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The Empirical Study on Measurement, Early Warning and Effects on the Economy of the Industrial Excess Production Capacity in China

Author: HanGuoGao
Tutor: GaoTieMei
School: Dongbei University of Finance
Course: Quantitative Economics
Keywords: Excess production Capacity The Cost Function Method Capacity UtilizationRate Investment in Fixed Assets Monitoring and Early Warning ExcessLiquidity Market Structure Panel Data Model
CLC: F224
Type: PhD thesis
Year: 2012
Downloads: 898
Quote: 0
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That the production capacity is gteater than the demand is a normal phenomenon in the conditions of market economy and the special performance of the relationship between supply and demand in the cyclical economic fluctuations. However, if the production capacity exceeds the effective demand to some extent, the excess capacity emerges, it will bring many negative effects to the social and economic life. The emergence of excess capacity not only results in a large waste and non-effective allocation of resources and energy, but also oversupply of products will result in vicious competition between enterprises, market disorder, product prices fall significantly, inventories increase, economic benefits of enterprises decrease or even loss and close down, a great number of workers unemployed, the bad debts of banks increase and the credit risk increase, trade friction increase and economic structural contradiction becomes prominent and so on, it will eventually affect the sustained and healthy development of the national economy as a whole.Since the1990s, as China’s distribution system changes, the production capacity of the consumer goods industry was generally excessive. Since the beginning of the21st century, accompanied by China’s new round of economic growth, the prolem of the excess production capacity has spread from the production sector of consumer goods to the production sector of investment goods. Driven by the consumption of the housing and automobile and so on, the shortage of part of the production areas appears, which gives rise to the investment boom. Due to lack of effective demand in the market, when the investment cycle ended and the huge production capacity began to release concentratedly, the production capacity was excessive obviously, which seriously affected the healthy development of China’s industries and businesses.Therefore, how to measure China’s industrial capacity utilization level and establish safety monitoring and early warning system of industries with scientific and effective methods, analyze the causes of the excess production capacity and the effects of the excess production capacity on the macroeconomy has important significance for understanding China’s industry volatility features and monitoring the industry economic running dynamics and the situation of excess capacity and effectively alleviate China’s problem of excess production capacity for the enterprises and government decision-making departments.On the basis of a large number of literature home and abroad which are related to excess capacity, using the methods of qualitative description and quantitative analysis combined, this paper makes the measurement of the industry excess production capacity as a beginning, and then investigates the relationships between the excess capacity and the investment in fixed assets, finance and industrial organization structure, establishes the security monitoring early warning system of the industries with excess capacity in our country to dynamically focus on the industry development trend and the conditions of capacity utilization. In the end, this paper makes the corresponding policy recommendations on how to alleviate China’s excess capacity effectively. The main innovations are as follows:Firstly, based on production, cost and equilibrium theory in Microeconomics, this paper makes use of cost function method proposed by Berndt and Morrison(1981) and the Generalized Method of Moments of Panel model to measure the capacity utilization rate level of twenty-eight heavy industries and light industries of China from1999to2008respectively and analyzes the volatility features of China’s manufacturing industry development. The results show that there are seven industries which belong to industries with excess capacity among twenty-eight manufacturing industries in our country, including ferrous metal, nonferrous metal, petrochemical and coking, chemical raw materials, non-metallic mineral products, paper industry, chemical fiber. The changes of capacity utilization level of China’s most industries show the consistency with economic cycle fluctuations. The government has taken many macro-control policies to alleviate the excess capacity, but with little success. Some traditional labor-intensive and low-end technology-intensive industries which have higher dependence on foreign countries are prone to the production capacity overloading and higher capacity utilization level.And then establishes the Panel Data Model with variable coefficients, which makes use of empirical analysis to prove that the investment in fixed assets is the direct cause of the excess production capacity for the seven industries with excess production capacity. In response to the phenomenon of the macro-control policies have little effect on curbing investment in fixed assets, this paper elaborates that the unreasonable mode of economic growth, the irrational pricing mechanism of the production factors, the institutional weaknesses in the process of economic system transition, driven by interests and understanding bias, the high saving rate and so on are the underlying causes of current excess production capacity in our country.Secondly, based on the theory of investment demand under uncertain conditions which is proposed by Lucas and Prescott and the theoretical models of the relationship between excess capacity and investment in fixed assets studied by foreign scholars, this paper makes use of Dynamic Panel Data Model to construct the equation of the investment in fixed assets of China’s industries with excess capacity, and then to construct the equation of the investment in fixed assets of China’s industries with excess capacity from two aspects of self-financing and domestic loans, focusing on the effects of the existed excess capacity on investment in fixed assets, the main conclusions are as follows:the existed excess capacity does not play an inhibitory effect on the total investment of industries with excess capacity, This is mainly because China’s economic institution is unsound and the industry information system is not perfect, which makes the government and the businesses still have the expansion phenomenon of investment in the condition of excess production capacity. The existed excess capacity does not