The root causes of excess production capacity

Excess production capacity is not limited to some conventional industries, but also some emerging industries, and should remind the government to avoid interfering too much into the development of industry, said an article in the 21st Century Business Herald (excerpts below).

The State Council recently issued a guide on solving the problem of excess production capacity in the sectors of iron and steel, cement, electrolytic aluminum, sheet glass and shipping.

This is not the first time that the central authority has issued such a guideline to deal with excess production capacity. Yet, excess production capacity is more serious now and some new industries, including wind power and solar panels, are also suffering.

The government should first reflect on the causes of the issue and take more well-targeted measures to address it.

On the one hand, it is hard for new industries to grow in some backward areas. As a result, to maintain economic growth, the government is promoting some conventional industries, in spite of excess production. On the other hand, local governments pay too much attention and energy to boost expansion and growth of some new industries, regardless of the changes in market demand.

The preferential polices in land and tax make excess production capacity a new problem for the new industries, especially under the influence of the global financial crisis.

The excess production capacity of some industries is rooted in local government protectionism in the new industries and reliance on the conventional industries.

It takes a certain period of time to weed out excess production. Meanwhile, it takes more time to foster the healthy growth of new industries.

Sacrificing some economic growth, to some extent, will help shorten this period of time.