Abstract: In view of the increasingly serious environmental pollution in China, the government formulated a series of environmental regulation policies. However, local governments are constrained by environmental protection and economic development in the process of implementing environmental regulation due to the political centralization and economic decentralization, leading to the limited effect of traditional environmental regulation. Traditional environmental regulation has limited effect in dealing with the increasingly serious environmental problems. Therefore, Central Environmental Inspection system arose at the historic moment. In order to test the effect of Central Environmental Inspection on reducing overcapacity of Chinese manufacturing enterprises, the Multiphase Difference-in-Differences method was used to investigate the impact of this system and the effect mechanism based on the annual data of listed manufacturing enterprises from 2012 to 2019. The results showed that Central Environmental Inspection was beneficial to the reduction of overcapacity of manufacturing enterprises and played a role by promoting the regional specialized agglomeration. At the same time, the system had a significant effect on reducing overcapacity of manufacturing enterprises in regions with high marketization process and in heavy and moderate pollution industries. It also had a significant effect on controlling the backward production capacity in large size, state-owned and private manufacturing enterprises.