China announces measures to reduce overcapacity in industry

China’s State Council has issued a statement giving details of its plans to tackle overcapacity in manufacturing industries, including blocking approvals for new projects and stimulating domestic demand.

In a change of tack from the country’s previous approach, which sought for larger companies to absorb smaller competitors, the cabinet now plans to focus on ‘establishing and perfecting’ market mechanisms. Private companies will be enlisted to help restructure oversized businesses; tax incentives will be offered to encourage firms to relocate manufacturing facilities overseas; outmoded capacity will be eliminated under stronger environmental, safety and energy standards, and the country could also see higher electricity and water prices for those companies that do not meet these standards.

China’s manufacturing industries have suffered under a climate of growth at any cost. The result has been significant overcapacity that has left many companies with heavy losses and reliant on government help. Plans were announced earlier this year for the mass closure of outdated facilities, which will go a long way to easing the supply glut for industries such as cement and steel. This latest announcement should help to continue this work, and prevent the interference of local governments, which have been guilty of encouraging capacity expansion by offering subsidies and other incentives for growth. Under the new mechanisms, the power of local governments in the approvals process will be significantly reduced. It will also be made easier for companies to withdraw from industries where there is massive overcapacity.

Edited from various sources by Katherine Guenioui