China to ban new projects in sectors facing overcapacity

BEIJING (REUTERS) - China will tackle chronic overcapacity problems in sectors such as steel and cement by blocking approvals for new projects and by making better use of the market, according to a new plan issued by the State Council on Tuesday.

Margins in the targeted sectors, which also include shipbuilding, aluminium and glassmaking, have been affected for years by a capacity glut that has left many firms suffering heavy losses and reliant on government subsidy.

The long-awaited plan, published by China's cabinet, said it would focus on "establishing and perfecting" market mechanisms, marking a change of approach after years spent trying to strong-arm the sectors into submission.

It would also set higher environmental and quality standards for industries and encourage the private sector to play a role in restructuring oversized firms.

As well as blocking new approvals, the new plan will seek to absorb overcapacity by stimulating domestic demand, and will also offer tax incentives to encourage firms to relocate plants overseas.

The previous approach sought to encourage giant state-owned firms to merge or swallow up smaller competitors but it was not successful, with industry experts complaining that the focus on strengthening state-owned enterprises had served to raise capacity, rather than reduce it.

China will also seek to eliminate old capacity by strengthening environmental, safety and energy standards. It will also set up differential electricity and water prices for firms that violate environmental standards.

Beijing has been trying to take a more coordinated approach to tackling the problem of overcapacity, and China's 2013-2017 pollution "action plan" has already laid out closure targets for outdated steel capacity, and will allow the authorities to stop the construction of projects in industries facing oversupply.

Past efforts to rein in overcapacity had failed to tackle the role played by growth-obsessed local governments, which had encouraged rapid capacity expansions with subsidies, access to credit and favourable contracts.

Beijing has already launched a series of reforms that will reduce the role of local governments in the approval process while attempting to strengthen their regulatory powers.

Mr Su Bo, China's vice-minister of industry, told a conference last month that "administrative interference" in industry was one of the biggest causes of overcapacity, adding that preferential policies in areas such as land allocation had distorted the market and created unfair competition.

Steel mills have enjoyed soft loans, massive subsidies and favourable local supply contracts, allowing them to expand far too quickly, and Mr Su said China would seek to create more orderly entry requirements for industries and reduce the role played by local governments.

The new plan said it would try to set up mechanisms that would make it easier for firms to "withdraw" from bloated industries. Experts have suggested that the failure to set up an adequate bankruptcy law in China had contributed to the oversupply problems.

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