The drivers of coal overcapacity in China: An empirical study based on the quantitative decomposition

Abstract

To examine the driving factors behind coal overcapacity in China, we attempt to reveal the drivers of the supply-side natural excess capacity (NEC) and demand-side cyclical excess capacity (CEC). We analyzed the drivers using cost and demand curves, and then tested the theoretical hypotheses using the appropriate data. The results show that, on the supply side, the NEC is affected by the entry deterrence strategy, the firms’ factor hoarding under the expected future demand fluctuations, and government investment incentives. The first two factors enhance the NEC, whereas the last factor reflects its motive and ability. Its motive promotes the NEC directly, and it does so by enhancing the propulsive effect of its ability on the NEC. On the demand side, the CEC is influenced by demand shocks. Economic growth has a negative relationship with the CEC. The regulation of interest rates and other countercyclical policies are beneficial to the process of stabilizing the CEC fluctuations. Therefore, governments should formulate their policies based on a scientific judgment of the factors inherent to the NEC and CEC, build a new and improved system to evaluate the performance of local government officers, and formulate a de-capacity plan based on the expected future demand when necessary.