China can tackle overcapacity with reform: expert

China has to carry out economic structural reforms to tackle overcapacity, according to Li Wei, an economics professor at Cheung Kong Graduate School of Business (CKGSB).

Li and CKGSB created the Business Conditions Index (BCI) in 2011, a set of indices that measures the business sentiment of Chinese executives about China's macroeconomic environment through their predictions of sales, profit, the financing environment and inventory over the next six months.

During a talk in New York on Wednesday, Li said that profit expectations had a sharp decline in the second half of 2015, and went into the negative, which rarely happened in the previous four years.

Expectations on the financing environment and inventory sides have remained in low ranges.

Even though the costs of production have increased for manufacturers, businesses could not raise their prices because of overcapacity, Li explained. And he said that many companies also had lots of debt to pay back.

In the past three years, China eliminated more than 90 million tons of steel production capacity and over 200 million tons of coal mining capacity, xinhua reported.

The State Council has said that no new steel projects will be licensed, outdated plants will be closed, and "zombie" companies eradicated, according to Xinhua.

"Overcapacity means we need to carry out economic structural reforms, allowing the market to guide an outflow of resources that has become stagnated, and configure a way to put valuable resources to better use," according to latest BCI report published on March 4.

Li and CKGSB get the BCI by surveying about 400 of its alumni who are top executives in private companies.

CKGSB has conducted nearly 50 surveys in the past five years.

Compared to the Purchasing Managers' Index, which collects similar data often through state-owned companies and export-focused companies, Li said the CKGSB BCI reflects business sentiment from the private sector.

During each survey, respondents are asked to indicate whether certain aspects of their business are expected to increase, remain unchanged, or decrease over the coming six months as compared to the same period last year.

The index takes 50 as its threshold, so an index value above 50 means that the variable measured is expected to increase, while an index value below 50 means that the variable is expected to fall.

The BCI registered 55.8 in February, up from an overall BCI index of 51.2 in January.

hezijiang@chinadailyusa.com