China was a traditional country under planned economy in the past. After 28 years' reform and opening to the outer world, great changes have taken place everywhere in this country with a long history and civilization. In 1990's,
China made a world-amazed decision with gradually stepping into the market economy, in order to realize a sustained economic development and to have a better place in the global economy.
After that, new reforms have been announced one after the other. Among these, the most important one is state system reform, with the key purpose of changing state's functions from principal participator of the market to a regulator only. However, there are no similar experiences in history. Therefore,
China has to practice the change from the scratch and learn from its own experiences.
So far, the state system reform is still under way and far from success. Many problems and conflicts are arising. Both surplus steel capacity and difficulties in downsizing the capacity are caused by state system reform's lag. Major problems in the current state system are listed hereafter:
1. Investment system
At present, governments at all levels have major rights to make wide
investments. The
investments mainly include infrastructure
investments, industrial projects, joint ventures and countless other projects. Without being supervised effectively, governments often waste man power and money to invest on some valueless, even awful projects for special purposes, such as so-called achievements in posts, and bribery. Due to the booming steel market in recent years, local governments have invested multitudes of funds in
steelmaking.
2. Tax system
China's tax income is distributed to central government and local governments according to tax catalogues. Local governments' income is mainly from local taxes and their expenditure budget is almost totally controlled by themselves without any supervisory and penal rules. Because they can spend their money freely, local governments have great desire to increase their local tax income. And its best way is to encourage big
investments and new projects. Even after the central government ordered cooling down the over heated
investments, local governments continued striving to increase
investments.
3. Assessment system of achievements
Currently, all levels of governments assess their inferiors' work mainly by some indexes related to economic development. The core of them is the GDP growth rate. This unilateral assessment system easily directs local officials to abnormal ideas. To increase GDP index, local officials incline to accelerate local economic development despite any potential serious problems, such as pollution, and meaningless
construction.
Steelmaking is a basic industry with great contribution to the GDP. Therefore, local governments actively promote the development of this industry and resists to any orders from the top government to downsize it. It is reported that about 80 percent of the new steel projects since 2005 are illegal, without central government's approval. But they have all been developed easily so far because they obtained local governments' permission.
Due to the above factors, it is not easy to cool down
China's over heated economy. Steel capacity surplus is just a response to state system reform's lag.