China is finally getting serious about its overcapacity problem as new projects in sectors like steel, aluminum and cement will not be approved, and existing firms will be restructured.
According to a new plan issued by the State Council on Tuesday, targeted industries also include shipbuilding and glassmaking, all of which have for years seen too many competitors and subsequently heavy losses. State-owned enterprises in these sectors have relied heavily on government subsidies, Reuters reported.
The plan will focus on “establishing and perfecting” market mechanisms and encourage the private sector to play a role in restructuring oversized firms. Previously, the government has encouraged state-owned firms to merge or buy out smaller competitors, but the strategy has proved unsuccessful – strengthening the conglomerates served to raise capacity instead of reducing it.
Aside from supply-side reforms, there will be strategies to stimulate domestic demand in these sectors, and offer tax breaks to encourage firms to relocate plants overseas.
China will also enforce higher environmental, safety, energy and quality standards for industries, which will help to reduce current capacities. The measures would ideally allow the world’s biggest polluter to tackle its dire environmental concerns along with overcapacity, after a carbon-trading scheme earlier in the year that allotted firms certain emission limits. Under the new capacity plan, firms that violate environmental standards will have to pay higher electricity and water prices.
Overcapacity has been driven in large part by growth-obsessed local governments, which had encouraged capacity expansion with subsidies, access to credit and favorable contracts – a process termed “administrative interference” by Su Bo, China’s vice-minister of industry at a conference last month.
Preferential policies in areas such as land allocation had distorted the market and created unfair competition, Su added, according to Reuters. To combat such interferences, Beijing has put in place a series of reforms aimed to reduce the power of local governments in the approval process.
Steel, one of China’s industries with the severest overcapacity problem, has long enjoyed soft loans, massive subsidies and favorable local supply contracts, which resulted in rapid expansion. Su said the central government needs to up the entry requirements to industries like steel that are already oversaturated.
The new plan will also set up mechanisms that would make it easier for firms to exit these industries. Experts have suggested that the lack of an adequate bankruptcy law in the world’s second largest economy has contributed to the overcapacity problem as well.
China's Overcapacity: New Projects Banned In Steel, Cement And Aluminum
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