China's attempt to cut overcapacity has been a creditable move, but more reforms are needed to address the problem, according to a report published on Monday by the European Chamber of Commerce in China.
The European Chamber lauded decisions to let the market play the "decisive role" in the economy, and the fact that the 2015 Central Economic Work Conference identified overcapacity as one of the top-five priorities for 2016, but said that such aspirations needed to be paired with correspondingly bold actions.
Following policy meetings that stressed cutting industrial overcapacity, local authorities announced their targets for capacity cuts and some provinces also carried out surveys of unproductive companies.
While such efforts deserve credit, issues such as regional protectionism and misdirected investment hindered policy implementation, the report said, suggesting more sustained attempts by the government to tackle the problem.
Specifically, the report gives 30 recommendations including cutting expenditure in industries with excess capacity, expanding dividend payments by state-owned enterprises to reduce unneeded expansions, and further open up the service industry to reduce reliance on industries with overcapacity.
"Without a sustained effort to address it now, overcapacity may well seriously impede the effectiveness of China's economic reform agenda," said Joerg Wuttke, president of the European Chamber.
The report identified eight fields with the most excess capacity: crude steel, electrolytic aluminum, cement, chemicals, refining, flat glass, shipbuilding, as well as paper and paperboard.
Notably, thanks to efforts by the government to raise the entry barriers for less competitive market entrants, the wind energy sector was removed from the European Chamber's list of sectors characterized by major overcapacity when the Chamber published an original study on the issue in 2009.
The European Chamber also lauded China's move to limit the ability of local governments to subsidize their champions through the 2014 revision of the Budget Law and hopes that it will be strictly enforced.
