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Study on the Overcapacity in Chinese Iron and Steel Industry

Author: JiangFeiTao
Tutor: HuangJianBai
School: Central South University
Course: Management Science and Engineering
Keywords: Iron & steel industry overcapacity Formation Mechanism Governance policies Investment subsidy Risk cost externality
CLC: F224
Type: PhD thesis
Year: 2008
Downloads: 1686
Quote: 18
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Based on those classic literatures, this paper reviews the mainstream theories on the form mechanism of overcapacity and points out that: (1) The viewpoint that market mechanism of low concentration causes superfluous construction, excessive competition and overcapacity lacks rigorous rationale. (2) Viewpoint that Industrial characteristic of low entrance barrier and high withdrawal barrier causes superfluous construction is theoretically contradictory. (3) The establishment of" excessive-entry theorem " strictly relies on two basic suppositions, namely "the business-stealing effect" and "increasing return to scale". Using this theory to explain overcapacity, we should first judge this industry whether satisfies these two basic suppositions or not. (4) Model which explains how overcapacity forms with the viewpoint that keeping excessive production ability can boost cahoots among enterprises only considers the income by the cahoots and ignores the cost needed by the investment. So it has fundamental flaw theoretically. (5) Researches which try to prove enterprise entrance is irrelevant with profit in order to show blind entrance is the cause of overcapacity is not precise technically and need improving.After China’s fiscal decentralization reform, local government has independent economic interests, and government official political promotion system with the core of evaluating GDP growth makes local governments have a strong motivation to intervene enterprises’ investment and make use of all kinds of preferential investment policies. The issues of Chinese obscure property rights of land and financial institutions’ soft budget constraints make the measures of cheap land and other investment subsidies and help enterprises access to financial resources as the main means appealing the investment of local governments. Further model analyses show that the problem of enterprises’ lower own capital causes serious exterior risk costs caused by the behavior of local governments’ low land price and the function as a gage of acquiring land with lower price and local governments’ Intervention in the financial system of credit makes the enterprises overinvestment and the whole Industry’s overcapacity, and is used to explain the formation mechanism of overcapacity in the iron and steel industry.This paper checks up the applicability of the theory that "Excessive-entry theorem" and "blind entrance" can explain the overcapacity in Chinese iron and steal industry. (1) The key large and middle scale iron and steel enterprises are the main reigns in the steel and iron market. Its total output continuously presents unilateral trend of escalation. The iron and steel industry certainly does not have remarkably "the business-stealing effect". Surveying the relative efficiency and the scale efficiency of Chinese iron and steel enterprises by the data envelope, and further using the linear regression to research the influence that scale makes to the efficiency, we can finally indicate the Chinese iron and steel industry certainly does not have the characteristic of increasing return to scale. Excessive-entry theory can’t be used to explain why overcapacity forms in the Chinese iron and steal industry. (2) Using co-integration analysis, Granger causality test, IRF and variance decomposition to test the profit margin of iron and steel industry and enterprise entrance, we know that profit margin has remarkable driving effect to enterprise entrance. Blind entrance theory can’t explain the overcapacity in iron and steel industry.The theoretical discussion of the acceptability of the investment regulations policies in the iron and steel industry and an empirical analysis with HP filtering show that: (1) Investment regulation policies can not prevent overcapacity in the iron and steel industry fundamentally. (2) Policy-makers can not access to and integrate the required information and knowledge, so it is unable to make accurate prediction about market and a wise investment plan. (3 ) For this policy hinders the discovery process and self-adjustment process of the market, China’s steel industry has a serious shortage of investment in fixed assets in longer period, and this hiders rapid adjustment of the steel product structure and the timely updated of the equipment, and it also arouses the acute fluctuations of the fixed asset investment of the steel industry.According to the formation mechanism of overcapacity in Chinese iron and steel industry, the wise governance policy should proceed from these three areas: (1) Reforming the fiscal and taxation systems and government officials political promotion system with the core of evaluating GDP growth, it is to reduce strong motivation of local government to interference in business investment improperly. (2) Reforming the existing land management system and making land ownership explicit, local governments can not provide subsidies for business investment through offering land at low-cost. (3) Make bank’s budget restraint hard and straightening out the relationship between the local government and the banks, and at the same time, improve enterprise the ratio own capital in the total investment while reducing external risk in the investment behavior.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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