Abstract:

China’s persistent industrial overcapacity has exacerbated market inefficiencies， resource waste， and environmental pollution， posing a challenge to industrial upgrading and high-quality economic development. As strategic emerging industries （SEIs） become a key driver of new productive forces， government subsidies have accelerated their growth but also induced excessive investment and overcapacity in sectors such as photovoltaics （PV）， wind power， new energy vehicles， and machinery manufacturing. Whether subsidy recession can effectively mitigate overcapacity during the mature stage of industrial development remains an open question. The “531” photovoltaic policy， issued on May 31， 2018， marked a major acceleration in subsidy recession within China’s PV industry. Given the industry’s severe overcapacity and complete subsidy policy cycle， the “531” policy provides a quasi-natural experiment for identifying the causal effect of subsidy recession policy on enterprise overcapacity. Using panel data from listed PV and wind enterprises from 2014 to 2023， this study estimates enterprise overcapacity based on the production function method and applies the difference-in-differences model to investigate the impact of subsidy recession on overcapacity. Heterogeneous effects across industrial chain segments and ownership types are explored， and the underlying mechanisms through R&D investment and rent-seeking behaviors are examined. In addition， product output and life-cycle carbon emission data are used to quantify the policy’s economic and environmental benefits. The results indicate that subsidy recession significantly reduces overcapacity in the PV industry， with stronger effects for downstream firms and state-owned enterprises. Mechanism analysis shows that the policy alleviates overcapacity by stimulating R&D investment and reducing rent-seeking behavior， thereby shifting firms from extensive capacity expansion toward innovation-driven development. Furthermore， the policy yielded comprehensive benefits totaling 7.493 billion CNY in 2018， equivalent to 4.92% of the PV industry’s total output value， through fiscal savings， increased corporate revenue， and carbon emission reductions resulting from replacing coal-fired electricity with PV power generation. Based on micro-level evidence from China’s PV industry， this study provides policy implications for addressing overcapacity. First， governments should establish a well-designed subsidy exit mechanism with clear timelines and dynamic evaluation systems to reduce policy dependence while sustaining technological upgrading. Second， differentiated subsidy policies should be tailored to firms with different ownership and positions along the industrial chain， with greater emphasis on innovation incentives and coordinated industrial development. Finally， market-oriented reforms should further improve subsidy allocation transparency， clarify the respective roles of government and the market， and ensure an orderly subsidy withdrawal process to facilitate a smooth policy transition.

Key words: subsidy recession, overcapacity, strategic emerging industries, “531” photovoltaic policy