The Problem of Excess Capacity in the Chinese Economy and its Implications on the Chinese Society

The Chinese Government’s response to The Global Financial Crisis was a RMB 4 trillion financial stimulus package which was mainly aimed for covering expenditure for infrastructure programs and keeping economic growth at a plausible level. Although Chinese Government managed to ease the pressure which a lot of export-oriented companies faced during the crisis as well as create additional job places in the core of the launch of massive infrastructure projects, the stimulus introduced by the government exposed some other problems of the Chinese economy, which were of the structural origin to some extent. According to the concept of “Budget constraint”, for a long time, a great deal of Chinese SOEs were reliant on massive financial support by the government, that allowed them to remain competitive without being incorporated in market relationships. In this situation, some companies, especially those that were parts of the steel and coal industries, started producing more units at a lower cost and below their level of capacity utilization. This meant that a certain share of plant’s or mill’s facilities was out of usage, the same amount of employers were involved in the production of the same volume as at higher capacity utilization, so the cost of production of one unit was more under these circumstances.