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

YANG Qijing1 WU Haijun2

(1.School of Economics, National Academy of Development and Strategy and the Center for Firm and Organization Studies, Renmin University of China)
(2.School of Economics, Renmin University of China)

【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.

【Keywords】 overcapacity; government control; transfer of industrial land; promotion competition;


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    [1]. ① According to the Guiding Opinions of the State Council on Resolving the Serious Overcapacity Problem (No. 41 document issued by the State Council in 2013), at the end of 2012 the capacity utilization rates of China’s steel, cement, electrolytic aluminum, flat glass and ship industries were only 72%, 73.7%, 71.9%, 73.1% and 75% respectively, which were significantly lower than the international level; the profits of steel, electrolytic aluminum, and ship industries fell sharply and enterprises commonly faced difficulties in operation; the existing and planned projects in industries with serious overcapacity like steel have worsened the problem of overcapacity. [^Back]

    [2]. ① The study by Kornai (1986, Chinese version) shows that in the classic socialist system, SOEs lack effective self-restraint mechanisms, which usually results in serious investment hunger; in the transitional period, the government’s external control of enterprises’ investment is no longer strong, while enterprises’ self-restraint mechanisms such as profit motives and the concern about financial dilemma have not yet been established, which makes it difficult to eliminate the investment hunger of enterprises in the short term. [^Back]

    [3]. ① In the Notice, the listed regulated industries with overcapacity include steel, cement, flat glass, coal chemical industry, polysilicon, wind power equipment, electrolytic aluminum and shipbuilding. However, the names of the listed industries do not strictly correspond to the industry classification standards followed by the website http://www.landchina.com/. In order to match them as much as possible, we mainly classify the industries according to the two-digit codes in the standards, but some industries are classified at a more detailed level. As a result, the regulated industries with overcapacity in this paper include the manufacturing of ships and floatation devices, ferrous metal’s smelting, rolling and processing, ironmaking, steelmaking, steel rolling and processing, iron ore mining, ferroalloy smelting, aluminum mining, aluminum smelting, oil processing, coking, nuclear fuel processing, coal mining and washing, the manufacturing of cement, lime and gypsum, the manufacturing of cement and gypsum products, the manufacturing of non-metallic mineral products, the production and supply of electricity and heat, and the manufacturing of electrical machinery and equipment. It is important to note that although the central government has released some policy documents later, they mainly aim to eliminate the backward existing capacity rather than to prohibit new capacity and the industries involved highly overlap with those listed in the Notice (2009). Therefore, this paper takes the Notice in 2009 as the signal of policy implementation. [^Back]

    [4]. ② In accordance with our data, the industry of non-ferrous metal’s smelting, rolling and processing mainly refer to copper smelting and titanium alloy smelting. [^Back]

    [5]. ① When we replace the number of industrial land transfers with the area of transferred industrial land as the explained variable, the obtained trend graph is very similar to Figure 1 and the test results are very similar as well. However, we do not think this is a better choice, because larger area of transferred land does not necessarily mean that local governments have attracted more investment projects. [^Back]

    [6]. ② In fact, the central government’s political authority is a prerequisite for the success of the economic power division system between the central and local governments (Yang and Nie, 2008). [^Back]

    [7]. ① Many studies have found a similar phenomenon at the provincial level, namely that as the tenure of the provincial Party secretary or governor increases, their motivation for developing local economy weakens (Zhang and Gao, 2007; Wang and Xu, 2008; Cao et al., 2014). [^Back]

    [8]. ① If the local leader takes office before June 30, then the tenure starts from that year, with t = 1, 2, ...; if the local leader takes office after July 1, then the tenure starts from the following year, with t = 1, 2, .... If the local leader leaves the position before June 30, then he or she is not considered as a local leader for that year; if the local leader leaves the position after July 1, then he or she is considered as a local leader for that year. [^Back]

    [9]. ① The Notice on Several Issues Concerning the Strengthening of Land Control released by the State Council (August 31, 2006) stipulates that after January 1, 2007, on the primary market industrial land must be transferred via bidding, auction or listing. Therefore, the data of industrial land transfers after 2007 on the website http://www.landchina.com/ are quite complete. On this website, the public information about each industrial land transfer includes the local government as the supplier, the location of the land, the area and level of the land, the way of transfer, the classification of the industry, the payment, the enterprise as the investor and the expected time of completion. [^Back]

    [10]. ② A lot of data about Tibet and Hainan are missing. Moreover, some provincial-level regions, such as Yunnan, Guizhou, Ningxia, Xinjiang and Qinghai, do not have many prefecture-level cities. Therefore, the data of these areas are removed. [^Back]

    [11]. ③ For example, the land resources management department of an ordinary prefecture-level city is usually “the Bureau of Land Resources Management of XXX City” which is directly under the leadership of the city’s government, and has big autonomy in terms of the transfer of state-owned land. Although the districts and counties under the municipalities which are directly under the central government are at the same administrative level compared with the abovementioned bureaus, the name of their land resources management departments is the “XX (district) Sub-bureau of the Land Resources Bureau of XXX City.” The sub-bureaus are often branches of the bureaus of land resources management of the municipalities directly under the central government. They are under these municipalities’ governments rather than district or county governments and have very limited power in terms of the transfer of state-owned land. [^Back]

    [12]. ① In fact, similar conclusions can be obtained even when the sample period is reduced to 2007–2011. Specifically, no matter whether the data about the characteristics of the mayor are controlled, the regression coefficient of treatic × yt × dummy variable of the Party secretary’s tenure is about −0.15, which is negative at the significance level of 5%. However, this is not the case when it comes to the mayor. [^Back]

    [13]. ① According to the reviewers’ suggestions, we study the impact of the continuous variable of officials’ age on rule-breaking industrial land transfers and find that the mayor’s age does not have significant effects on industrial land transfers. When the control variables about the city, Party secretary and mayor are controlled, at the significance level of 10% the rule-breaking industrial land transfers will reduce by 0.06 as the Party secretary’s age increases by 1. The details are available upon request. [^Back]

    [14]. ① Driven by the reviewers’ valuable suggestions, we add these important robustness analyses. [^Back]

    [15]. ① For example, the Notice of the State Council on Accelerating the Structural Adjustment of the Industries with Overcapacity was issued in March 2006. [^Back]

    [16]. ① In 2007–2012, there was no land transfer in the industry of production and supply of electric power and thermal power, and the industry of manufacturing of electrical machinery and equipment only had 26 land transfers. The land transfers of these two industries only accounted for 0.3% of the total land transfers of regulated industries (8800 transfers). [^Back]

    [17]. ① The capacity utilization rates calculated by Han et al. (2011) cover the period of 1999–2008, while the data we use cover the period of 2007–2012. Hence we adopt the data calculated by Han et al. (2007) for 2007 and 2008, and use the average capacity utilization rate of 2007 and 2008 for the following years. Their data do not cover the capacity utilization rates of two industries, namely the production and supply of electric power and thermal power and the industry of coal mining and washing, and thus we remove the two industries. In 2007–2012, the two industries had 1251 industrial land transfers, which accounted for 14.22% of the total industrial land transfers. [^Back]


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This Article


CN: 11-1138/F

Vol 39, No. 11, Pages 126-146

November 2016


Article Outline


  • 1 Introduction
  • 2 Literature review and hypotheses
  • 3 Identification strategy and data description
  • 4 Regression results
  • 5 Robustness tests
  • 6 Conclusion
  • Footnote