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Approaches and Suggestions on Output Reduction, Transformation, and Improvement of Quality and Efficiency for Industries with Excess Overcapacity


By Liu Shijin, Development Research Center of the State Council and Xu Wei, Institute of Market Economy of DRC

Since August 2014, China's economy has witnessed an increasing downward pressure for economic development. The main reason of slower economic growth is due to negative growth in enterprise profits. The obvious decline in corporate profits is chiefly ascribed to profit plunge in industries with excess overcapacity. There are mainly two approaches towards easing the downward pressure: one is to increase investment demand, raise capacity utilization rate on the supply side, and thus recover the kind of balance during rapid growth period; the other is to increase investment on the demand side, expand the period of time for readjustment on the supply side and thus achieve "balance after transformation". The first approach is not advisable due to the "glass ceiling" effect, which may decrease future demand and build up local financial risks, whereas pursuing for "balance after transformation" is a feasible approach. To promote such balance, it is suggested to implement a special work plan of "reducing production, realizing upgrading through transformation and improving quality and efficiency of growth for industries with excess overcapacity". The major measures in this plan are as follows: 1. Include steel and iron, coal, petroleum, petro chemistry, iron ore and other industries into this special work plan; 2. Formulate schemes for reducing output; 3. Establish "Fund for output reduction and transition of industries with excess overcapacity" which is responsible for financing chiefly through releasing long-term (a decade and above) special bonds; 4. Provinces concerned promote the implementation of this output reduction and transition plan to leverage the role of bonds; 5. In aspects relating to utilizing such bonds and reducing output, larger room of autonomy and innovation will be granted to local governments; 6. Related prevention and punishment measures will be adopted to avoid such incidents among some factories that "let others reduce their output while I myself am free to reduce less or little", so as to ensure the full implementation of this output reduction plan. Once the plan mentioned above is carried out smoothly, the supply-demand relationship of industries in question will witness major shifts. When these industries reduce output by 10 %, enterprise profits are expected to approach or even reach the level of average social profits, while corporate profits of the entire society will become stable, thus bringing China's economy into a relatively steady and sustainable growth period.