Enterprise investment, local government intervention and coal overcapacity: The case of China

Abstract

Long-term management of China's coal overcapacity depends on the targeted policy guidance on industry production capacity expansion in the overcapacity formation process. In this study, coal enterprise and local government are treated as game participants, and a three-stage dynamic game model has been developed to depict the boosting effect of the game behavior of coal enterprise's and local government's capacity investments in different markets of supply and demand. The results are shown in the following: (1) local government has been the "behind-the-scenes" operator of over-investment and redundant construction, and its excessive interventions in coal industry investment have been the primary cause of overcapacity formation; (2) when the market is in short supply, coal enterprise's optimal behavior is to continuously increase the rate of investment growth until it reaches the threshold to obtain the maximum excess profits, ultimately leading to overinvestment in the industry; and (3) the key factors affecting the game abilities of coal enterprise and local government are the market's self-regulation and the central government's supervision intensity. Although the Chinese government, a highly vertically oriented bureaucratic structure, is implementing a mandatory de-capacity policy to alleviate the intensity of excessive coal capacity, it is not a long-term regularization on the supply-side reform.