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Institutional Characteristics and Policy Adjustment of Excess Capacity in China

LIU Cheng;National Acedemy of Economic Strategy,CASS;  
Capacity expansion has drawn wide attention,but there are also many ambiguities. This paper reviews all kinds of literature on the causes of excess capacity--macroeconomy,corporate behavior,and market failure. It is found that these literatures can not explain the excess of production capacity in China exceeding other countries,the environmental standards are artificially depressed,influx of enterprises,and other special phenomena. Further analysis found that the local government perspective can better explain these special phenomena of overcapacity in China and the special institutional causes that make China's excess capacity. According to the policy analysis,the existing "de-capacity" policy has adopted the industrial policy,financial subsidies and administrative orders mainly based on the market failure hypothesis,deviating from the Chinese characteristics and failing to achieve the fundamental effect of resolving production capacity. Therefore,we should make targeted policy adjustments from the incentives of local officials and channels of marketization.
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