect of macro environment to companies investment using listedcompanies data on the basis of building the index of the market state. The result shows that themacro environment does not affect the investment directly, but makes investment decisionschanged reversely from quiting to entering by changing the micro expectation of market state,leading to induced elasticity growth from14%to2.8times resulting from different market states. Italso shows that the interest rate dose not play an effective role in regulating the investment butpromote a large number of "zombie" companies formed. The industry returns on capital are notpulled down by capital growth in seven typical overcapacity industries, resulting in lack of intrinsicmotivation to quit by adjusting production capacity. There needs to be effective cooperationbetween government and market to resolve the overcapacity issues.