"The more standards (policies for solving excess capacity), the stronger the human factors." Lu Feng, the Director of the China Macroeconomic Research Center (CMRC) of Peking University, has for many years, paid attention to policies of resolving excess capacity using Chinese characteristics. He was the author of Fighting against Excess Capacity (1999-2009).
On December 24, 2013, Lu Feng analyzed the policy of resolving excess capacity in this round for reporters of the 21st Century Business Herald. He believes that excess capacity exist in a specific macroeconomic cycle in certain industries. It is a normal phenomenon that can be adjusted by market-based approaches. Environmental problems are not entirely the problem of excess capacity. The fact that should be paid attention to is that the excess capacity policy should be carried out in the expectation of controlling environmental pollution, but there may be problems in theory and in effect.
Steady macroeconomic policy is a good remedy to controlling excess capacity
21st Century Business Herald: Recently some equipment of idling steel enterprises have been dismantled in some locations, indicating the determination to resolve the problem of excess capacity in the steel industry. What do you think of the clean-up?
Lu Feng: Tearing down a discontinued steel enterprise is a kind of concentrative management, which can be understood because it has Chinese characteristics. Concentrative management will have few results, but to solve the problems of excess capacity and environmental pollution under the market system, more mechanistic and normal approaches are needed.
Discontinued steel enterprises did lead to low capacity utilization because there is still capacity, but these companies don’t produce. In a sense, the pollution that they brought to the environment is temporarily gone. Why don’t these discontinued companies exit completely and remove the capacity? This is probably because it is expected that at sometime a climax in the market will return. If macroeconomic policies stick to the principle of prudence and avoiding irritation, the enterprises will ultimately exit if there is not demand for them in the market.
To deal with or eliminate the so-called backward excess capacity and to ensure it does not revive, the best way is to avoid over-stimulating the economy and to use market mechanisms to gradually eliminate it. In a sense, the recession in the macro economy, objectively speaking, is an elimination mechanism. From a macro-level, it is to correct the excessive expansion in the past, while at the micro-level, it is to eliminate some of the relatively backward enterprises. A "clean-up" sometimes and a "revival" at other times may disrupt market expectations, making enterprises that should exit business not want to exit.
Environmental governance should be independent of capacity management
21st Century Business Herald: what is the difference between this round of resolving excess capacity and that of the past?
Lu Feng: In the background of new leaders pushing reforms, polices designed to deal with excess capacity reflect the innovation and highlights. For example, keywords in the document titles changed from "to stop low-level redundant construction," and “to stop blind investment in specific industries” to "resolving conflicts of serious excess capacity". It is proposed that we "speed up to establish and improve the long-term mechanism of resolving conflicts of excess capacity with market-oriented approaches," which is very impressive. Some of these measures reflect new ideas and are used to deal with old problems in a new situation. However, determined by the basic logic of industrial policy, several measures still follow the past means of managing excess capacity.
I think experiences and lessons of past policies need to be carefully summed up, and the relationship between excess capacity, market regulation, environmental pollution and government intervention should be straightened out, so that a new round of resolving conflicts of excess capacity truly reflect the specific results of the Third Plenary Session of the 18th CPC Central Committee.
21st Century Business Herald: Policies of resolving environmental pollution and excess capacity are, in some places, put into effect together. What do you think of this?
Lu Feng: One way to deal with environmental pressure is to control excess capacity, which is one of the characteristics of related policies in the past. There is a logical contradiction because if capacity is not in excess, or if capacity utilization is high, pollution emission and environmental problems will get worse. It can be seen that this kind of industrial policy itself has the issue of how to sort out logical relationships and strive to be scientific.
Steel production in China is at an unprecedented scale, which has brought environmental pressures and required strict environmental standards. However, pollution control should be independent of industrial policy for excess capacity. Excess capacity is a normal phenomenon in a market economy, and should be dealt with and resolved by taking advantage of market competition and an elimination mechanism. Environmental pollution is a kind of external problem, namely a problem of market failure. It needs to be dealt with through appropriate government intervention, which should primarily rely on transparent and stable rules, formulated by the Environmental Protection Department and maintained by a strict enforcement of the law. Concentrative management is necessary, but the most important thing is to rely on mechanisms and long-term law enforcement.
The more standards, the more difficult for the expected results to be achieved
21st Century Business Herald: In the document of resolving excess capacity in this round of development, policies of macro-control and environmental control are mentioned simultaneously, what is the association between these policies?
Lu Feng: First, it should be clear that the right to control the capacity of steel production, whether it is right or wrong, belongs to industrial policy rather than macroeconomic policy. Macroeconomic policy is cyclical, while industrial policy should be implemented steadily after confirmation. The industrial policies are considered as macroeconomic policies, which are difficult to be scientific and truly get on track. In any country with a market economy, excess capacity must exist in a certain macroeconomic cycle of some industries, and the most important way is to adjust it with market-based approaches.
The governance of excess capacity, in the past, was predominantly led by the National Development and Reform Commission (NDRC), with the help of the unique ability of NDRC as a macro sector regulator. The NDRC has strong abilities, which is a matter of fact and a good thing. However, to play the institutionalized and normalized role in controlling environmental pollution, dedicated functional departments should be run better. For example, functional departments such as environmental protection deal with it through strict routine law enforcement.
Government can regulate it from the perspective of environmental pollution or security. Technical standards, such as the volume of the furnaces should not be an independent regulatory issue or even a prohibited reason. With different market demands and different enterprise characteristics, there should be choices of different types of technology. Only when specific technology is selected, causing excessive pollution, does the government have a reason to intervene. If the government chooses an index to intervene in and govern arbitrarily, it would have many more choices. In this case, inconsistency with a reasonable scope of administrative intervention might appear.
It can be seen from past situations that capacity management will give rise to many things, not only technology, but also pollution, size, and investment access. Control departments are constantly making tradeoffs and will achieve success one way or another. However, the more the standards, the stronger the human factor, and objectively speaking, it is then difficult to achieve the desired results. Under the new situation of resolving excess capacity, the policy focus should strive to improve in this area.
