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Excess Manufacturing Capacity

Excess Manufacturing Capacity

Endogenous change of market structure and the harnessing of excess production capacity

XU Zhaoyang;Zhou Nianli

Economic Research Journal,2015,Vol 50,No. 02

【Abstract】 We built a firm dynamics model with demand uncertainty in this paper. According to our research, if there exists higher uncertainty in the demand for the products of some promising industries, firms with higher efficiency in these industries tend to invest cautiously, and this provides opportunity for firms with lower efficiency to survive, leading to a lower level of market concentration and capacity utilization. As these industries get mature and the demand uncertainty decreases, those firms with higher efficiency tend to expand. As a result, firms with lower efficiency will exit gradually, and market concentration and capacity utilization will finally rise to an appropriate level. Therefore, when some promising industries are in their early development stages, it is natural for many firms to crowd into these industries. This is neither a market failure nor a government failure caused by intervention of local governments. We also researched the development history of the household appliances industry and the steel industry in China, and show that the most critical solution to the problem of excess production capacity is to ensure fair competition and let the market’s endogenous mechanism better play its role.

The realistic bases and formation mechanism of overcapacity based on gradual reform

FAN Linkai;LI Xiaoping;YING Shanshan

China Industrial Economics,2015,No. 01

【Abstract】 Chinese market-oriented reforms have incremental characteristics, and the process of marketization in steel, aluminum and other competitive industry lags behind the whole process of marketization process of socio-economic system, the government retains a large number of administrative interventions to maintain the state-owned enterprises strong influence in these industries. With the deepening of market process, private enterprises with strong cost advantage will expand production capacity to erode the market share of state-owned enterprises with high-cost, which in turn leads to overcapacity of state-owned enterprises. The capacity control policy to avoid overcapacity makes the market-oriented process of industry be further left behind, and local governments will ease the strength of regulation to pursue local economic growth, which leads to more serious overcapacity. This paper models the problem from both static and dynamic dimensions to prove that the coexistence of lagging marketization reform and capacity regulation under incremental reform will lead to serious capacity excess problem. This study shows that the capacity control policies should be made considering the balance between overcapacity and state-owned enterprises “strong influence.” But just from the view of overcapacity, capacity regulation in the last ten years may have taken the opposite effect. To fundamentally resolve the problem of overcapacity, it is necessary to accelerate market-oriented reform process in the industries with overcapacity.

Office terms of local officials, enterprise resource acquisition and excess capacity

GAN Chunhui;ZOU Jun;WANG Jian

China Industrial Economics,2015,No. 03

【Abstract】 This paper discusses the causes of enterprise excess capacity from the perspective of office terms of local officials, and an empirical test is made by using the data of World Bank survey data of Chinese enterprise. The results show that the fourth and fifth year of tenure is the critical period of promotion for the local officials. Compared with other periods of tenure, local officials have a higher probability of promotion during this period. In order to improve economic performance, local officials have incentives to provide relatively more land and financing for enterprises in this period. Compared with officials promoted from other city, officials promoted from local city have more capability to allocate resources and can provide more land and financing resources for enterprise. Compared with other enterprises, sate-owned enterprises can get land and finance more easily. When the costs of key resources reduce, enterprises have incentive to expand production capacity, leading to the decline of capacity utilization ratio and excess capacity. Therefore, the evaluation and promotion of local officials should base on the comprehensive performance of an entire tenure, and it is necessary to construct diversified index system of performance evaluation, improve the exchange between remote officials appropriately, cultivate the market of land and financing and other factors, and strengthen the budget constraint of state owned enterprises.

The optimal space of China's industrial policy: subsidy effects, compatible competition and overcapacity

HUANG Xianhai;SONG Xueyin;ZHU Zhujun

China Industrial Economics,2015,No. 04

【Abstract】 After the worldwide disputation about “East Asia miracle” in the mid-1990s, the new phenomenon-overcapacity of strategic emerging industries in China now attracts widespread attention to the government intervention policy once again. China industrial policy seems to fall into the circular path “stimulation extension-elimination-stimulation”. Based on the extended “2×2” Bertrand model, this paper found the theoretical mechanism through which subsidy policy show different results just because it's different implementation methods. Subsidy policy can gets more incentive effects of innovation if it implemented in a competitive way, but when the degree of market competition surpass a certain limit, ongoing subsidies would reduce the sensitivity of enterprises to the industry competition pressure, and cause the risk of “production only in order to obtain subsidies” and overcapacity. The core conclusion of this article is that there exists the “optimal space” for industrial policy which based on industry characteristics. If industrial policy deviate more from the optimal space, the policy effect would expected to be inefficient. Based on these insights, we propose a high operational and systematic optimization framework for optimizing the Chinese industrial policy.

