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China detailed plans to curb overcapacity in industries such as steel, aluminum, cement and wind power..

By Steve Gavriliuc for CEOWORLD Magazine Updated:September 30, 2009

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

In a reiteration of existing policy targets, the State Council 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 in a notice posted late on Tuesday on www.gov.cn.

While highlighting overcapacity in conventional sectors such as steel and cement, it also aimed at new industries such as wind power equipment and silicon.

For the steel industry, the government set a firmer tone of clamp-down by calling some 10 percent of the country’s crude steel capacity illegitimate, but did not elaborate what it would do about it. China is the world’s biggest steel producer and consumer.

“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.

The cabinet said it would no longer approve or support any new steel projects or any expansion in existing projects.

By 2011, blast furnaces with a capacity of 400 cubic meters or less, and rolling furnaces and electric furnaces with a capacity of 30 metric tons 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.

China Business News citing figures from China Iron & Steel Association recently, daily crude steel output in mid September posted at 1.655 million tonnes off slightly from 1.67 million tonnes averaged in early September or down 11,000 tonnes from mid August.

Crude steel production in China was on a record-breaking run during June and August and hit an all time high of 52.33 million tonnes in August up by 3.3% or 22% on year. And the monthly output translates into annual production of 600 million tonnes fanning wide concerns about mounting up overcapacity pressure.

The State Council, China’s highest executive body, also issued new rules to contain excessive capacity in seven other sectors, including revisiting a years-long campaign to curb steel output.

Premier Wen Jiabao said earlier this month that excess industrial capacity due to slower external demand is his biggest worry as China’s economy continues to recover. Wednesday’s move doesn’t change China’s broad policy focus on stimulating the economy, but shows that the government is increasingly dealing with excesses of its expansionary policies.

A failure to rein in excess capacity “will make it hard to prevent vicious competition in the market and raise profits, and will lead to shuttering of companies, or insufficient use of capacity, layoffs, big increases in bad assets held by banks,” the government said in its sternest warning on the subject yet, wsj reported.

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