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BEIJING: February 23, 2016. A new report from the European Chamber of Commerce in China says central government efforts to resolve excessive production capacity have failed due to regional protectionism, weak regulatory enforcement, low resource pricing, misdirected investment, inadequate protection of intellectual property rights and an emphasis on market share.

The report is an update of a study done by the Chamber in 2009 and suggests China can resolve its excess capacity by cutting capex in the following sectors: crude steel, electrolytic aluminum, cement, chemicals, refining, flat glass, shipbuilding, 
paper and paperboard.

Chinese-ShipbuildersEuropean Chamber president Joerg Wuttke commented: “China has not followed through on the attempts it has made over the last decade to address overcapacity. This has led to a further deterioration of the problem. Without a sustained effort to address it now, overcapacity may well seriously impede the effectiveness of China’s economic reform agenda.”

The Chamber also suggests a reform of the country’s fiscal system by adopting a consumption-based, VAT-sharing system to reduce local government employment subsidies; improvements in IP protection to encourage increased R&D spending; applying labor laws more rigorously; reducing energy price subsidies to industry; continued resource price reform on coal electricity, water and natural gas; and publishing more reliable and transparent industry data for companies to make more informed decisions about their production volumes.

“A review of our original study showed that the action plan we proposed in 2009 is still relevant today. We hope that our analysis and recommendations for 2016 will result in concrete actions by Chinese policymakers,” said Wuttke. “Although the [Communist] Party’s annual Central Economic Work Conference has listed addressing overcapacity as a priority every year from 2007 to 2015, fundamental changes have not yet taken place. Tackling overcapacity is now more urgent than ever: the cost of maintaining the status quo is far too high,” he added.

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