Government improper intervention and over-capacity of strategic emerging industries: a case study of Chinese photovoltaic industry

YU Donghua;LV Yinan

China Industrial Economics,2015,No. 10

【Abstract】 On the basis of “market failure theory” and “system distortion theory,” this paper puts forward “government improper intervention theory,” and studies the reason and mechanism of the over-capacity in strategic emerging industries from the perspectives of government action, industry internal links and supply side. The paper takes the photovoltaic industry as an example and divides the industry into the upper, middle and lower reaches, and measures the capacity utilization rate of the industry and its three reaches by production function approach in the empirical analysis. And meanwhile this paper quantitatively estimates the government subsidies, the distortion degree of land price and financial support and their effect on over-capacity. The results show that, on the one hand, not only structural over-capacity, but also systematic over-capacity coexist in the photovoltaic industry. On the other hand, though traditional government intervention has exacerbated over-capacity in the photovoltaic industry, its impact varies much in terms of different internal links. In general, in the industry the link with greater government intervention always has greater degree of over-capacity. To resolve the current strategic emerging industry over-capacity problem, it is necessary to change the traditional supporting policies, avoid the inappropriate government intervention, further promote the marketization of the factor market, improve the capacity of enterprises’ key technology research and manufacturing, and avoid a low-end locking on the emerging industrial chain, in order to form a dynamic mechanism with innovation as the core.

Can the Belt and Road Strategy solve the problem of iron and steel production overcapacity in China? A study based on TVP–VAR–DMA

NI Zhongxin;LU Xing;XUE Wenjun

Journal of International Trade,2016,No. 03

【Abstract】 This article studies the main factors affecting demand for Chinese steel and uses Small, Medium, and Large TVP-VAR models as well as TVP-VARDMA and TVP-VAR-DMS models to forecast demand for Chinese steel. The results show that the TVP-VAR-DMA model adapts quickly to gradual and sudden economic changes in China and greatly improves the accuracy of current predictions. The prediction results from our study show that based on IMF predictions of the GDP growth of various countries and the condition that the Chinese steel production capacity would be capped, the Belt and Road strategy would be able to solve the problem of Chinese steel production overcapacity. The prediction results also show that Chinese demand for crude steel will increase by about 14.6 million tons between 2015 and 2020. In 2020, crude steel overcapacity will only be about 48 million tons. In order to completely solve the overcapacity problem, the Chinese government should further expand the Belt and Road strategy into international steel markets, strengthen the market’s ability to allocate resources and reduce the growth of production capacity of low-level steel products.

Policy gate, wave channels and development opportunities: a theory of optimal government intervention from the perspective of new structural economics

Fu Caihui

Journal of Finance and Economics,2016,Vol 42,No. 06

【Abstract】 It is a very important phenomenon that investment wave and overcapacity occur in the process of rapid structural change in developing countries. From the perspective of new structural economics, this article constructs a theory of optimal government intervention degree based on the exploration of this phenomenon. Firstly, the late-mover advantage exists in the structural change in developing economies because of their location in interior frontier. Secondly, the development opportunities of the late-mover advantage are associated with social consensus but incomplete information, thereby resulting in coordination difficulties of the market and potential losses resulting from investment wave for market subjects and meticulous attitude towards development opportunities. Finally, market cautiousness lead to insufficient utilization of development opportunities, and the government implements active development policies to intervene with prices, costs and profit margins in the market so as to enhance market incentives and alleviate constraints. Yet, although development opportunities can be more fully taken advantage of, overcapacity becomes more severe in the meantime. Accordingly, this article advocates that development policy cannot “give up eating for fear of choking,” and the rational practice is to balance the tradeoff between pros and cons and reach the optimal intervention degree.

?Analysis of the influencing factors of the overcapacity of China’s industrial sector from the perspective of biased technological progress

YANG Zhenbing

The Journal of Quantitative & Technical Economics,2016,Vol 33,No. 08

【Abstract】 In this paper, we calculated the overcapacity index of China's industrial sectors by decomposing the capacity utilization rate by the production side and the consumption side and further investigated the effect of the biased technological progress, investment proportion and other factors on overcapacity. This research found that subject to capacity utilization rate of the production side and the consumption side, the general overcapacity index of the Chinese industry shows a downward trend; the capital-biased technological progress leads to preference for capital input in the production, and speeds up the worsening of investment towards overcapacity, which is particularly obvious in light industry. Therefore, correcting the preference for factors input in production may help ease the current overcapacity.

