By Zhao Changwen, DRC

2016-12-23

The Central Economic Work Conference proposed to continue the further promotion of the five tasks of cutting overcapacity and excess inventory, deleveraging, reducing costs and strengthening points of weakness.. In 2016, the goals of cutting overcapacity set at the beginning of the year had been fully completed ahead of schedule. According to the goals set in the 13th Five-Year Plan, the overcapacity of iron and coal has been cut respectively by one third and one forth.

First, the main economic task in 2016 was to cut overcapacity. 1. Cutting overcapacity is one of the five tasks relating to the supply-side structural reform. 2. Instead of taking a “one-size-fits-all” approach, the government implemented relevant reform measures in key industries and areas. However, there are still some long-term and short-term issues to be addressed in terms of both symptoms and root causes.

Second, in 2017 the government needs to focus on cutting overcapacity through market performance and legal measures. 1. We need to adhere to the principle of making progress while keeping stable economic performance, push forward the supply-side structural reform and combine adjustment with regulation. 2. We need to prevent the resurgence of overcapacity which has been resolved, strictly implement industry standards through intensified supervision, and cut overcapacity by legal means. 3. We need to bring into full play the role of market mechanism in cutting overcapacity. In treating “zombie” enterprises, we need to encourage mergers and acquisitions.

Third, the long-term mechanism to cut overcapacity should be built with deepening the reform at the core. Cutting overcapacity and industrial upgrading are the two sides of the coin. Eliminating backward production capacity itself is to promote industrial upgrading; and in the process of cutting overcapacity, the technological transformation and equipment renewal of enterprises should be the major points. State-owned capital should withdraw from heavy industries with excessive capacity, and merge with strategic emerging industries, and establish a long-term mechanism to resolve overcapacity.

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