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China accelerates overcapacity reduction

It was usually quiet Friday morning at the Baoshan Cement Co Ltd factory in east China's Jiangxi province.

The factory's production lines were shut down after it was put on a list of companies designated by the Ministry of Industry and Information Technology to be shut down due to overcapacity.

More than 1,400 companies in 19 industries have been asked to reduce their production capacity.

According to the ministry, the closures must be completed by the end of September and production may not be transferred to other regions.

China is the world's biggest producer of steel, aluminum and cement. Overcapacity in a number of sectors has dragged down prices and profit margins for some enterprises amid China's economic slowdown.

Official statistics indicate that only 72.5 percent, 78 percent and 67 percent of capacity is used for the alumina, electrolytic aluminum and steel sectors, respectively, last year, far less than that of other countries.

The iron and steel industry reported losses of 699 million yuan ($113 million) in June, the first monthly deficit to hit the industry this year.

The combined profits of members of the China Iron and Steel Association (CISA) hit 2.27 billion yuan in the first half, with an average profit margin of 0.13 percent, the lowest among all industries, according to CISA.

The double-digit economic growth China embraced in the past decades has largely disappeared alongside a sluggish global economy. China's economic growth slowed to 7.5 percent in the second quarter from 7.7 percent in the first three months.

The government is trying to curb overcapacity as part of efforts to shift the economy away from investment in heavy industry. Instead of initiating another massive stimulus program to lift the economy, authorities are moving cautiously to keep growth steady while implementing related reforms.

President Xi Jinping urged in late July that tackling overcapacity should be prioritized, with more efforts to boost industrial restructuring.

The investment-driven growth that boosted China's economy in years past is not sustainable, said Asian Development Bank economist Zhuang Jian, adding that the government should use this time as an opportunity to reduce overcapacity and transform the economy.

It has been a decade since authorities began to shut down steel, cement and electrolytic aluminum producers who were at overcapacity. The number of industries targeted for reducing capacity has grown from three in 2003 to 19 in 2013.

In north China's Hebei province, the country's largest steel producer, authorities announced a plan in 2010 to cut the province's steel manufacturing capacity to less than 95 million tons by 2015.

But in 2012, the province produced more than 200 million tons of steel.

Local governments have an incentive to continue developing the steel industry, as the sector is a significant contributor in terms of tax revenues and employment, said Song Jijun, deputy director of Hebei's provincial metallurgical industry association.

Steel production has enjoyed rapid growth in Hebei, despite reduced demand for steel products. The province's crude steel and steel product output for the first half of the year totaled 103.35 millon tons and 116.56 million tons, respectively, up 6.83 percent and 9.06 percent year on year.

The taxes paid by steel producers in Hebei totaled 9.99 billion yuan in the first half, down 29 percent year on year. Their profits also tumbled 41 percent from the previous year to 3.31 billion yuan.

In China's vast underdeveloped central and western regions, local governments are vying to attract investment from the east to drive economic growth despite overcapacity

Although their profits are minimal, steel enterprises have to maintain production, as they don't want to lose their market shares and are afraid of possible loan suspensions by banks, said Liu Zhibiao, head of the provincial academy of social sciences of east China's Jiangsu province.

Overcapacity has not been limited to traditional industries. Emerging sectors like the photovoltaic and wind turbine manufacturing industries have also had to deal with excess capacity.

Although economists generally agree that overcapacity can be tolerable in a healthy market, China's overcapacity stems from a government-led and investment-driven growth model, rather than the result of normal market operations.

Governments are fueling overcapacity by approving large-scale production that can boost local GDPs and create more jobs, Zhuang said.

Meanwhile, a sluggish overseas market and weak domestic consumption are also leaving many sectors in overcapacity, he said.

Most of the production capacity added in the electrolytic aluminum and cement industries in recent years has been done without government approval, according to a Xinhua investigation.

"The most important thing to do is to restrict the government's role," Zhuang said. "Governments should not make investment decisions on behalf of enterprises."

The government should improve the threshold for market entrance and create an overall industrial development plan instead of promoting inefficient production, said Tong Xingxue, president and CEO of LDK Solar Co Ltd, a leading producer of solar power equipment.

The role of industrial associations should also be strengthened, Tong said.

The government can help guide investment to the education and medical sectors through preferential policies, Zhuang said, adding that this move can restructure the economy and maintain growth at the same time.

The central government is concerned about the harm overcapacity could do to the economy and is making efforts to eliminate outdated production facilities.

A second list of companies that are at overcapacity will be created soon and companies on the list will be urged to dismantle outdated production facilities in a timely fashion, according to the Ministry of Industry and Information Technology.

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