Overcapacity and enterprises’ multi-dimensional innovation capabilities

XIA Xiaohua;SHI Yupeng;YIN Zhifeng

Business Management Journal,2016,Vol 38,No. 10

【Abstract】 Development of innovation and overcapacity are two core issues in China’s present economic development. The analysis on the relevance of the two will provide theoretical support for solving the current overcapacity. Based on World Bank’s enterprise surveys data, the authors study the role of innovation in eliminating overcapacity. Innovation is divided into product and service, process, management and marketing innovations, and it is found that improvement in innovation capability is an effective tool to eliminate overcapacity. Furthermore, in the current stage, strengthening management and marketing innovations will help cut overcapacity in a sustained and stable manner, showing more significant effects. The research also indicates that state-owned enterprises have the dual features of serious overcapacity and insufficient innovation capability, compared with non-state-owned ones. Such dual features are mainly reflected in state-owned enterprise groups whose shares are not completely held by governments. Based on the core role of innovation in the process of eliminating overcapacity, the authors argue that enhancing institutional mechanisms and promoting the innovation of state-owned enterprises have the dual effects on improving state-owned enterprises’ innovation operating efficiency and resolving overcapacity.

Overcapacity, the central government’s regulation and local governments’ responses

YANG Qijing;WU Haijun

The Journal of World Economy,2016,Vol 39,No. 11

【Abstract】 Based on the 2007–2012 panel data of the transfer of industrial land in prefecture-level cities (including sub-provincial cities), this paper evaluates the effect of capacity control policies adopted by the central government in September 2009. We have two major findings through the research. Firstly, after the implementation of the capacity control policies, local governments significantly reduced the transfer of industrial land toward regulated industries with overcapacity; while for the unregulated industries with overcapacity, such transfer kept increasing. Secondly, it was quite common that local governments violated the central government’s prohibitions, especially when their Party secretaries and mayors had huge promotion potential. These empirical results imply that China’s overcapacity problem is endogenously rooted in its special political economic system. In this sense, though China’s overcapacity problem may be relieved in the short term by the central government’s capacity control policies, it cannot be fundamentally resolved unless the market-oriented reforms are further implemented and the political performance evaluation and promotion mechanisms are appropriately adjusted.

The Influence of fiscal transparency on enterprise excess capacity: from perspectives of subjective and passive investment biases

DENG Shulian;ZHU Ying

Journal of Finance and Economics,2017,Vol 43,No. 05

【Abstract】 This paper incorporates fiscal transparency of local governments into analytical system of enterprise micro behavior, and empirically tests two mechanisms of the effect of fiscal transparency on enterprise excess capacity, namely, formation mechanisms of subjective and passive investment biases, according to statistical information like A Study of Fiscal Transparency of China’s Municipal Governments in 2012 and the World Bank Survey of Chinese Enterprises in 2012. It comes to the results as follows. Firstly, the increase in fiscal transparency results in the rise in enterprises’ rational expectations of government behavior, the reduction in uncertainty of judgment on external business environment, and the inhibition of low capacity utilization and excess capacity resulting from enterprise subjective investment bias. Secondly, the increase in fiscal transparency leads to the rise in costs of government intervention in the land factor market, then reduces enterprise passive investment bias resulting from government intervention in the land factor market, and increases capacity utilization.

Does Chinese firm OFDI relieve overcapacity?

WEN Huwei

Journal of International Trade,2017,No. 04

【Abstract】 The Outward Foreign Direct Investment (OFDI) is an important strategy for the government to solve the overcapacity crisis. Based on PSM–DID method, this paper uses firm–level data to examine the relationship between OFDI of Chinese firm and the overcapacity index. The results show that: Firstly, the overcapacity index of Chinese OFDI enterprises has decreased by 2.82%. Secondly, OFDI of enterprises in the overcapacity industries has a greater positive impact on the overcapacity index, meanwhile, enterprises with higher overcapacity index are less inclined to implement OFDI activities. We then examined scale effect and hysteresis effect of OFDI and found that the increasing number of OFDI countries significantly reduces overcapacity index, and OFDI has a long–term effect on overcapacity index. In order to relieve overcapacity, the government should continue the Go Global strategy, in particular, encourage enterprises in overcapacity industries to develop foreign direct investment.

