Selective industrial policy and overcapacity: Evidence from a quasi-natural experiment in China

Overcapacity has long been a "chronic problem affecting China's economic development." Why is China's overcapacity intractable? This study takes the "Revitalization Plans of Ten Industries" (the RPTI) issued by the Chinese government in 2009 as a quasi-natural experiment. It deploys the data of China's A-share listed enterprises and the difference-in-differences (DID) model to investigate the impact of the selective industrial policy on enterprise overcapacity. The results show that the policy has a significant and persistently negative effect on the capacity utilization rate of the treated group. Mechanistic studies reveal that policy-induced overcapacity is caused by increasing government subsidies for the treated group, depressing corporate investment efficiency, and growing capital misallocation. After considering zombie enterprises, we find that the policy mainly leads to the overcapacity of regular enterprises but has no negative impact on zombie enterprises, and zombie enterprises crowd out the capacity utilization rate of regular enterprises in the same industry. This study indicates that a selective industrial policy that prevents the market elimination mechanism from functioning is an underlying cause of overcapacity in China. The study's findings reveal why the administrative de-capacity policies enacted by the Chinese government have failed to eliminate backward capacity but rather created a new overcapacity issue.