Why Overcapacity Rapid Economic Development

Market economic conditions, especially in the special stage of economic development in which China is located, moderate overcapacity is conducive to the role of the competition mechanism, however, at this stage, China's overcapacity in some industries has exceeded the normal market to bear the scope of economic growth and smooth operation will have a serious impact.

1, overcapacity will reduce the investment multiplier, weakening the recovery momentum brought about by increased demand. Overcapacity will weaken the spending effect generated by fiscal policy. At present, the problem of overcapacity has been aggravated and is gradually spreading trend, whether it is traditional or emerging industries, or due to the weakening of the investment capacity, or due to the existence of a greater risk, the enterprise lacks the motivation or ability to invest. As a result, under the government's expansionary fiscal policy, the investment multiplier will be reduced, and private investment is difficult to effectively start.

A study published by Standard & Poor's on Jan. 31, 2013, concluded that investment levels in emerging economies such as China are too high relative to returns on investment, and that these economies could face an economic pullback once the investment cycle enters a downward trend. The data suggests that China is the only one of the 32 countries studied by the Standard & Poor's system that falls into the high-risk category. While S&P's ratings are questionable, they do suggest that the market is somewhat wary of China's economic performance.

2. Overcapacity can lead to a downward spiral in the producer price index, weakening companies' profitability. Overcapacity means that market supply exceeds demand, the downward pressure on prices will continue to increase, enterprises generally difficult to operate, the loss side of the expansion of the efficiency decline. In fact, the current overcapacity has already depressed prices in a situation where supply exceeds demand, leading to a downward trend in the PPI year-on-year for several consecutive months.

According to the basic conclusions of the Quantity Theory of Money, a theoretical level of inflation is obtained by using China's money growth rate (measured using Ml) minus the real CDP growth rate, which is then compared to China's PPI. The "PPI" curve is a realistic producer price index expressed using the industrial producer ex-factory price index. China's PPI is basically below the theoretical inflation rate, which suggests that the inflation corresponding to money growth rates exceeding real GDP growth rates is not fully manifested in China, which is partly due to the downward movement of prices caused by overcapacity in China's manufacturing sector.

3, overcapacity will be excessive consumption of funds, affecting the normal play of monetary policy effects. Monetary policy effect is in the government to implement the expansion of monetary policy, the main body of the enterprise, especially the private economy can be low interest rates to raise funds for investment, which led to an increase in aggregate demand generated by the macro effect. In fact, in China, financial resources are mainly concentrated in excess capacity of state-owned and state-controlled enterprises, private economy is difficult to get strong financial support. The reality is to see the monetary growth rate "hot" and the real economy "cold" coexist, partly from the overcapacity industry on the excessive consumption of new funds. Excess capacity industry will dilute liquidity, making the monetary policy multiplier reduced, at the same time to make private enterprise capital access difficulties, monetary policy economic adjustment function is difficult to give full play to.

4, overcapacity will form a financial risk, serious and even lead to a wider range of financial risks. Overcapacity enterprises will face the enormous pressure of the buyer's market, price competition is much more intense than the normal market environment, in this case, the general operating difficulties of enterprises, very likely to form financial risk, when accumulated to a certain extent, may lead to financial risk.

We chose "the number of large and medium-sized industrial loss-making enterprises", "the number of state-owned and state-controlled industrial loss-making enterprises", "the growth rate of the number of industrial loss-making enterprises", "growth rate of total loss of large and medium-sized industrial loss-making enterprises", "growth rate of total loss-making enterprises of state-owned and state-controlled industrial loss-making enterprises" and other five indicators at a typical time for comparison, we can see that, since 2005, on the whole, China's main industrial enterprises Since 2005, on the whole, China's major industrial enterprises have been experiencing operational difficulties and more serious losses, partly or even mainly due to overcapacity resulting from sustained investment in recent years. This investment pattern continues and accumulates to a certain extent, it may lead to many enterprises to break the capital chain, affecting the stability of the whole macro-economy.

5, overcapacity indicates that the investment-driven growth model has not adapted to the stage of development requirements. Analysis shows that China has entered a period of economic slowdown, large-scale investment in the manufacturing industry does not adapt to this stage of economic development requirements, investment-driven growth model is not sustainable.