China must not repeat its mistakes in tackling overcapacity

In recent months, Chinese overcapacity has been a major topic of discussion – and a source of controversy – among economists and policymakers around the world. While these concerns are not entirely off base, they are excessive and resolvable.

Over the past four decades, as China has shifted from a planned economy characterised by shortages to a market economy oscillating between insufficient demand and overheating, its government has often sought to eliminate overcapacity whenever it arose. In 2003, for example, a crackdown on overcapacity in the steel industry led to the shutdown of many steel mills.

Following the 2008 global financial crisis, China’s exports plummeted, leading to a significant economic slowdown. In the first quarter of 2009, Chinese gross domestic product grew by just 6.1 per cent, the lowest rate in more than a decade. To counteract this shock, China’s government introduced a 4 trillion yuan (US$586 billion) stimulus plan.