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Chimneys and blast furnaces spew out gray， white and dark yellow smog smelling of sulfur， a common scene in Tangshan， north China’s Hebei Province， a city known for iron and steel manufacturing. There seems to be no end in sight to their numbers， and blackened skies have become the norm， an outcome of over-expansion in China’s iron and steel industry.
In recent years， excess production capacity has been spreading， greatly hindering China’s economy and posing a severe challenge to its natural environment.
On October 15， the State Council issued the Guidelines to Tackle Serious Production Overcapacity， which listed five sectors with severe overcapacity—cement， electrolytic aluminum， sheet glass， shipping and steel—and claiming that such excess would lead to a drop in revenues and mounting risks.
According to statistics， by the end of 2012， the rate of capacity being used up for the five sectors are 72 percent， 73.7 percent， 71.9 percent， 75 percent and 73.1 percent， respectively， which means 25 percent to 28 percent of capacity remains idle. Despite the fact that profits in these sectors have been on the decline， an array of projects remain under construction， aggravating current overcapacity.
Among them， the steel sector is most critical and must cut 80 million tons out of its capacity in the next five years， according to the guidelines.
The culprits
In the eyes of local governments， iron and steel companies have been the major contributors to tax revenue and GDP， so much so that some factories were even allowed to operate without production licenses.
“Almost half of existing steel capacity out there has not yet been officially approved，” said Zou Zhongchen， former President of Shandong Iron and Steel Group. A 1-million-ton steel factory can pay taxes as much as 300-500 million yuan （$49.3 million-82.2 million）， equivalent to the fiscal revenue of an average county. “How can a local government make up the gap if one such factory is shut down，” Zou noted.
Li Xiao， an analyst from Xinhu Futures， believed there were three incentives behind the current steel overcapacity. First， local governments are not willing to sacrifice jobs for capacity reduction. Second， shutting down blast furnaces mean more losses. “Even if a company stops production， it has to pay wages and depreciation costs，” Li added. Finally， since steel companies have to borrow money from banks to ensure a cash flow and regular output， production suspension would force banks to end lending， and the capital chains of steel firms would break down. Miao Changxing， Deputy Director General at the Ministry of Industry and Information Technology， argued that over optimistic market expectations and blind investment should also be blamed for the oversupply. The profit margin of the steel industry once exceeded 20 percent， which， along with subsidies， tax credits and preferential land policies， boosted overall steel capacity from 300 million tons in 2003 to roughly 1 billion tons in 2012， said Chen Kexin， an expert from Beijing Lange Steel Information Research Center.
Effects
This year， some areas in north and east China have been continuously choked in dense smog. A survey by the Ministry of Environmental Protection showed that 17 out of 20 cities that suffered the most severely polluted air are abound with steel producing factories. When capacity exceeds demand in these areas， not only is the environment harmed， but so is industrial development. In other words， overcapacity impedes China’s ability to shift its economy toward more high quality and efficient growth.
“If immediate measures are not taken to deal with current overcapacity， vicious competition will spread and intensify， leading to expanded losses， a higher unemployment rate， growing non-performing assets and damage to the environment，” the State Council warned in the guidelines.
To fight against the global financial crisis，policies have been put in place to expand domestic demand and promote economic growth since 2008. Local governments were motivated to start infrastructure projects， building roads， bridges and airports， while the number of ghost cities and towns bloomed across the country.
At an executive meeting of the State Council held on June 19， Premier Li Keqiang showed support for cutting capacity and proposed issuing loans for mergers and acquisitions to those enterprises that cut excess capacity. He said loans would be denied to illegal construction projects involving industries with overcapacity.
“The guidelines are a reminder that overcapacity has bred myriad contradictions and problems for China’s economic development，” said Li Xinchuang， Deputy Secretary General of China Iron and Steel Association.
“To deal with the problem， China has to go through a period of struggle， and some industries will be hit hard，” said Zhu Baoliang， an economist with the State Information Center， who added that measures should be taken to guide investments and accelerate industrial upgrading. Possible responses
In the guidelines， curbing blind capacity expansion is mentioned as a top priority. Luo Tiejun， Deputy Director of the Department of Raw Materials of the Ministry of Industry and Information Technology， stressed that combating overcapacity could be done in three ways： refusing new projects that may add to overcapacity， strictly controlling and monitoring projects under construction， and liquidizing remnant assets. Local governments should be more accountable when trying to get approval for new projects.
“While the market should be given full play， local governments should keep in mind that they are walking a tightrope，” said Ren Haoning， a senior research fellow from China Investment Consulting Corp.
Worth mentioning is that specific solutions were drawn up for different sectors. For the steel sector， focus is put on better coordinating dispersed production capacity. Other measures include advancing product standards for rolled steel like hot rolled ribbed steel bars and electrical steel， and carrying out fair tax policies.
For the glass sector， improvements need to make in glass product standards， such as promoting low-radiation hollow glass and upgrading existing production lines. Efforts should also be made in integrating production with the deep processing of glass sheets and increasing core competitiveness.
