Economic analysis of overcapacity

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A market economy inherently leads to overcapacity, as in such an economy people will imitate those industries that generate high profits; even after supply and demand reach balance, inertia remains, resulting in excess capacity. Excess is not something to fear; the principle of survival of the fittest in market competition is what drives out the excess. A healthy level of excess is 10%–15%. In a market economy, 10%–15% of companies go bankrupt each year, as better companies drive out the weaker ones. There’s no need to be alarmed – this is completely normal. But as long as the excess exceeds 30%, overall corporate profits drop to zero; at 40%, almost no companies will be able to make a profit. Even the best companies can end up in the red, which leads to systemic risks. This is the iron law of the market economy. I often hear entrepreneurs say that even if there is a 30% surplus, as long as they have strong financial resources, good technology, and excellent management skills, they can find ways to transfer that 30% surplus to other companies, thereby ensuring 100% sales for their own products and even being able to raise prices. However, with such an attitude of thinking they are the best in the world, they will ultimately suffer heavy losses. 　　In the industrial sector, this is the case with steel: currently, the production capacity is 1 billion tons, while demand is only a little over 600 million tons, resulting in a 50% overcapacity and losses across the entire industry. There is also a surplus in more than a dozen industrial products, including cement, wind power generation, photovoltaic cells, non-ferrous metals, electrolytic aluminum, and alumina. In Chongqing, industrial profits increased by 42% in 2013 and by another 35% the previous year, showing good performance. While it is true that some products met market demands, an important factor was the absence of overproduction. The national steel production was 100 million tons ten years ago, and it is now 1 billion tons. In Chongqing, steel production capacity has not increased by even 1 million tons over these ten years; it remains at 6 million tons. Coal: ten years ago, the national production was 1.8 billion tons, and now it has risen to over 4 billion tons; the actual amount produced is around 3 billion tons. In Chongqing, however, the production remains at 40 million tons, with no increase. If there is overcapacity in these areas, it will result in large losses that will offset much of the current profits. Therefore, by following the regulatory guidelines set by **** and the State Council and working in an honest, down-to-earth, and conscientious manner, it is beneficial to plan ahead. Everyone must believe in economic laws and think rationally. 　　Urban development also suffers from overcapacity. In terms of land supply, an area with an urban built-up zone of one square kilometer should generally be able to accommodate 10,000 people; thus, over 100 square kilometers can support 1 million people, which facilitates a more prosperous integration of industry and urban areas. But if a place has only 500,000 people and 100 square kilometers of land have been developed, no matter how prosperous the city may be, it will surely be an empty, deserted, dead city at night – that is excess. Therefore, over these more than ten years, we have always adhered to the basic principle of 10,000 people per square kilometer. There is also a standard of experience for the development of industrial parks: each square kilometer should generate an output value of 10 billion. If the output value reaches 100 billion, then 10 square kilometers are required; if it reaches 300 billion, 30 square kilometers are needed. It would be a waste of land to use 30 square kilometers to achieve only a output value of 50 billion. Such excessive downturns will act like a plague, scaring away all companies that come to investigate, ultimately harming both others and oneself; such behavior must not be allowed. 　　In urban development, there are six types that need to be prevented from becoming excessive. The first is housing. 40 square meters per person is sufficient. If the city’s population eventually reaches 10 million, 400 million square meters of housing will be needed; any excess would be redundant. In some places, the per capita area is 80 square meters – there’s definitely a lot of speculation involved. The second are office buildings. A basic rule of thumb is roughly 20,000 GDP per square meter. If too many office buildings are built, in the end no one will have a place to work. Third are shops. Generally, for a retail volume of 20,000 in metropolises, 1 square meter of shop space is required; in districts and counties where rent is lower, 1 square meter is sufficient for a retail volume of 10,000. If the retail sales amount to 500 billion and there are 100 million square meters of retail space, there will be an oversupply; the gross profit won’t even be enough to cover rent, and losses will surely occur. Fourth is the trade market. It’s not impossible for various provinces to try to create their own versions of Yiwu in Zhejiang, but Yiwu is unique across the whole country. If every county tried to establish its own small version of Yiwu, requiring hundreds of thousands or even millions of square meters of space, such places would surely remain empty. Fifth is the convention center. It is reasonable for a megacity with a population of ten million to have exhibition centers covering hundreds of thousands of square meters. However, if cities, prefectures, districts, and counties build exhibition centers of that size, it will definitely be excessive; in some places, several such centers are even constructed, each covering hundreds of thousands to millions of square meters, and there simply aren’t enough exhibition spaces available to accommodate them all. Sixth are urban complexes. If a city builds 20 such complexes, with two or three in each district or county, and each district or county has only a hundred thousand people or so, where would all that consumer demand come from? Bubbles will definitely form as well. Real estate requires substantial capital; once there is an excess, the bad debts fall on the financial system. Sometimes, fearing that real estate developers might go bankrupt, banks withdraw the funds that should have been lent to them in order to avoid risks. As a result, these developers are forced to turn to usurers, which quickly leads to their bankruptcy; this pattern of passing the burden from one party to another also contributes to instability.