Impact of excess capacity on quality of export products: evidence from micro enterprise data

GAO Xiaona;LAN Yisheng

Journal of International Trade,2016,No. 10

【Abstract】 This paper investigates the impact of excess capacity on quality of export products by using highly-detailed Chinese customs data and Chinese industrial-enterprise data. It indicates that the smaller the scope for quality differentiation is, the larger the negative effects of excess capacity on export quality are. Furthermore, the lower enterprise’s productivity is, the larger negative impacts of excessive capacity on export quality are; the negative impacts of excessive capacity on local enterprises and lower-end products are more significant than that on foreign direct investment (FDI) enterprises and the high-end products. Therefore, differentiated policies should be adopted to deal with excessive capacity in enterprises and products with different characters.

Can deregulation of foreign capital entry improve capacity utilization? ①

YANG Guang;SUN Puyang

The Journal of Quantitative & Technical Economics,2017,Vol 34,No. 06

【Abstract】 Research objectives: to study the relationship between deregulation of foreign capital entry in upstream sectors and capacity utilization in downstream enterprises, based on the view of linkage of upstream and downstream industries. Research methods: this paper estimates capacity utilization on enterprise level by virtue of China Industry Business Performance Database, measures the degree of regulation about foreign entry of 920 four-digit industries through the Catalogue for the Guidance of Foreign Investment Industries issued by National Development and Reform Commission, and then merges upstream and downstream industries under input-output table to conduct empirical study. Research findings: the deregulation of foreign capital entry improves the capacity utilization of downstream industries, and the effect in service sector is more significant than that in manufacturing sector; in addition, this result is robust even if we remove the effect of deregulation of foreign capital entry in the industry which the enterprise belongs to, or we take deregulation of foreign capital entry in India as the instrument variable. Research innovations: we estimate capacity utilization on the enterprise level and make empirical study on the deregulation of the upstream sectors and capacity utilization of the downstream industries. Research value: this paper explains and verifies why policy of opening can improve capacity utilization of downstream industries.

Overcapacity in China: measurement and distribution

ZHANG Shaohua;JIANG Weijie

Economic Research Journal,2017,Vol 52,No. 01

【Abstract】 Overcapacity, local government debt, and the real estate bubble are three major threats to the Chinese economy. The chronic problem of overcapacity has plagued the Chinese economy for many years and has been the focus of macro control. The literature on this topic emphasizes the causes rather than the measurement of overcapacity; and the methods used (investigation method, trend-through-peak method, production function method, and data envelopment analysis method) are static; they overlook the inter-temporal decision procedure of firms. We argue that overcapacity is a byproduct of firms’ market decision and that it is necessary to incorporate firms’ multi-stage input-output procedure into the model to measure overcapacity in China. We thus extend the DSBM model proposed by Tone & Tsutsui (2010) and use inventory as a carry-over activity to re-estimate provincial industrial capacity utilization in China. Our sample covers 30 Chinese provinces and municipalities in 2001–2011, and the input and output data are from China Industry Economy Statistical Yearbook. Our major findings are as follows. (1) There is a significant difference between the static DEA method and the dynamic DEA method in measuring capacity utilization. The static method tends to underestimate capacity utilization and overestimate the excess capacity and the excess volatility of capacity utilization. The results of the dynamic method show that the average capacity utilization rate is 60.68%; thus, there is a serious problem of excess capacity and an obvious procyclicality property. (2) The dynamic analysis of register type, industrial type, and firm scale indicates that the problem of excess capacity exists at all levels. The capacity utilization of SOEs is higher than that of other types of enterprises, the utilization of heavy industry capacity is lower than that of light industries, and the utilization of large enterprises is lower than that of small and medium enterprises. (3) The eastern region of China does not have the problem of excess capacity, while the central, western, and northeast regions have serious overcapacities. This phenomenon exists in terms of different property rights, industrial types, and firm scales, which show that the marketization level, the degree of openness, efforts to protect property rights, and other factors rooted in different regions are the ultimate causes of regional differences in overcapacity. Thus, we suggest that excess short-run micro-policy interventions should be avoided and that the long-run effectiveness of the market competition environment should be enhanced. We extend the literature in the following ways. (1) We measure technological rather than economic capacity, which is more suitable given the development stage and transformation of the Chinese economy: we take inventory as a carry-over activity to model the inter-temporal decision-making procedures of firms, which makes our model closer to the real production procedure. (2) We use a slack-based model rather than a radial model to estimate industrial capacity utilization because it can overcome the problem of overestimation when there are slacks in input or output. (3) Because economic development shows great heterogeneity at the provincial level, capacity utilization may also exhibit large differences between regions. Therefore, we discuss capacity utilization in three dimensions, “registration type,” “light and heavy industry” and “firm scale,” to enhance our understanding of overcapacity in China.

