Over the past 30 years, one of the major challenges facing China's economy has been overcapacity. Whether it's automotive, housing, coal, steel, photovoltaic, or lithium-ion industries, every industry has experienced or is experiencing a phase of overcapacity.
Put simply, overcapacity means that production capacity exceeds societal demand. This does not mean that there is a surplus of products per se, but that even if the demand for the products is met, there is still a surplus of production capacity.
In today's content, we will delve into the reasons behind China's frequent overcapacity, especially the role played by local governments in this process.
The root cause of overcapacity
The formation of overcapacity problems is closely related to the attributes of specific industries. For example, cyclical industries such as pig farming are characterized by a long industrial chain that experiences cyclical fluctuations. During a recession, the demand side may contract, while the supply side of capacity growth is delayed, leading to overcapacity. However, as the economy recovers and demand increases, overcapacity will gradually decrease. The *** of this cyclical fluctuation is ** large fluctuation. For example, in 2019, pork** soared to parity with beef and mutton, leading many restaurants to cancel pork dishes. In order to mitigate the volatility of cyclical industries, the financial market has introduced trading, which allows producers and distributors to lock in early and smooth out market volatility.
The role of place**
Another reason for overcapacity lies in the role of local **, which reflects the short-sightedness of local protectionism and the market cost. Historically, since the fifties, the country has been implementing a policy of decentralization. In those days when there was no internet, in order to manage the country more effectively, some powers were decentralized, especially those related to economic development. This has led to the start of regional competition at all levels of locality. In the economic field, the local government is almost fighting on its own, and each region at and above the county level is trying to establish a complete and self-sufficient industrial structure. Taking automobile production as an example, a province and city must not only be able to produce tires, but also have the production capacity of various parts such as engines, chassis, bodies, seats, etc., and even complete the assembly of vehicles locally.
In the wave of reform and opening up, the local performance appraisal mechanism has changed, and the importance of economic growth has become increasingly prominent. This shift has spawned fierce economic competition between localities, and a race has begun over who can grow faster.
In short, the shortcut to local economic growth is through large-scale capital investment, especially in capital-intensive projects such as heavy chemical industry. Once this kind of project is settled, it can not only bring stable economic growth to the local area, but also increase tax revenue, becoming a "treasure" in the eyes of the local government.
Therefore, in order to attract enterprise investment, the local government has launched a series of strategic and preferential policy competitions. Since 1992, a number of industrial parks have sprung up across China, which have become arenas for cooperation between local governments and enterprises. In these parks, enterprises can not only enjoy tax incentives, but also receive various administrative conveniences and support, such as talent introduction, bank loan assistance, etc.
Over time, this model has led to fierce homogeneous competition between industrial parks and local governments, which in turn has led to a surplus of industrial parks.
In this competitive landscape, local governments often adopt imitation strategies to quickly follow up with development. Taking the automobile industry as an example, in the early 80s, many foreign automobile manufacturers established joint ventures with Chinese enterprises, which gave birth to the rapid development of China's automobile industry. Guangzhou, Nanjing, Shanghai and other places quickly became important towns in the automotive industry. Although the capacity utilization rate of some automotive products is not high, local governments such as Shanghai still resolutely decided to invest in the construction of a new auto parts chain, showing the desire and investment of local governments for economic development.
Ideally, if the market is completely unified, each region will divide the industry according to its comparative advantages, for example, Hunan will focus on leather parts such as car seats, Guangzhou will produce mechanical parts such as body chassis, Shanghai will be responsible for engine production, and Fujian will be assembled and sold. This mode of division of labor and cooperation will more effectively promote the overall development of the industry and the economy.
With the fierce regional competition between local governments for their own economic interests, various localities have hoped to incubate key projects such as the automobile industry in their own territories, resulting in duplication of investment and waste of resources. Moreover, the local government does not hesitate to support local enterprises to occupy a place in the fierce market competition through financial subsidies and other means.
In recent years, the local competition in the photovoltaic industry has been particularly prominent, and it has become a microcosm of the national competition. This kind of competition is not only reflected in the business game and cooperation at the enterprise level, but also reflects the zero-sum game between local ** at a deeper level - in the limited promotion space, the success of one party often means the loss of the other. As a result, local protectionism has intensified, which is manifested in tax incentives for local enterprises, the issuance of industry licenses, financial subsidies and preferential treatment of land use rights.
