Abstract: Using the data of Chinese listed companies from 2002 to 2019 and PSM-DID method, this paper focuses on explaining the difference and internal mechanism of the effect of industrial policy on the capacity utilization of state-owned enterprises under the different situations in which the "visible hand" is violating the economic laws forcing the "invisible hand" or conforming to the economic laws to cooperate with it. It is found that the "visible hand" represented by government subsidies is not the main inducement of overcapacity of state-owned enterprises. Driven by the "paternalism" motivation, local governments' strongly support state-owned enterprises with low total factor productivity. The " visible hand" violates the economic law and the "invisible hand" is the internal root of overcapacity. Mixed ownership reform is not a "panacea" for state-owned enterprises to improve capacity utilization. Only when the "invisible hand" is coordinated in areas with a high degree of marketization, can the efficiency of government subsidies for state-owned enterprises be significantly improved, and the role of government subsidies in capacity utilization has changed from inhibition to promotion. The research conclusion of this paper has positive policy significance for building a long-term mechanism to resolve overcapacity of state-owned enterprises and improving the government's ability to implement accurate policies under the guiding ideology of " promoting a better integration of effective markets and effective government".