Project matching and overcapacity in China

WU Lixue ;LIU Cheng

Economic Research Journal,2018,Vol 53,No. 10

【Abstract】 Production overcapacity has become an intractable threat to China’s economic development. Since the reform and opening-up, this problem has repeatedly occurred in many fields, to varying degrees and in different forms. The central government has issued a number of related policies, but the effect has not been satisfactory. Compared with the cyclical overcapacity in other countries, China’s overcapacity is more extensive, longer and more repetitive. In particular, examining China’s overcapacity at different times and in different regions and industries, we found that overcapacity was in regions and industries that were neither very highly planned nor very highly marketalized, but rather undergoing the marketization process and maintaining features of the mixed economy. In these fields, both local governments and enterprises are important to the development of industry, and both obtain huge benefits from development. For example, the textile and the household appliance industries experienced severe overcapacity in the mid-1980s and early 1990s, respectively. At that time, the two industries were transitioning from planning to marketing and were the “leading industries” in many local economies. However, these two industries have not experienced large-scale overcapacity since they finished overall market-oriented reform and achieved market-based resource allocation. For another example, the steel industry showed the most severe overcapacity in this round of business cycle. For quite a long time after 1978, when little market reform was seen, the industry experienced severe shortages. Since the mid- and late-1990s, their overcapacity has arisen alongside the incomplete reform. Based on this observation, we analyzed the causes of overcapacity in China from the perspective of the interaction between local governments and enterprises according to the characteristics of China’s project investment, by considering capacity as the standard of matching between local governments and investment enterprises in the project market. We assumed that both local governments and enterprises were competitive, had critical impacts on industrial capacity and derived returns from the matching. Thus, based on the standard matching theory, we obtained the following findings. (1) Industrial production capacity is optimal only when market participants’ shares of returns from a project are equal to the proportions of their contributions. (2) There is an excess (lack) of production capacity if the government’s proportion of returns is greater (smaller) than its share of contributions to a project. Therefore, the difference in distribution of contributions and earnings between the government and enterprises leads to different capacity statuses in different periods, regions and industries. To test the theoretical predictions of this paper, we used the time and the intensity of administrative examination and approval reform as proxy variables for local government revenue-sharing capabilities and estimated the impact of changes in local government shares of return on production overcapacity with panel data of 30 provincial areas and 19 manufacturing industries from 2001 to 2012. The results showed that local government revenue-sharing capabilities significantly reduced the overcapacity rate in the manufacturing industry, the approval center enhanced the capacity usage rate more than 10%, the establishment time increased by a year would improve the usage rate by about 2.5%, and the center type raised at one level would improve the usage rate by more than 2% during the sample period. Results of sub-industry analysis showed that these conclusions were more prominent in state-owned enterprises, high-monopoly industries, heavy industries and industries with serious overcapacity. This paper made the following contributions. First, our analysis offered a theoretical criterion for optimal capacity and regarded excess and insufficient capacity as deviations from optimal capacity. Second, our theory explained the problems of overcapacity in enterprises different in scale, ownership and industries where they are in and how they changed with the promotion of the reform process. Third, we tested the model based on the recent reform of the local administrative examination and approval system, and estimated the impacts of changes in local government’s shares of return.

Is capital price distortion an accelerator for overcapacity?

YANG Zhenbing;CHEN Xiaohan

Economic Review,2018,No. 05

【Abstract】 This paper uses panel data of 31 provinces of China from 2001 to 2013 to calculate the overcapacity index at the provincial level, and examines the direct and indirect effects of capital price distortion on capacity utilization. We find that there is a serious distortion that the marginal product of capital is greater than the cost price in China’s industrial sector. Affected by the sharp decline of capacity utilization rate on the production side, the degree of overcapacity shows an increasing trend. On the one hand, the capital price distortion accelerates the impact of investment on worsening overcapacity through incentive investment behavior. On the other hand, it hinders the improvement of capacity utilization rate by inhibiting technical progress. Therefore, the final performance of the capital price distortions on capacity utilization rate is negative. The rapid expansion of the production scale through low investment cost is the cause of the deterioration of overcapacity, and this phenomenon can be gradually alleviated by improving the price determination mechanism of factor markets.

