Overcapacity troubles Chinese economy, reform needed (3)

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Li Yan attributed the overcapacity to declining demand, excessive investment and low-tech expansion.

"The problem is now rooted in challenges involving time, management and technology," he explained.

Li agreed with Feng in saying that local government performance-oriented investment is another cause of rebounding overcapacity.

Local governments are deeply involved in managing production, which can affect market operation.

"Government power causes similar choices to be made in different places," Feng said. "Vastly profitable sectors like land and mineral resources have led local governments to steer corporate investment."

Local governments are also in charge of approving projects, leading investors to prefer government-targeted sectors so as to ensure approval, Feng said.

Despite central government urges to curb excess capacity, local governments have not taken all the factors involved in industrial layout into consideration. Boosting the local GDP and employment are still prioritized, leading to repeated input for the same projects.

Regional protectionism and lagging systematic reform have sheltered many incompetent companies, hampering the market's function, analysts said.

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