China seeks to curb industrial overcapacity

China pledged on Monday to halt its industrial overcapacity to maintain a stable rapid growth of its economy and avoid losing that investment. But the success of the initiative is not at all sure as local authorities, which are judged by their performance in promoting growth and employment, usually ignore orders from Beijing.
"In the short term, inspection and supervision will be very hard," said Ken Peng, economist at Citigroup in Beijing.
"The authorities are concerned about overinvestment. But it is not unanimous. The implementation depends on local authorities and will not be easy," he said.
The Government hopes to halt the expansion of six sectors, by prohibiting the approval of new investment and leaving them without financing.
The sectors considered are steel production, cement, chemical derivatives of carbon, polysilicon, flat glass and wind energy equipment, according to a statement released by 10 ministries headed by the National Development and Reform.
China ordered banks not to finance projects in these sectors that do not meet the guidelines established by the Government, the ministries said.
Nor will investors meet unauthorized funds for expansion through bonds, short-term notes, medium-term notes, convertible bonds, public offerings and secondary equity sales.

The communique states that local governments must pay attention to signs of overcapacity in the fields of aluminum production, shipbuilding and processing of soybeans, but said that these industries would not be subjected to the same restrictions.

"Many sectors are still reporting serious problems of overcapacity and redundant construction, and some problems are even worse," the ministries.
Besides generating a drop in prices and profits, overcapacity incentive for manufacturers to sell their excess production abroad. As a result, increase trade tensions with U.S. steel and tires and Europe, in shoes.
The statement, which adds to a policy set last month by the State Council-designated name given to China's cabinet, said that overcapacity control is a priority in the restructuring of the economy.
"The Chinese economy is currently at a critical stage of stabilization and recovery," the statement said.

LOCAL OPPOSITION

The guidelines reflect the concern that much of the fiscal stimulus package of 4 billion yuan (585,000 million) and the resurgence of bank credit which accompanied it would stop going to the industrial sector.The Government intended that the money should go to infrastructure efforts, affordable housing, rural development, technology upgrades and strengthening the social safety net.But these drastic measures reflect the confidence that Beijing can now pay attention to its deep-rooted structural problems such as overcapacity and heavy dependence on investment, now that the economy has seen the worst of the global crisis.
Xiong Bilin, a senior commission official, told a press conference that China will have no difficulty in achieving the government target of growth of Gross Domestic Product (GDP) of 8 percent.

In recent years, the commission has repeatedly taken steps to control overcapacity in a number of sectors, including the steel, cement and metal foundries.But Xiong admitted the difficulties of the agency to meet local opposition.

China, the world's largest producer, has a capacity to 600 million tonnes of steel a year, but 58 million of that total has been installed without permission from Beijing, said."We are asking local governments to create a good environment for market development. We're not asking specifically to close this or that," he added.