Market should play a crucial role in cutting excessive capacity. According to market mechanism, price would fall in sectors faced with overcapacity, and some companies would suffer a loss and finally go bankrupt and the demand and supply would reach a balance. Such case has already been seen in sectors such as consumption, garment and photovoltaic.

However, government should also strive to maintain a healthy and fair business environment. The reason behind the current overcapacity issue is unfair competition. For instance, due to the weak enforcement of regulation, some firms known for causing high energy consumption and pollution didn't pay for the environmental cost. In these situations, bad money could drive out the good ones.

Therefore, the government should enhance enforcement of laws and regulations, and punish unsafe production or other wrongdoings. For sectors plagued by severe overcapacity such as steel and coal, it should also take necessary steps to alleviate the issue.

First, the government should launch clear guidance on withdrawal. Companies should hold accountable to their own investment decisions. Specific supporting guidance can help ease the exit process and ensure social stability. Such consideration is already underway.

Second, multiple measures can be used to address re-employment issue. Amid capacity slash, how to allocate laid-off workers is the key. The government should enhance training service and basic social security coverage, and encourage employment across the region.

Third, the government should adopt fiscal and financial measures to address zombie companies that consume a large amount of capital and land resources but actually are no longer sustainable on their own. They should be cut off from any fiscal or financial support and roll out liquidation plan.

Fourth, the government should push ahead industrial transformation and updates, along with de-capacity. The "Made in China 2025" and the Internet Plus drive will help companies move up the industrial chain and improve their competitiveness.

Risks are manageable at current stage

Despite the slowdown and operating difficulties in some sectors, the overall strength of our economy has improved, which provide leeway for continuing de-capacity.

China's economy still grows relatively fast and therefore is able to absorb some negative impact brought by de-capacity. Chinese people are hardworking and the economy has a strong resilience and great potential. A lot of infrastructural and living needs still wait to be satisfied. The fast-growing service sector and new technology especially leaves much room for the adjustment of manufacturing.

Besides, the job market remains stable is well-poised for de-capacity. The overall employment has been on the rise, along with China's economic growth. In fact, apart from a short period during the 2008 financial crisis, eastern provinces have experienced labor shortage since 2004. According to the National Statistics Bureau, the surveyed unemployment rate was 4.99 percent in 2015, unchanged from 2013 and 2014. As long as capacity cuts are carried in a steady and orderly manner, the economy can absorb the laid-off workers and employment risks are manageable.

De-capacity paves ways for a brighter future. Not all industries with overcapacity are less advanced ones. Some have relatively high technology and competitiveness. For example, the level of mechanization among China's miners averages 81 percent, while 95 percent for major players. The steel sector is among the world's first-tier, thanks to big advancement over the past years in terms of product quality, equipment and energy-saving technology. As long as we stick to cutting excessive capacity and make enough room for market force, these sectors can have a better development.

The authors work at the industrial economic department of Development Research Center of the State Council.