play an inhibitory effect on self-financing investment in fixed assets, which is mainly due to the profit-driven nature of the capital. The industries with excess capacity were originally industries with high profitability, in order to pursue the profit maximization, the enterprises reinvestment with self-accumulation achieved in higher economic efficiency.The existed excess capacity has a significant inhibitory effect on domestic loans investment in fixed assets, which is mainly attributed to the credit risk management and the credit crunch measures of the commercial banks.Thirdly, this paper measures the industrial capacity utilization level of China’s twenty-eight areas with the production function method as the indicator of the degree of industrial excess capacity. Further, this paper makes use of the panel data model to study the effects of industrial excess capacity on the excess liquidity in banks of the entire country and different regions, the conclusions indicate that the liquidity in China’s banks changes the same direction with the industrial capacity utilization level. Excess capacity reduces the demand for loans of enterprises, enhances the workers’ willingness to save, exchanges for a large number of foreign exchange earnings through exports, which all have make a large number of money deposited in the bank system and show the excess liqudity. The capacity utilization level in eastern China has lower effects on liquidity in the banks than the central and western regions, which is mainly because that compared to the central and western regions, the eastern part has wider investment and financing channels, the funds which exit from the industries with excess capacity can relatively easily find the appropriate investment channels.Fourthly, based on the theory of market structure, this paper analyzes the relationship between the market structure and the excess production capacity of China’s steel, cement and electrolytic aluminum industry, through the calculation of the degree of concentration CRn, Herfindahl Index(HI) and Entropy Index(EI), showing that the market degree of concentration of China’s steel industry is overall on the low level and showing a U-shaped changing trend. There are many reasons of the formation of low degree of market concentration, the direct reason lies to the expanding size of market, and the underlying reasons mainly lie to that China’s steel enterprises have low regional degree of concentration, large steel enterprises develop slow, and the small and medium-sized steel enterprises have developed rapidly, the local government reduces industry barriers with all kinds of favorable policies to allow a large number of private enterprises to pour into the steel market, moreover, there are many obstacles for the industries with excess capacity to merge and reorganize and the progress is slow. Similarly, the overall level of the market concentration of China’s cement and electrolytic aluminum industry are also low.The degree of product differentiation of the steel, cement and electrolytic aluminum industry are all small, therefore, the industry product homogeneity is high competitive, there are excessive competition between enterprises, which launch a price war by expanding the production scale to reduce costs. In addition, China’s industries with excess capacity always show that easily into and hard out, lack of the strict market access standards and effective barriers to enter, at the same time, the exit of the backward production capacity involves many problems, it is difficult for the large backward production capacity to exit from the market under the protection of the local government, diluting the degree of market concentration and resulting in the serious low-level redundant construction of all of these industries. Fifthly, this paper chooses ten economic early warning indicators which not only can reflect the features of industry excess capacity, but also reflect the capacity utilization situation, and then constructs the excess capacity safety monitoring and early warning system of three industries which are steel, nonferrous metals and non-metallic mineral products. The results show that under the influence of financial crisis in Southeast Asia, the U.S. economic bubble burst and the9·11, in the year of2001, China’s industry capacity utilization situation composite index of steel, nonferrous metals and non-metallic mineral products have decreased in varying degrees compared with that in2000. Subsequently, China’s rapid economic development has spurred the demand for basic raw materials industry, the industry capacity utilization situation composite index of steel, nonferrous metals and non-metallic mineral products increased substantially. However, in the year of2005, the investment in fixed assets brought about by the rapid economic growth are mostly completed and put into operation, then the productioin capacity released concentratedly, leading to the supply of the three industries which are steel, nonferrous metals and non-metallic mineral products have been far greater than the demand, the capacity utilization situation composite index dropped sharply, and the industries of steel and non-metallic mineral products had entered into the warning interval of obviously excessive capacity. After the year of2006, with the increasingly good economic situation at home and abroad, the capacity utilization situation composite index of the three industries which are steel, nonferrous metals and non-metallic mineral products rebounded sharply. Until the year of2008, the global financial crisis led to the economic downturn at home and abroad, the capacity utilization situation composite index of the three industries which are steel, nonferrous metals and non-metallic mineral products dropped significantly, and the industries of steel and non-ferrous metals had entered into the warning interval of obviously excessive capacity, the problem of excess capacity is more prominent.This paper draws on the international advanced theory and research methods of excess capacity and makes a study of China’s problem of excess capacity from various angles. The study on the measurement of capacity utilization level, volatility features, causes of excess capacity and construction of monitoring and early warning system and so on will help to in-depth explore the running situation and changing trends of industries with excess capacity during the economic transition period, and has important theoretical and practical significance for the industrial enterprises to carry out the rational investment, for the industrial sectors to develop healthily, for the government departments to develop macro-control measures so as to alleviate excess production capacity as well as for the national economy to have a sustained, rapid development.

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