Limitations and Negative Results of Investment Regulation Policies

Jiang Feitao, Chen Weigang and Huang Jianbai

Chinese Economy, 2010, vol. 43, issue 4, 30-48

Abstract: This article systematically studies investment regulation policies adopted after 1994 to prevent overcapacity in the Chinese iron and steel industry. Theoretical analysis shows that these policies have three major limitations: they cannot fundamentally govern overcapacity; they cannot be used by policymakers to make accurate predictions or formulate acceptable investment plans; they may disturb the market process and lead to negative policy results. Reviews of policy predictions show that there has always been a large difference between iron and steel industry policy forecasts and plans for investment regulation and market realities. A Hodrick-Prescott filter analysis of the effects of these policies on fixed-asset investment in the industry further reveals that the policies obstruct self-adjustment of fixed-asset investment in the market, leading to negative policy results. Policies of these types should be adopted with great caution.

Date: 2010
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