Financial Pressure And Excess Capacity

China's economic construction has made remarkable achievements while also bred a lot of problems,one of which is the increasingly serious excess capacity.Since the emergence of excess capacity in the 1990s,this problem has been continuously fermented and spread,which seriously affects the healthy and sustainable development of society and economy and is becoming one of the main risks challenging China's macro economy.All along,the central government has paid much attention to the issue of excess capacity,and has also continued taking measures to resolve overcapacity and optimize the industrial structure,but with little success.This shows us that the solution to China's overcapacity needs to accurately grasp the inherent causes of this issue.Unlike Western countries,China's overcapacity may be closely related to China's unique system.Many scholars have been trying to find out the reasons for the Chinese-style excess capacity from China's institutional level,but overall,the relevant micro-empirical evidences are still very scanty.This paper attempts to provide micro-empirical evidences of local governments promoting industries with excess capacity from the perspective of financial pressure.Specifically,based on the reform of the elimination of agriculture taxes in 2005,we use county-level data and Chinese industrial enterprise database from 2001 to 2007 to test whether county-level governments would develop industries with excess capacity in a short term in face of financial pressure.The empirical results show that among the same prefecture city,a county which suffered more public revenue loss due to the reform would achieve a greater degree of development in industries with excess capacity in a short term.Furthermore,there is a significant difference between enterprises of different natures.The performance of state-owned enterprises is obvious,while there is little effect on foreign-owned enterprises.There are also subtle differences among different regions.Compared with the central area,the performances of the eastern and western area are more obvious.Finally,this paper briefly explores the inherent mechanism for the development of overcapacity in some industries and finds that it is likely to be the result of local governments relaxing environmental regulations under financial pressure.Based on the results above,this paper puts forward some policy suggestions including deepening the reform of financial system,coordinating the relationship between reform and stability,improving local officials' assessment and strengthening the incentive and restraint mechanism of environmental protection.The study of this paper will help to better understand the reasons why China's overcapacity is fermented and difficult to resolve.The policy suggestions have practical significances on effectively resolving the issue of excess capacity,promoting the "supply-side reform" and improving the financial system.