China Issues Guidelines To Cut Overcapacity

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On October 15, the State Council of China published the Guidelines on Tackling Severe Overcapacity Problem (hereinafter "the Guidelines"). The Guidelines show the government's determination to address China's severe overcapacity problems in five major industries: steel, cement, electrolytic aluminum, sheet glass, and shipping.

Overcapacity has been a chronic problem for the Chinese government. To tackle the problem, the Chinese government has issued a number of policies in the past. For example, in September 2009, several central government agencies jointly issued Several Opinions on Restricting Overcapacity and Repeating Constructions in Certain Industries and Guiding A Healthy Industry Development, providing detailed targets and measures for eliminating backward capacities and tackling overcapacity problems in six industries. Again in February 2010, the State Council issued the Circular on Further Strengthening the Backward Capacity Elimination Work to further the overcapacity work, which covered ten industries. Numerous industrial plans also contain provisions addressing the overcapacity issue. Those efforts, however, did not achieve the central government's goal as expected, mainly due to the resistance from local governments that relied on those industries for GDP growth in their jurisdictions. At the end of 2012, the capacity utilization rates of the aforementioned five industries were 72 percent, 73.7 percent, 71.9 percent, 73.1 percent, and 75 percent, which are lower than the world averages for these industries.

China's new leadership is therefore renewing this effort. The Guidelines aim to reach a reasonable capacity scale, significantly improve development quality, and establish a sustainable development system within five years. To achieve these goals, the Guidelines have set up eight tasks, i.e., prohibiting blind capacity expansion, clearing up illegal capacities, eliminating backward capacities, optimizing industrial structure, improving domestic demand, expanding export markets, strengthening enterprise innovation, and establishing a benign and sustainable development system. Further, the Guidelines require that the government provide tax incentives, grants, and assistance in placing laid-off workers. The Guidelines also call on financial institutions to provide loans to support mergers and acquisitions, restructuring, and industrial upgrade projects consistent with the state policy. Importantly, the local government issue has been addressed. The Guidelines add addressing overcapacity to the local government's performance evaluation system and clarify that provincial governments are responsible for implementing these measures in their jurisdictions.

Relevant agencies are taking actions to promote the implementation of the Guidelines. On November 4, the two premier agencies administering industrial affairs -- the Ministry of Industry and Information Technology and the National Development and Reform Commission -- hosted a teleconference where the two agencies interpreted the contents of the Guidelines and arranged key tasks thereof. The Ministry of Land and Resources also issued a notice earlier in November, establishing a number measures to implement the Guidelines.

-Lingna Yan