Excess Production Capacity?
According to the report of Caixin.com, on the China Development Forum on March 24th, Zhang Weiying, a professor of Peking University, asked Zhu Zhixin, deputy director of the National Development and Reform Commission, and the two persons argued on the rationality of industrial policies.
Zhang Weiying took the complete loss of the photovoltaic industry as an example, explained that the industrial policy of using the fiscal funds to support a specific industry was adversed to creating better industrial development environment, and the problems of corruption and excess production capacity tended to occur. And Zhu Zhixin expressed that the policies should not be totally repudiated due to finding problems of the industrial policies.
On March 25, Miao Wei, minister of the Ministry of Industry and Information Technology, when talked about the problem of excess production capacity, he indicated that the government may tolerate appropriate excess production capacity, and in some cases, only proper excess may heat to competition between enterprises.
Do the industrial policies with “balancing the market” as the purpose actually restrain or create the excess production capacity?
Fu Weigang, executive president of Shanghai Institute of Finance and Law, indicated that the government cannot predict the future industrial development directions more accurately than others. At present, we should not only get rid of the prejudice on “excess production capacity”, but also should pay attention to that the industrial policies induce rent-seeking.
Fu pointed out that China’s industrial policies has drawn lessons from those of the Ministry of International Trade and Industry of Japan. But in Japan, the supporting policies aim at private enterprises, and China’s policies finally all tend to aim at state-owned enterprises while private enterprises are discriminated.
As Fu Weigang said, if the industrial policies intend to be successful, the government must have the capacity than others in the market to more accurately predict which industries are more important, and gives more favorable policies and resources to relevant enterprises. In fact, the government does not have such prediction capacity, and these practices cause many problems, such as rent-seeking and unfair competitions etc.
Just as the photovoltaic industry, the government regarded it as a bright future industry in those years, and so many favorable policies have distorted resources allocation.
Fu stated that one of the goals that the state promotes industrial policies is to “restrain the excess production capacity”, but the premise is they can support some industries and restrain other industries by industrial policies so as to achieve the balanced development in the market. However, industrial policies carried out in practice cannot restrain the “excess production capacity” for many industries.
Fu argued that in the market economy countries, the “excess production capacity” should not be regarded in a derogatory sense —— in any market economy country, in its certain industries, the situation of excess certainly exists.
In Fu’s opinion, the reverse side of “excess production capacity” is “supply shortage”, and the two sides are normal phenomena of the market economy. The productive investment finally realizes balanced development only after many times of trials. Everyone cannot accurately know the quantity demanded for certain products at the very start. Just because an excess occurs for products in the market, there will be market competition and survival of the fittest.
For example, the U.S. started the railway construction in 1830. In the early 20th century, the wild tide of building railways appeared. In 1916, the American railway reached 400,000 kilometers (at present there are less than 100,000 kilometers railways in China). Up to now there are only 278,000 kilometers railways left in the U.S., and the excess railways have been pulled down. Most of the railways were private-invested.
Fu stated that if there were no excess production in a certain place, there are only two possibilities: firstly, it is still in the time of planned economy; secondly, certain products are really very good, and demand exceeds supply. It is thus clear that the situation of excess exists for most products in daily life. Simply in many mature market economy, the private enterprises occupy the main body, if they go bankrupt due to decision-making mistakes, what they lose is their own money, and have no negative effects for other people. “But in China, such money is mainly invested by fiscal funds, so it may lead to fiscal risks.”
“As a market economy, it should not be afraid of excess production capacity. Some enterprises are doomed to fail in the market, and a large amount of money is also doomed to be wasted” Fu said, “Those failed enterprises provide ‘price signals’ for the market, and they play a warning role for other investors”.
As mentioned above, since government can’t judge which industries are more worth to invest and which need to be restricted, it should initially reduce the intervention to the market, lessen the scopes of subsidy and limitation. “I think that Microsoft and Google in the U.S. and China’s Baidu and Tencent absolutely do not develop relying on the industrial policies of the government.”
In addition, the industrial policies will also encounter many legal problems in practice. Fu stated that investment projects in China are divided into “encouragement type, limitation type and forbidden type” at present, and in fact it is suspected of violating the “freedom to operate business”. “For example, in those years, Li Shufu of Geely wanted to produce autos, but the government said that it did not allow private persons to step into auto production, and Li Shufu said, ‘even if I fail, could you give me a chance for failure?’ But now, the government just does not give a single chance of failure.
（Caixin Online | Intern Reporter: Zou Zijian | 2013-3-26）
