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October 13, 2009

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Home » Business » Manufacturing

Overcapacity sparks stringent curbs

FACTORIES producing steel, cement and aluminum are suffering from too much money flowing in and too many goods flowing out as stockpiles mount during the global economic recession.
The Chinese government is taking advantage of the imbalance in supply and demand to crack down on industrial inefficiency, waste and overproduction.
The State Council, China's Cabinet, announced sweeping new curbs on investment in more than five industries just before the start of National Day holiday in a sign it is serious about manufacturing reform.
"We have to address overcapacity and duplication in these sectors in a timely manner," the State Council said "otherwise it will lead to vicious market competition, declining profits, facility closures, layoffs and growth in banks' bad assets."
Overcapacity is by no means a new problem in China, where small, inefficient factories are numerous despite government efforts to force consolidation and streamline production in key industries.
The Ministry of Industry and Information Technology said overcapacity in the steel industry alone reached 160 million tons in 2008, while surpluses in cement production totaled nearly 300 million tons. The capacity utilization rate of the aluminum industry was only about 65 percent.
China began a round of economic structural reforms in 2007, and insiders expect the pace to quicken because the global financial crisis had reduced demand for Chinese goods.
Wang Minghui, chairman of Yunnan Baiyao Group, which makes traditional Chinese medicine, said the crisis provided an excellent opportunity to promote industry consolidation and rein in inefficient factories.
Inefficient companies
"Many industries are in a period of transition," Wang said. "The crisis should see further consolidation by eliminating less-competitive companies."
Government support for more marginal companies kept them alive and stymied efforts to streamline certain industries, he added.
Small, sometimes inefficient companies spring up when demand is booming and everyone wants to jump into profitable industries.
According to the State Council, the number of new steel factories in the first half of this year grew a fifth from the same period in 2008. Industry observers estimate the output of steel may exceed 700 million tons this year. Market demand in a normal year is about 500 million tons, and that's not counting the effects of the economic slowdown.
Emerging industries such as energy technology are also a magnet for new investment. Wind power generation and polysilicon are among the sectors where excess production poses a threat.
Before 2007, there were only three domestic firms producing polysilicon used in solar panels, with total output of less than 600 tons. By the first half of 2008, there were nearly 20 polysilicon companies with total capacity of more than 50,000 tons - almost 90 percent of the world's production.With more polysilicon projects are under construction, production capacity could almost triple to 140,000 tons by 2010, double current global demand.
Some economists warned earlier this year that the government's stimulus package and loose credit policies would cause more production surpluses and advised the government to channel investment to industries with the greatest growth potential.
In July, Wang Qing, a Morgan Stanley economist, said in a research note: "China's rebalancing is mainly policy-driven. It will deliver marginal improvement. But it is not a first-best solution."
In August, the government announced that investment in a range of industries would be reined in.
The latest steps are even stronger. Under orders announced on September 30, new aluminum production projects are banned for three years, and regulators will limit spending on factories making steel, cement, flat glass, polysilicon and wind-power equipment.
Meanwhile, new steel mills, cement factories and other projects will have to meet higher environmental and efficiency standards. It will also become harder for projects to raise finance.
Zhou Qiren, an economics professor at Peking University, cautioned against too much government intervention.
"The market will regulate itself in its own way," Zhou said. "The government should curtail deeper intervention when the market shows signs of a healthy turnaround."


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