China cracks down on industrial overcapacity

A steelworker labors Aug. 10 in a mill in Jiangsu Province, China. China’s Cabinet announced steps Wednesday to reduce overcapacity in steelmaking, cement and other industries. AP Photo by Eugene Hoshiko

Joe McDonald
AP Business Writer

Beijing — China announced sweeping curbs on surging investment in steelmaking, cement and other industries, warning that chaotic overexpansion was raising the danger of job losses and trouble for banks.

Business groups and economists have warned that Beijing’s huge stimulus might fuel a dangerous boom and bust. The government said in August it would rein in investment in a range of industries but gave no details until now.

Under Wednesday’s order, new aluminum production projects are banned for three years and regulators will limit spending on factories to make steel, cement, glass and 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,” according to a statement on the Cabinet’s Web site.

Beijing appeared to be trying to fine-tune measures to keep China’s recovery going by ensuring adequate supplies of industrial goods while preventing a glut that could set off price wars, hurting financially weak producers.

Businesses and investors have waited uneasily for details of how industries would be affected, worried the measures might squeeze profits.

According to Wednesday’s announcement, local authorities were partly to blame for runaway spending because they ignored planning guidelines.

“Some regions act illegally, give approvals in violation of regulations or allow building before approval is granted,” according to the statement.

The investment boom also has been fueled by government orders to state-owned banks to support growth by sharply raising lending in the first half of this year. 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.

Beijing’s two-year, $586 billion stimulus is meant to reduce reliance on slumping exports by boosting domestic consumption with massive spending on construction of highways, airports and other projects. It helped to boost economic growth to 7.9 percent in the quarter ended June 30, up from 6.1 percent the previous quarter.

New steel mills, cement factories and other projects will have to meet higher environmental and energy efficiency standards, according to the Cabinet statement. It gave no details of how each industry’s production capacity might be affected.