Beijing clamps down to curb overcapacity
No funds allowed for projects in six sectors
October 20, 2009
By Zhou Xin and Alan Wheatley Beijing
China yesterday launched the latest in a long list of attempts to rein in industrial overcapacity to keep its fast-growing economy on an even keel and prevent investment from going to waste.
The success of the new initiative is far from assured because local officials, who are judged on their record in promoting growth and jobs, regularly ignore orders from Beijing.
"In the near term, monitoring and supervision will be very tight," said Ken Peng, an economist with Citigroup in Beijing. "Lawmakers are concerned about overinvestment. But it is not a uniform opinion. Implementation depends on local authorities, and it will not be easy," he added.
The government hopes to curb the expansion of six sectors by withholding approval for new investment and by starving them of financing. The industries are steel, cement, flat glass, coal chemicals, polysilicon and wind power equipment.
China would order banks not to finance projects in these sectors that do not meet government guidelines, according to a statement issued by 10 ministries, led by the National Development and Reform Commission (NDRC), the main central planning agency.
Investors would not be allowed either to raise money for unauthorised expansion.
The statement ordered local governments to pay attention to signs of overcapacity in aluminium, shipbuilding and soy-crushing, but said these industries would not be subject to the same restrictions.
"Many sectors are still reporting serious problems of overcapacity and redundant construction, and some problems are even getting worse," said the ministries.
Apart from driving down prices and profits, overcapacity tempts manufacturers to sell their excess output overseas. As a result, trade tensions are high with the US over Chinese exports of steel and tyres, and with the EU over shoes.
Yesterday's guidelines, which follow a directive from the State Council last month, demonstrate concern that too much of the government's 4 trillion yuan (R4.3 billion) fiscal stimulus package is finding its way into the industrial sector.
The money is meant to go into infrastructure, affordable housing, rural development, technological upgrades and bolstering the social safety net.
But the clampdown also reflects confidence that Beijing can afford to turn its attention to deep-seated structural problems - such as overcapacity and an excessive reliance on investment - now that the economy is over the worst of the global crisis.
Xiong Bilin, a senior NDRC official, said China would have no difficulty reaching the government's full-year gross domestic product growth target of 8 percent.
The commission has repeatedly tried to curb overcapacity in a range of sectors, and Xiong alluded to the difficulties that the agency's campaigns have faced because of local opposition.
China had the capacity to make 600 million tons of steel a year, but 58 million tons of that total had been installed without Beijing's approval, he said.
"We're asking local governments to create a good environment for market development. We're not asking them specifically to shut down this or that," said Xiong.
Past measures to limit expansion have included lending curbs and bans on smaller plants. Size restrictions have often backfired, as executives expand to avoid being shut down.
Efforts to limit runaway capacity growth by enforcing environmental regulations have proven difficult to carry out because environmental protection bureaus often wield less power than local officials, who back the investments.
Peng, the Citigroup economist, said a lot of needed infrastructure construction in central and western China had been delayed in recent years for fear of economic overheating, so the surge in investment was partly just a process of catching up. - Reuters
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