A Study On The Formation Mechanism Of Overcapacity In China

Overcapacity has been a serious problem in China since the mid of 1990 s. The causes and the governance o f overcapacity have been concerns o f Chinese governments and academia. From the perspective o f practice o f China’s overcapacity management, the governance policy did not reach the expected effect, and caused many adverse reactions. This paper studied the forming mechanism o f overcapacity, and proposed the management policy suggestions based on the theoretical analysis framework o f overcapacity.Overcapacity can be divided into surface overcapacity and deep overcapacity. The thesis analyzes the formation mechanism o f overcapacity from both micro and macro perspective respectively. On the macro perspective, the paper builds a macro excess intensity index. In the national economy, if the economic subjects have strong incentives to invest and the industry investment expansion is coordinated and in proportion, the whole national economy will have a rapid economic growth under the stable equilibrium state. However, when the investment expansion is not balanced within the industry, it can cause imbalances in development of the whole national economy. Macro overcapacity intensity index will increase as part o f the expansion o f the industry investment. If not curb the investment expansion timely the economy will appear on a large scale, serious overcapacity.On the micro perspective, this paper constructs an overcapacity analysis framework in the transition condition, and put forward a double principal-agent model named uthe principal-agent supervisor-agenf, model. In the analysis framework, the central government entrusts to the enterprise management and supervision o f local government, in order to stimulate the enthusiasm o f the local government to develop the economy, carried out the basis o f economic growth promotion tournament system, let the local governments at all levels are in competition under the pattern o f economic growth. In order to pursue maximize the interests o f the local economy, the local governments interfere the enterprise management and production. Under the intervention o f local governments, enterprises often consider more for the present economic interests, rather than the long-term benefits. Enterprises invest in some high input, high output, short period project regardless o f the market supply and demand as well as regional comparative advantage. This result is bound to cause the regional industrial structure convergence, and every place lost comparative advantage. The phenomenon o f overcapacity appeared in large scope.In the current economic transition condition, the phenomenon o f overcapacity in China has a very complex mechanism. To solve the problem o f overcapacity, we need to clarify the following three relationships: the relationship between the central andlocal government, the relationship between government and market, the relationship between local governments.The governance o f overcapacity must be conducted from the strategic planning and consideration, and formulates the strategic countermeasures. Then we can realize the benign development o f the industrial structure. First o f all, the state should deepen the system reform and, eliminate the institutional barriers which lead to overcapacity. Secondly, we should make full use o f market mechanism to eliminate overcapacity. China must refonn the production factor market, and straighten out the price o f all kinds o f factors o f production. Thirdly, we should promote the adjustment and reconstruction o f industrial structure. Due to lack o f deepening the innovation o f mechanism and environment, Chinese industry has a huge gap compared with the developed countries. To settle China’s overcapacity fundamentally, we should understand the mechanism o f overcapacity and deepen the innovation path out o f the industry.