Fiscal stress, excess capacity and supply-side reform

XI Penghui;LIANG Ruobing;XIE Zhenfa;SU Guocan

Economic Research Journal,2017,Vol 52,No. 09

【Abstract】 The Chinese government is committed to resolving overcapacity. Nevertheless, to this day overcapacity is unresolved and has even worsened. Therefore, the question considering why China’s overcapacity pattern is difficult to change remains to be answered. The discussion of this issue has important practical significance for the structural transformation and sustainable development of China’s future economy. This study argues that market mechanism theory can explain part of the phenomenon but cannot fundamentally explain overcapacity in China. Conversely, the government promotion theory proposes that surplus capacity stems from the unreasonable investment system and the government’s benefit actuation. The literature lacks direct and micro empirical evidence about the motivation of local government behavior. One direct consequence is that even if the support means and policy tools are improved and optimized, due to an internal incentive mechanism, the local government often continues to “innovate”, which ultimately fails to truly resolve overcapacity. This study makes some attempts to provide micro empirical evidence of the government promoting overcapacity industries from the perspective of fiscal pressure, and to explore the empirical effect of “pressure type” fiscal incentives on overcapacity creation and problem resolution, which offers further evidence in favor of government promotion theory. Arguably, certain industries still make benefits in taxes and profits when they have a certain degree of excess capacity, which is the basis of fiscal incentives. Empirical results show that a reduction in the value-added tax (VAT) sharing rate increases the number of new enterprises in overcapacity industries at the two-period lag time, and we find that the new capacity cannot be directly absorbed, thus reducing enterprises’ capacity utilization. The common trends ( placebo and reverse causality tests) indicate that the change in the VAT sharing rate has an exogenous nature. In addition, we find that this conclusion is not affected by economic cycles and local government’s competition. Finally, we do not find that the transfer payment scale increases, which means that a reduction in the VAT sharing rate creates some fiscal pressure. The alternative competition test shows that the development of overcapacity industries does not come from the reduction in tax collection effort. The development of overcapacity industries can alleviate fiscal pressure, as we find that the VAT tax is not significantly negative at the two-period lag. The policy analysis shows that past capacity policy cannot effectively restrict the development effect of the tax sharing rate change, and that local fiscal pressure is an important reason for China’s overcapacity problem. This study makes the following main contributions. First, the empirical results of this paper further verify the incentive effect of fiscal centralization proposed by Tao et al. (2009). The municipal government increases the support economy after the tax centralization, which provides the most direct micro empirical evidence for Chinese “pressure type” fiscal incentives. Second, the empirical results show that fiscal incentives are the key reason for the formation of and difficulty eliminating excess production capacity in recent years. Third, the study demonstrates the effect of tax centralization on the promotion of the development of local industries with excess capacity. However, it shows that tax centralization is not the only policy affecting overcapacity, which means that any policy shocks that reduce local finance may improve local government’s dependence on overcapacity industries. This also provides some enlightenment for the supply-side reform. In addition to resolving current overcapacity industries, we should prevent other high-tax industries from evolving into new overcapacity industries. We should also pay attention to the stabilization of local financial resources in the reform process.

Overcapacity in China’s iron and steel enterprises: causes and differences across ownership

MA Hongqi;HUANG Guitian;WANG Ren;SHEN Guangjun

Economic Research Journal,2018,Vol 53,No. 03

【Abstract】 After growing at an unprecedented rate of approximately 10% annually for over three decades, China’s strong growth streak has recently run out of steam, showing steady and marked deceleration during the new normal. Along with the economic slowdown, the problem of overcapacity in China’s manufacturing industries has become more serious and is attracting greater attention from policymakers. The iron and steel industry is fundamental to the national economy, and its development directly affects China’s national power. Given the importance of the industry, this paper used data from the Chinese Industrial Enterprises Database ( CIED) 1998–2013 to estimate the firm-level capacity utilization in the industry and explored the causes of the overcapacity problem and the differences across ownership. We first documented two stylized facts about the problem of overcapacity. (1) Capacity utilization is not always pro-cyclical. In fact, capacity utilization was counter-cyclical during 2005–2007, when the economy grew rapidly, and after the 2008 global financial crisis. (2) There is a significant difference in capacity utilization between SOEs (SOEs) and non-SOEs. Non-SOEs utilize a higher proportion of their capacity than SOEs. This study analyzed the causes of the overcapacity problem, and the findings are outlined as follows. (1) Non-market factors (e.g., finance support, sunk costs, enterprise scale and employment elasticity) play more important roles in explaining the capacity utilization of iron and steel enterprises than market factors. Therefore, the overcapacity problem reflects the conflicts in the market or non-market methods of resource allocation. (2) The performance of market factors as a mean of resource allocation depends on non-market factors. While finance support and sunk costs strengthen market factors, enterprise scale and employment elasticity weaken them. The latter dominates the former, implying that non-market factors attenuate the allocative efficiency of the market. (3) Non-market factors like finance support become stronger when economic uncertainty increases, thus reducing the function of the market to balance demand and supply for iron and steel. This is why capacity utilization was counter-cyclical during 2005–2007 and after 2008. (4) Enterprise scale is positively correlated with capacity utilization, implying that large enterprises invest more rationally than small firms. In addition, iron and steel enterprises must grow large to upgrade their technology and operations, which helps improve their efficiency and capacity utilization. We also investigated the causes of the difference in capacity utilization between SOEs and non-SOEs. Firstly, the difference mainly results from variations in sunk costs and finance support, and both of them can explain over half of the total difference. More specifically, SOEs have higher sunk costs and more finance support, which reduces their capacity utilization. Secondly, while market factors contribute to only around 33% of the difference, non-market factors contribute to 98.3%. Therefore, the fundamental method for resource allocation is the principal factor for understanding capacity utilization. Thirdly, the difference in enterprise scale is also a determinant of the gap in the capacity utilization rate between SOEs and non-SOEs because large firms utilize more of their capacity, and SOEs are typically larger than non-SOEs. The analyses in this paper have important policy implications. The first one is to improve capacity utilization, and it is urgent to eliminate local governments’ motives to invest irrationally. However, local governments should aim to provide high-quality public service. The second one is that distorted market factors are the channels through which non-periodic power impedes the market’s power to balance demand and supply. Therefore, as the fundamental method of allocating productive resources, periodic market factors should again play a role in adjusting the demand and supply for iron and steel via price. The third one is that a fair, competitive market environment can help overcome the problem of overcapacity. As finance support is one of the most important determinants of the gap between SOEs and non-SOEs, it is best to tighten SOEs’ budget constraints and guarantee financial resources for non-SOEs.