This kind of competition between local governments is not only a simple comparison of economic data, but also a contest of ideas and abilities on how to promote local economic development. China's historical "test field" policy provides a vivid illustration of this kind of competition. This kind of policy allows local governments to try different development strategies according to the actual local situation under the general framework. From the popularization of the people's communes to the gradual implementation of reform and opening up, it is a process that has gradually taken shape and spread to the whole country through local experiments and innovations. These "experiments" not only promote the diversity and flexibility of China's policies, but also provide a stage for local governments to demonstrate their political wisdom and management capabilities.
However, this disorderly competition between local governments has also brought some negative effects, such as overcapacity and waste of resources. To some extent, these problems reflect that local governments may ignore the sustainability and overall interests of industrial development in the process of pursuing economic growth and political performance. Therefore, how to guide the healthy competition between local governments while ensuring local enthusiasm has become an important issue in China's current economic and political development.
* The policy intention of launching the "unified market" is to break down the barriers between regions and promote the effective flow of resources and the full integration of the market. This policy aims to enhance the intrinsic dynamics and efficiency of the national economy by optimizing the market structure and eliminating local protectionism. However, as you said, to achieve this ambitious goal, we need to overcome many difficulties, including adjusting the pattern of vested interests and reforming the existing institutional mechanisms, which are complex and challenging.
As for the problem of overcapacity, it is indeed a major problem in the current economic development. Overcapacity not only leads to fluctuations, but also may affect the stability of related enterprises and the livelihood of employees, and more seriously, it hinders the upgrading of industries and the optimization of economic structure. Especially when overcapacity is caused by disorderly competition between local governments, this phenomenon exacerbates the unbalanced development of the local economy.
In 2015, the state proposed the strategy of "three removals, one reduction and one supplement", which aims to achieve the optimization and upgrading of the economic structure by destocking, deleveraging, de-capacity, cost reduction and making up for shortcomings. In terms of capacity reduction, the key is to eliminate backward production capacity, especially those enterprises with heavy environmental pollution and backward technology, so as to promote the healthy development of the industry and the sustainability of the environment.
Strategies to increase demand, while in the short term can alleviate the situation of overcapacity, their effectiveness and sustainability need more consideration. Short-term stimulus measures, such as the way to remove real estate inventory, can indeed increase demand to a certain extent, but for long-term economic health, it is more important to achieve sustained growth in demand through innovation and industrial upgrading.
For the current challenges, such as the overcapacity of the lithium battery industry and the photovoltaic industry, not only policy intervention is needed, but also structural adjustment and technological progress within the industry. By promoting scientific and technological innovation, optimizing industrial layout, improving product quality and service, and opening up domestic and foreign markets, we can fundamentally solve the problem of overcapacity and promote the healthy development of the industry and high-quality economic growth.
Ending:
Let's look back at the overcapacity problem in 2015, after years of efforts, it seems that we once saw the alleviation of the problem. However, in the blink of an eye, the same problem is again in front of us.
Whether it's capacity or product, we seem to be able to recognize this problem more clearly.
Cyclical industry fluctuations, regional competition and protectionism all seem to indicate that sooner or later some industries will face a situation of surplus. This has become an almost inevitable reality.
Let's dive a little deeper into the topic of local competition. Although competition between localities may lead to the duplication and waste of resources, in the context of the shortage of various products in China, this competition not only promotes the spread of technology to all corners, but also cultivates many technical talents across the country. In the early stage of economic development, this kind of competition promoted economic growth at a faster speed, allowing "Made in China" to quickly influence the global market with its cost advantage and huge production capacity, and played an irreplaceable role.
Things are always split in two. In the early stage of economic development, local competition promoted the rapid development of industries and talents. However, with the passage of time, when the industry needs to shift from high-speed growth to high-quality development, the repetitive construction caused by local competition and the slow industrial renewal brought about by protectionism have begun to become stumbling blocks to development. Therefore, facing the future, we need to move towards the goal of "unified market", although this road is not easy to walk, but it is the only way.
In this world, few things are absolutely good or absolutely bad. Maintain a rational and objective attitude, and our horizons will become broader.