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October 1, 2009

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China cracks down on overcapacity

CHINA has announced sweeping curbs on surging investment in steel making, cement and other industries, warning that overexpansion was raising the danger of job losses and trouble for banks.

Business groups and economists have warned that China's huge stimulus might fuel a dangerous boom and bust. The government said in August that it would rein in investment in a range of industries.

Under yesterday's order, new aluminum production projects are banned for three years and regulators will limit spending on factories to make steel, cement, glass, polysilicon used in solar panels and wind power equipment.

Without controls, "it will be hard to prevent vicious market competition and increase economic benefits, and this could result in facility closures, layoffs and increases in banks' bad assets," the State Council, the Chinese Cabinet, said on its Website. It said local authorities were partly to blame for runaway spending because they ignored planning guidelines.

The investment boom has also been fueled by government orders to state-owned banks to support growth by raising lending. Economists say that is likely to lead to excessive industrial investment, especially with stimulus-financed construction boosting demand and prices for steel, cement and other materials.

China's 4-trillion-yuan (US$586 billion) stimulus is meant to reduce reliance on exports by boosting domestic consumption with massive spending on construction of highways, airports and other projects. It helped boost economic growth to 7.9 percent in the quarter ended June 30.

New steel mills, cement factories and other projects will have to meet higher environmental and efficiency standards, the Cabinet said.

China is the world's biggest steel producer, and is trying to make the industry more competitive by closing smaller mills. Regulators have tried to enforce similar changes in cement and other industries but local leaders who don't want to lose jobs and tax revenue resist closing outmoded facilities.

China's annual steel production capacity of 660 million tons already exceeds its needs of 500 million tons, and another 58 million tons of capacity is under construction, "much of it illegitimate," the statement said.

New steel mills must be approved by the central government instead of local authorities to ensure they meet environmental standards, the statement said.

Coal and petrochemical projects must meet higher energy efficiency standards and regulators will "speed up the elimination of backward projects," it added.

Proposed cement factories will be reviewed and developers forced to redesign any that do not meet standards, it said.

New polysilicon factories must be able to capture and recycle up to 99 percent of waste gases, the government said.

Proposed glass factories will be reviewed and must meet higher energy efficiency standards.


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