The Formation Mechanism And Management Of China 's Overcapacity Under The Industrial Life Cycle

Since the1990’s, along with the continued rapid growth of China’s economy, overcapacity has gradually become a major problem of the sustainable development of our economy and society. Overcapacity has a negative impact on our economic development and is being intensified. If overcapacity is not resolved, it will inevitably affect China’s economic development, and even conduct all aspects of social life. Given the situation of China’s overcapacity is very complicated and the policy is practically ineffective, we must understand the causes and the formation mechanism of overcapacity, in order to identify specific measures to reduce the impact to a minimum degree.Research on the formation mechanism of overcapacity is very rich, due to a broad explanation and large efforts of the experts and scholars. This paper, first, on the basis of literature review from1990’s, has found some important views on the formation mechanism of overcapacity, covering three aspects:on the government level, we need to consider the game between the central government and local governments, the competition among local governments, and the multiple objectives of the local governments; on the market level, we need to consider the both the diversification and changes in demand, macroeconomic cycles and industrial structure change, as long as market failure; on the enterprise level, the disorders of property rights system and the competitive strategies is indispensible. However, subjected to the circumstances, these studies are mainly part research, and cannot plant a comprehensive research framework on the formation mechanism of overcapacity.Secondly, this paper analyzes the current situation of domestic overcapacity, finding some new features, such as generalization of industry overcapacity, some overcapacity due to the previous problems, the imbalance between the elimination of backward production capacity and the production capacity growth and the complexity of current overcapacity. Then, we have an analysis by comparing the overcapacity among the developed and developing countries.Then I studied the four subjects, who have different qualifications and influencing factors to the formation mechanism of overcapacity in each stage. For example, the central government focuses on determining long-term and national policy, while the local governments prefer to short-term and local implementation. Enterprises, under the market conditions and policies, choose to enter, maintain or exit the industry, as market structure can be changed or imbalanced. To make things worse, under different situations, all these factors play a different role. Therefore, I introduce the industry life cycle as a tool to study all these factors under such a time framework, and explain the present situation.Then, from the perspective of industry life cycle, the paper analyzes, in detail, the traditional industries and emerging industries which are respectively in starting and maturing stage. For the traditional industry, it is always the drastic drop of the gross demand that plays an important role in the overcapacity, while the capacity cannot adapt to such a big change in the short term. Generally, the traditional industry overcapacity mainly goes through two stages. In the first stage, the central government and local governments, in order to avoid the risk of economic downturn, adopt expansionary policies, which play a leading role in the overcapacity formation. Enterprises, however, is mainly to take appropriate measures in accordance with the policies and market; in the second stage, when the economy recoveries and the central government starts to focus on the overcapacity governance, the local governments and enterprises not always implement the policy, which makes the situation much worse. Emerging industries have a different formation mechanism compared to the traditional ones. Mainly due to the vigorous growth in the short-term, supply far exceeds demand growth. Specifically, governments, market and enterprises, all have a prospect and continuously invest new capacity in the production, which eventually causes the overcapacity. However, emerging industries can self-regulate its overcapacity, that is, in the medium and long term, productivity growth is declining, as the plentiful consumer demand will come sooner or later, overcapacity will be eased one day, from which it will be gradually matured. As a result, from the perspective of the industry life cycle, overcapacity may occur several times with a high likeness in the early growth and late mature stages.Finally, this paper presents the conclusions and policy recommendations.