The release of the guidelines indicates that China intends to carry out reforms， said Li Xinchuang， of the iron and steel association. It illustrates the Central Government’s resolve to reverse its GDP-oriented assessment for local governments and further decentralize power.
In recent years， excess production capacity has been spreading， greatly hindering China’s economy and posing a severe challenge to its natural environment.
On October 15， the State Council issued the Guidelines to Tackle Serious Production Overcapacity， which listed five sectors with severe overcapacity—cement， electrolytic aluminum， sheet glass， shipping and steel—and claiming that such excess would lead to a drop in revenues and mounting risks.
According to statistics， by the end of 2012， the rate of capacity being used up for the five sectors are 72 percent， 73.7 percent， 71.9 percent， 75 percent and 73.1 percent， respectively， which means 25 percent to 28 percent of capacity remains idle. Despite the fact that profits in these sectors have been on the decline， an array of projects remain under construction， aggravating current overcapacity.
Among them， the steel sector is most critical and must cut 80 million tons out of its capacity in the next five years， according to the guidelines.
The culprits
In the eyes of local governments， iron and steel companies have been the major contributors to tax revenue and GDP， so much so that some factories were even allowed to operate without production licenses.
“Almost half of existing steel capacity out there has not yet been officially approved，” said Zou Zhongchen， former President of Shandong Iron and Steel Group. A 1-million-ton steel factory can pay taxes as much as 300-500 million yuan （$49.3 million-82.2 million）， equivalent to the fiscal revenue of an average county. “How can a local government make up the gap if one such factory is shut down，” Zou noted.
Li Xiao， an analyst from Xinhu Futures， believed there were three incentives behind the current steel overcapacity. First， local governments are not willing to sacrifice jobs for capacity reduction. Second， shutting down blast furnaces mean more losses. “Even if a company stops production， it has to pay wages and depreciation costs，” Li added. Finally， since steel companies have to borrow money from banks to ensure a cash flow and regular output， production suspension would force banks to end lending， and the capital chains of steel firms would break down. Miao Changxing， Deputy Director General at the Ministry of Industry and Information Technology， argued that over optimistic market expectations and blind investment should also be blamed for the oversupply. The profit margin of the steel industry once exceeded 20 percent， which， along with subsidies， tax credits and preferential land policies， boosted overall steel capacity from 300 million tons in 2003 to roughly 1 billion tons in 2012， said Chen Kexin， an expert from Beijing Lange Steel Information Research Center.
Effects
This year， some areas in north and east China have been continuously choked in dense smog. A survey by the Ministry of Environmental Protection showed that 17 out of 20 cities that suffered the most severely polluted air are abound with steel producing factories. When capacity exceeds demand in these areas， not only is the environment harmed， but so is industrial development. In other words， overcapacity impedes China’s ability to shift its economy toward more high quality and efficient growth.
“If immediate measures are not taken to deal with current overcapacity， vicious competition will spread and intensify， leading to expanded losses， a higher unemployment rate， growing non-performing assets and damage to the environment，” the State Council warned in the guidelines.
To fight against the global financial crisis，policies have been put in place to expand domestic demand and promote economic growth since 2008. Local governments were motivated to start infrastructure projects， building roads， bridges and airports， while the number of ghost cities and towns bloomed across the country.
At an executive meeting of the State Council held on June 19， Premier Li Keqiang showed support for cutting capacity and proposed issuing loans for mergers and acquisitions to those enterprises that cut excess capacity. He said loans would be denied to illegal construction projects involving industries with overcapacity.
“The guidelines are a reminder that overcapacity has bred myriad contradictions and problems for China’s economic development，” said Li Xinchuang， Deputy Secretary General of China Iron and Steel Association.
“To deal with the problem， China has to go through a period of struggle， and some industries will be hit hard，” said Zhu Baoliang， an economist with the State Information Center， who added that measures should be taken to guide investments and accelerate industrial upgrading. Possible responses
In the guidelines， curbing blind capacity expansion is mentioned as a top priority. Luo Tiejun， Deputy Director of the Department of Raw Materials of the Ministry of Industry and Information Technology， stressed that combating overcapacity could be done in three ways： refusing new projects that may add to overcapacity， strictly controlling and monitoring projects under construction， and liquidizing remnant assets. Local governments should be more accountable when trying to get approval for new projects.
“While the market should be given full play， local governments should keep in mind that they are walking a tightrope，” said Ren Haoning， a senior research fellow from China Investment Consulting Corp.
Worth mentioning is that specific solutions were drawn up for different sectors. For the steel sector， focus is put on better coordinating dispersed production capacity. Other measures include advancing product standards for rolled steel like hot rolled ribbed steel bars and electrical steel， and carrying out fair tax policies.
For the glass sector， improvements need to make in glass product standards， such as promoting low-radiation hollow glass and upgrading existing production lines. Efforts should also be made in integrating production with the deep processing of glass sheets and increasing core competitiveness.
The release of the guidelines indicates that China intends to carry out reforms， said Li Xinchuang， of the iron and steel association. It illustrates the Central Government’s resolve to reverse its GDP-oriented assessment for local governments and further decentralize power.