24 April 2019

POLICY WATCH: Beijing takes the knife to industrial excess

Five years. That’s how long China is giving itself to cut overcapacity in a range of industries regarded as some of the biggest obstacles to economic reform. To get there, Beijing has mapped out a route that will hopefully end in a more stable, upgraded economy.

The road map is contained in the State Council’s Guidelines to Tackle Serious Production Overcapacity, a document issued on October 16 and listing five prime sectors with serious excess production: cement, electrolytic aluminium, sheet glass, shipping and steel. 

The guidelines ban expansion of capacity in the selected sectors, demand reassessment of projects under construction and call for clearance of illegal capacity. They also insist that outdated capacity should be phased out, and efforts made to improve the standard of remaining capacity.

In all, 30 million metric tons of steel, 100 million metric tons of cement, and 20 million weight cases of glass in capacity should be eliminated, according to the statement.

Fading out obsolete capacity has been at the top of the government’s agenda since Xi Jinping {習近平} became the ruling Communist Party’s leader last year. Xi has expressed his concern on the issue four times since December. In July when Xi met a group of non-Communist Party members, he said “addressing overcapacity is key to adjusting the economy’s structure” and pledged to step up financial regulation and prevent risk.

This is not the first time Beijing has planned to cut excess output in these industries. But in the past, local governments have failed to follow through on the central government’s directives because they wanted to reach other economic goals and ensure affected workers kept their jobs.

Learning from those failures, the State Council will use extra funding to encourage companies to phase out obsolete capacity by 2015. Core technology and enterprise management must make breakthroughs to deliver growth through innovation.

Mergers are also encouraged. Domestic and global demand should be explored, consolidated and expanded. Government management should foster a fair market mechanism and environment, the statement said.

Analysts see the overcapacity drive as a test for the new government’s entire reform agenda of pushing for more sustainable development at more moderate economic growth rates.

The government has resisted calls for a major growth stimulus program like the 4 trillion yuan package then-premier Wen Jiabao {溫家寶} launched after the global financial crisis. The glut of funding failed to support real economic growth, serving only to pump up an economy that was overheated and marked by overcapacity and overinvestment.

China is the world’s biggest producer of steel, aluminum and cement. Overcapacity in a number of sectors has dragged down prices and profit margins for some enterprises amid China’s economic slowdown. Official statistics indicate that only 72.5 percent of aluminum, 78 percent of electrolytic aluminum and 67 percent of steel capacity were used last year, well below levels in other countries.

– Contact the reporter at [email protected]


EJ Insight writer

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