The direct reason is that the investment continued to grow too fast in previous years, and the investment in some industries such as real estate and steel was obviously overheated, which led to the expansion of production capacity far exceeding the expansion of demand. Investment growth and consumption growth are seriously out of balance. For four consecutive years from 2002 to 2005, the growth rate of investment in fixed assets remained above 20%, while the growth rate of consumption (total retail sales of social consumer goods) was between 9%- 13%, with the former being faster than the latter by about 1 times. Investment is the demand of the current period, and supply will be formed in the next period. The supply capacity will continue to grow at a rate about 1 times faster than the demand (final demand), which will inevitably lead to overcapacity in the coming year.

Technical reasons make it easy to expand production capacity, and its performance is that the growth of supply capacity is obviously faster than that of demand capacity. Since the mid-1990s, with the sufficiency of capital supply, the acceleration of technological progress and the weakening of the bottleneck of investment growth system (the government has relaxed the control on industry access), the supply capacity has accelerated, while the demand capacity has been relatively slow due to many medium and long-term factors. This potential gap between supply growth and demand growth does not necessarily lead to overproduction, that is, technical factors only provide the possibility of overcapacity.

ultimate cause

The fundamental reason is that the mode of economic growth is unreasonable.

First of all, it shows that the ability of local governments to intervene in investment and economic growth is too strong, and vicious investment competition is formed among local governments, which makes it difficult to curb capacity expansion. If the economic growth is too dependent on the direct promotion of the government and cannot be fundamentally reversed, then the problem of over-investment will be difficult to avoid.

Secondly, it is reflected in the low technical level of many industries and the weak independent innovation ability of enterprises. This makes the competition of enterprises mainly reflected in the quantity expansion and price competition of resource input and output, rather than focusing on the improvement of independent innovation ability and quality.

Third, industrial concentration is not high, especially because of institutional reasons, many industries still cannot achieve effective concentration of capital and brands in the long-term market competition. For example, due to the existence of local protectionism and the lag of system reform, many cross-departmental, cross-industry and cross-ownership mergers and acquisitions are difficult to achieve, and the result is often excessive industrial competition. That is, it is difficult for some technology-intensive and capital-intensive industries to form a market structure of monopoly competition, and the result is inevitably that the problem of excessive investment growth in industries is difficult to be corrected by the market mechanism itself.

Finally, the combination of administrative monopoly and natural monopoly or the "profiteering effect" formed by other factors has also strengthened the investment growth of some industries. For example, there are profiteering factors in real estate, steel, automobile and other industries, which make social funds flow into these industries for the second time, and finally make the production capacity of these industries over-expand. One situation is that the combination of administrative monopoly and natural monopoly makes the supply of some social public goods in short supply, which leads to the distortion of factor prices. For example, due to the influence of monopoly factors, the development of railway transportation lags behind, resulting in a large capacity gap. As a result, despite the rapid growth of coal supply, due to insufficient production capacity, coal prices have skyrocketed and "profiteering" has formed, which will further induce local governments to increase investment in the coal industry.

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