Policies to Reduce Excess Capacity in the Chinese Iron and Steel Industry: Industrial Policy as a Coordination Process

         
Author Name KAWABATA Nozomu (Tohoku University) / YIN Di (Tohoku University)
Creation Date/NO. September 2020 20-J-038
Research Project Comprehensive Research on the Current International Trade/Investment System (pt.V)
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Abstract

The purpose of this paper is to explain the implementation and implications of excess capacity reduction policy in the Chinese iron and steel industry during the first half of the 13th Five-Year Plan (FYP) and to evaluate it from the perspective of the economic coordination process. The policy for reducing excess capacity in this FYP was more circumspect than similar past measures. Consequently, the government has successfully reduced the formal capacity and eliminated informal production. However, capacity continued to grow where it escaped governmental oversight. Such capacity partially offset the effects of reductions. The policy had no selection mechanism to ensure the replacement of inefficient plants with better-performing ones. The government considered the quantity target absolute while selection of the equipment to be dismantled was reliant on administrative discretion and negotiations between the local government and enterprises. There were also loopholes in the capacity replacement policy. The policy was effective in financially restructuring the zombified state-owned enterprises and technologically in weeding out small, private ones; however, due to policy execution limitations, private enterprises in the iron and steel industry continued to grow. This paper concluded that the excess capacity reduction policies had achieved their quantitative targets but had not yet adequately made the market and government play appropriate roles in their respective fields. It also presented some implications for policy reform.