Why is supply-side structural reform inevitable?

ZHOU Mi;LIU Binglian

Economic Research Journal,2017,Vol 52,No. 02

【Abstract】 China is the second largest and one of the fastest-growing economies in the world. It provides a dramatic background for the economic research. With China’s economy shifting from rapid to moderate growth over the past three years, economists have attempted to explain the reasons and mechanisms behind. China differs significantly from the Western developed countries in the characteristics of economic slowdown. While an economic slowdown is always followed by a financial crisis and unemployment in developed countries, its structural reform focuses on domestic financial development, trade liberalization, current account liberalization, and labor market reform. China’s lower economic growth is characteristic of overcapacity as reflected by the overstock and oversupply of products in 14 industries, especially steel, cement, and glass. Faced with this economic slowdown, the Chinese government is engaged in supply-side structural reform. Why is the supply-side structural reform the only way to address the slowdown, and how does China’s reform differ from the structural reform in developed countries? This paper provided an extended supply-demand model with two new hypotheses, namely, saturated demand and exit price, and proposed three different kinds of consumption choice conditions, namely, classic conditions in microeconomics, constraint conditions for exit price, and constraint conditions for saturated demand. It adopted the extended supply-demand model to analyze dual commodity market including both general commodity and real estate. We found that China’s overcapacity is caused by saturated demand in commodity and the real estate market. It is a new problem that micro/macroeconomic studies have not explained in depth. This paper arrived at the following findings. The commodity market is constrained by a “saturated demand trap” that hinders the shift from investment to consumption. Funds are transferred to the real estate market and then stuck in the “investment preference trap,” which leads to the “bad-driving-good” in the dual market and makes commodity market control ineffective. Therefore, the regulation of the real estate market becomes a more important part of macroeconomic control as a whole. The most efficient solution is to combine China’s characteristics, conditions, and recent practices. Looking at the “saturated demand trap” in the general commodity market, we identified what must be supplied. For the “investment preference trap” in the real estate market, we identified the necessary supply targets and focused the supply-side structural reform on the structural adjustment of supply directions and targets. Three shifts are necessary in making policies about the supply-side structure reform in China. First, the single segmented control must be transformed into a dual interrelated regulation. Second, the commodity market must shift from skill to cognition-biased control. Third, the real estate market must shift from price to attribute-based management. Furthermore, developed countries must focus on reforms that optimize finance, trade and labor market. However, China emphasizes the balance of dual market in its supply-side structural adjustment.

Influence of market segmentation on overcapacity of Chinese iron and steel firms

MA Hongqi;TIAN Yuan

Economic Review,2018,No. 04

【Abstract】 Based on the micro-data provided by China Industry Business Performance Data, this article investigates the effect of market segmentation on overcapacity of Chinese iron and steel firms. This article has found that the market segmentation actually controls the external competition on the local iron and steel market, which relieves the stress of overcapacity of local iron and steel firms efficiently in the short term. However, in the long term, the protection of the market segmentation for local iron and steel enterprises is not sustained. This protection will change from a positive effect to a negative effect after three years. This shows that the market segmentation of Chinese regional competition is a shortsighted behavior, which will cause more serious overcapacity in the long run, and the repeated construction of iron and steel enterprises at the present stage is the evidence. Further analysis shows that in the short term, market segmentation in relatively developed regions is more conducive to controlling external competition. However, when the influence of market segmentation on the capacity utilization is gradually shifted from positive to negative, capacity utilization decline driven by the market segmentation in relatively developed regions is significantly faster than in the central and western regions.

