China Vows Crackdown on Industrial Overcapacity

BEIJING, Sept. 30 -- China's cabinet has laid out detailed plans to curb overcapacity in industries such as steel, cement and wind power, warning that the country's economic recovery could otherwise be hampered.

    The notice posted by the State Council late on Tuesday said meeting the government's long-standing goal of reducing overcapacity was urgent because the result of inaction would be factory closures, job losses and rising bad bank loans.

    "What especially requires our attention is that it is not only traditional industries such as steel and cement that suffer from productive overcapacity and are still blindly expanding," it said.

    "New industries such as wind power equipment and silicon are also showing signs of redundant construction," it said.

    It also singled out the coal and plate glass sectors as being offenders.

    The cabinet's notice built on a broad-brush announcement it had made in late August pledging to crack down on overcapacity in these industries.

    It said it planned to toughen regulatory standards to restrict entry in these sectors, strengthen environmental protection, control land use and limit access to bank loans, among other measures.

    In unusually blunt wording, the cabinet also pointed its finger at local authorities.

    "Some regions have acted illegally. We are once again seeing cases of illegitimate approvals, of construction starting before it has been approved, and of construction starting even as the approval process is underway," it said.

    The cabinet's strident warning about overcapacity underscored why Chinese officials have been circumspect about the economy, repeatedly saying that it has shown signs of recovering from the global financial crisis but is still not on solid ground.

    On Tuesday, the People's Bank of China said it will stick to its accommodative monetary policy to support an economy that is suffering from weak external demand.

    INDUSTRY-SPECIFIC PLANS

    For the steel industry, the cabinet said it would no longer approve or support any new steel projects or any expansion in existing projects.

    "There is 58 million tonnes of crude steel capacity under construction, most of which is illegitimate. Crude steel capacity could exceed 700 million tonnes and overcapacity will intensify if curbs are not implemented in time," it said.

    By 2011, blast furnaces with a capacity of 400 cubic metres or less, and rolling furnaces and electric furnaces with a capacity of 30 tonnes or less, must be eliminated.

    Previous steel capacity restrictions have had the opposite of the government's desired effect, leading to more capacity as mills rushed to expand to avoid restrictions.

    Cement projects that had not kicked off construction as of September 30 would be halted and reviewed, the notice said. Certain provinces will also be asked to make plans to eliminate outdated capacity within three years.

    Any additions of new capacity must be met by corresponding and equivalent cuts in outdated capacity, it said. "China's cement production capacity will rise to 2.7 billion tonnes per year if all approved projects start operation, and market demand totals only 1.6 billion tonnes," it said. In the coal sector, the cabinet said it would not approve any expansion projects for coking coal and calcium carbide in the coming three years. Synthetic ammonia and methanol projects would only be considered if they replaced small ones.

    It noted that traditional coal-to-chemical capacity exceeded demand by 30 percent. In the first half of 2009, only about 40 percent of coal-to-methanol facilities were in operation.

    For the wind power industry, it said that in 2010 Chinese companies would produce equipment equivalent to 20 million kilowatts of capacity, but that the country would install only 10 million kilowatts of actual capacity.

    To tackle this oversupply, the cabinet said it would in principle refuse approval for the construction of complete wind-power equipment factories. It also banned investors in the sector from using locally produced equipment, aiming to prevent local governments from building their own equipment plants.

    (Source: Reuters)