Dealing With Overcapacity: Let The Market Decide or Else

Teng Tai, head of Winbro Economic Research Institute, explains why the government's solutions to overcapacity will have large costs. One is a distortion of market supply:

The first misunderstanding is supplied through administrative means to force businesses to shut down or go bankrupt aging. The need to resolve the overcapacity steadily, according to the actual situation of the industry and enterprises subject to local conditions, give full play to the guiding role of the market and take market-oriented bankruptcy proceedings. If the mandatory distribution of various industries or the various elements of the enterprise through administrative measures, will result in large-scale roll-out policy elements and input, contrary to laws of the market, it may bring three issues. First, it may lead to aging supply production plummeted, demand already existing upstream and downstream industries to promote aging irrational supply price rise, but give birth to a new round of aging supply overcapacity, hindering the supply of factors of production shift to new industries. Second, if at the same time strong off companies, new supply industry has not yet formed, the economy could lead to a steep decline in rigidity, flexibility and toughness economic damage roundabout social labor market, thus the formation of employment, basic living, economic fundamentals deterioration of surface and a series of social and economic problems.

The late 1990s, the government has to limit the power industry, in 2003 and 2004 led to the emergence of electricity supply is tight, many provinces and cities have blackouts, adversely affect the normal production and operation. Similarly, the end of 2003, the State Council issued the "stop at iron and steel , electrolytic aluminum, cement and other industries of blind investment in certain provisions of the notice "was quickly formed ministries inspectors group traveled around the inventory, forced the closure of the iron and steel, electrolytic aluminum, cement, plate glass , real estate and other companies, resulting in 2007 these industries have emerged with varying degrees of insufficient supply.

The government doesn't know what is the proper level of steel or coal supply. So either they will err on the side of two much supply, and have to cut more later, or they will err on the side of too little, and be stuck with the rising prices.

iFeng: 经济学家：去产能 中国已经掉入两大陷阱！