China to tackle overcapacity by not approving new projects

Source: Agencies | October 16, 2013, Wednesday |

Print Edition

China will tackle chronic overcapacity problems in sectors such as steel and cement by blocking approvals for new projects and by making better use of the market, according to a new plan issued by the State Council yesterday.

Margins in the targeted sectors, which also include shipbuilding, aluminum and glassmaking, have been affected for years by a capacity glut that has left many firms suffering heavy losses and reliant on government subsidy.

The long-awaited plan, published by the Cabinet, said it would focus on “establishing and perfecting” market mechanisms, marking a change of approach after years spent trying to strong-arm the sectors into submission.

It would also set higher environmental and quality standards for industries and encourage the private sector to play a role in restructuring oversized firms.

As well as blocking new approvals, the new plan will seek to absorb overcapacity by stimulating domestic demand, and will also offer tax incentives to encourage firms to relocate plants overseas.

The previous approach sought to encourage giant state-owned enterprises to merge or swallow up smaller competitors but it was not successful, with industry experts complaining that the focus on strengthening SOEs had served to raise capacity, rather than reduce it.

China will also seek to eliminate old capacity by strengthening environmental, safety and energy standards. It will also set up differential electricity and water prices for firms that violate environmental standards.

China has been trying to take a more coordinated approach to tackling the problem of overcapacity, and the country’s 2013-2017 pollution “action plan” has already laid out closure targets for outdated steel capacity, and will allow the authorities to stop the construction of projects in industries facing oversupply.

Past efforts to rein in overcapacity had failed to tackle the role played by growth-obsessed local governments, which had encouraged rapid capacity expansions with subsidies, access to credit and favorable contracts.

The government has already launched a series of reforms that will reduce the role of local governments in the approval process while attempting to strengthen their regulatory powers.

Su Bo, vice minister of industry, told a conference last month that “administrative interference” in industry was one of the biggest causes of overcapacity.

He added that preferential policies in areas such as land allocation had distorted the market and created unfair competition.

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