Decisive market tackles overcapacity

Giving prominence to the market will help tackle industrial overcapacity and transform the current growth model, experts said.

Tuesday's communique after the Third Plenary Session of the 18th Communist Party of China (CPC) Central Committee stressed profound economic reform, with the market to play the decisive role in allocation of resources and the government working harder.

Zhang Jiashou, an economics scholar in south China's Guangxi Zhuang Autonomous Region, said that the reforms will deal with excess capacity.

"It will provide an opportunity for China to finish off extra industrial capacity which is wasting resources," he said.

China currently has severe overcapacity. The average utilization rate in oversupplied sectors such as steel is below 75 percent, far lower than the international average, and around 22 percent of production capacity in China's major industrial companies sat idle in the first half of the year.

Such extra capacity can be seen in Guangxi's Pingguo County, one of the major production bases for the Aluminum Corporation of China (Chinalco), a key state-owned enterprise. The county is known for its aluminum resources and has one of China's biggest aluminum processing industries.

Chinalco in Guangxi has a manufacturing capacity of 150,000 tonnes of electrolytic aluminum annually, but one sixth of that is idle, according to Yang Yurong, factory director.

"Although we have abundant aluminum resources, the high price of electricity price and the falling price of electrolytic aluminum have restricted development, leading to overcapacity," Yang said.

Electrolytic aluminum manufacture consumes a staggering amount of electricity, but lack of unified pricing allows some areas with low electricity costs launch new projects, exacerbating an already grievous overcapacity crisis, he added.

The poor electricity pricing mechanism is just part of a broader picture. Chi Fulin, head of the China Institute for Reform and Development, believed that marketization of productive factors is not good enough, causing waste and excess capacity.

"Over the past 30 years, marketization level of the commodities has grown by leaps and bounds, a glaring contrast to other production factors such as natural gas, coal, electricity," Chi said.

Another reason for excess industrial capacity is too much local governments intervention, which has blurred the line between marketization and interference, said Zhao Zhenhua, an economist at the Party School of the Central Committee of the Communist Party of China (CPC).

Zhao noted that in many parts of China, slogans promoting big projects and investments can be seen everywhere, showing local governments' blind passions for economic development.

"What appears to be overcapacity is in fact a revelation of blind competition among local governments," Zhao said, adding that too much artificial interference has contributed to repeated production.

As China's economy slowed, extra capacity became a major issue, one that the central government is now resolved to tackle.

In October, the State Council, China's cabinet, issued a guideline on overcapacity in each sector: new projects expanding capacity are forbidden, projects under construction should be reappraised, illegal capacity should be cleared up, outmoded capacity should be eliminated in an orderly way.

Liu Shengjun, another researcher, pointed out that the market is the most efficient way of tackling extra capacity, as it guides allocation of resources by supply and demand.

"Governments should repeal mechanisms that obstruct the market, such as subsidies," he said.

More reform in pricing of productive factors is expected, analysts said.

Zhang Jiashou said that at a critical juncture of transforming its economy, the core of economic reform should be the relationship between government and market.

"Industrial overcapacity could be resolved and a market mechanism could truly be established on the principal of 'survival of the fittest' ," he said.