China’s overcapacity problems increase

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/08

Overcapacity is most apparent in businesses supplying the construction sector (e.g. steel, concrete and glass), aluminium production, papermaking, coal mining and shipbuilding. While overcapacity has been acknowledged for years, the problem has snowballed as the economy has evolved. Excess shipbuilding capacity derives from a 2007 government decision to become the world’s biggest shipbuilder.

A just-released report from the EU Chamber of Commerce in China recommends over two dozen measures to deal with these issues. Investment in overcapacity sectors need to be reined in, direct subsidies from local government to businesses need to be cut, and prices of electricity, gas and water need to be more market-based. The Chamber further proposes hikes in environmental fees in order to encourage decommissioning of the worst-polluting production facilities. Moreover, state enterprises should be required to pay dividends rather than invest in additional production capacity. China’s leadership has recently embraced several initiatives to shutter plants in overcapacity branches, but the results to date have been modest.

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