Excess capacity and the real options value of multinationality

ZHOU Chao;SU Dongwei

Economic Research Journal,2019,Vol 54,No. 01

【Abstract】 Traditional theories of internationalization posit that multinationality enhances firm value because multinational companies can obtain various advantages through monopoly, ownership and control, internalization, and location. However, multinationality may reduce firm value because it can be accompanied by the liability of foreignness, formal and informal institution distance, and uncertainty of market demand and investment environment. Applications of real options theory to internationalization have recognized that uncertainty in the external business environment is associated with not only downside risks but also flexibility and opportunity that multinational companies can exploit to hedge against various political and economic risks. In particular, the network of multinational operations across different countries is equivalent to a portfolio of switching options, which enables the multinational company to shift production, investment, and sales activities across its subsidiaries in different countries when the external environmental condition changes, such as a sudden big movement in the exchange rate. In response to new opportunities and challenges, managers of multinational companies can maintain flexibility in deliberating, evaluating, and revising important decisions, thus creating real options value by deferring and switching investment projects across subsidiaries located in home and host countries. This flexibility lowers the downside risk and enhances the upside potential for multinational companies. Our paper is one of the first to apply real options theory to studies of internationalization for Chinese multinational companies. Using data from all of the manufacturing firms publicly listed on the Shanghai and Shenzhen Securities Exchanges during 2008 and 2016, we seek to determine whether multinationality under excess capacity can enhance the value of real options and whether and to what extent political risks, the correlation of economic growth between host countries and China, the correlation of economic growth between host countries, and market size affect the real options value of multinationality. We also use a list of excess capacity firms compiled by the Ministry of Industry and Information Technology and other government agencies to classify our sample into excess capacity and non-excess capacity industries. We then seek answers as to whether excess capacity is an important mitigating factor in determining the real options value of multinationality, and whether excess capacity affects the sensitivity between the option value of multinationality and external factors such as the political risks and economic links of host countries. We find that multinationality leads to lower downside risk and upside potential, but only for multinational companies with excess capacity. In addition, multinational companies in industries characterized by excess capacity on average have a significantly higher real options value of multinationality than multinational companies in other industries. Moreover, the real options value of multinationality increases with the market size of host countries, but decreases with the host countries’ political risks and the correlation of economic growth between the host countries and China. Our results are robust to (1) measures of multinational companies using the number of host countries, the number of host regions, the number of overseas subsidiaries, the diversification of host countries and host regions, and a comprehensive multinationality indicator; (2) measures of real options value using downside risk and upside potential; (3) the specification of a Heckman two-step procedure to account for the potential “self-selection” problem between multinationality and the value of real options. Overall, our results indicate that the benefits of multinationality are subject to whether multinational companies have excess capacity and operate in host countries with low political risks, low economic correlations with China, and low market sizes. Therefore, China’ s current Go Global Strategy, which it uses to encourage its firms to invest overseas, should not primarily focus on small countries or economies where political risks are high. The time is ripe for more manufacturing companies with excess capacity, high growth opportunities, and good risk management capability to become major participants in overseas investment in larger economics with advanced technologies and knowhow and in economies whose GDP growth shows a low correlation with that of China.

Tax burden and overcapacity: evidence from World Bank survey

LI Jianjun;LIU Yuansheng;WANG Bingjie

Public Finance Research,2019,No. 01

【Abstract】 Based on the theoretical analysis, this paper empirically examines the impact of tax burden on the overcapacity using the data of World Bank Survey on China’s enterprises in 2012. The research finds that the increasing of tax burden will decrease the capacity utilization ratio, and this relationship mainly works in the regions of low marketization. The enlarging of local fiscal pressure will induce the increase of enterprises’ tax burden, which lowers the capacity utilization rate. The reducing effect of tax burden on the capacity utilization rate mainly takes place on the overcapacity industries, heavy industrial enterprises, non-exports enterprises, and the enterprises without employing new technologies and new equipment. The further tests show that tax burden reduces the capacity utilization by the channel of hindering operation effect rather than changing investment choice. The results provide empirical evidence to the supply-side reform and resolving overcapacity of enterprises.

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