China Cuts Capacity in Some Industries to Reshape Economy

Photographer: Doug Kanter/Bloomberg

A worker handles a roll of steel at the Baosteel Group Corp. facilities in Shanghai. Close

A worker handles a roll of steel at the Baosteel Group Corp. facilities in Shanghai.

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Photographer: Doug Kanter/Bloomberg

A worker handles a roll of steel at the Baosteel Group Corp. facilities in Shanghai.

China ordered more than 1,400 companies in 19 industries to cut excess production capacity this year, part of efforts to shift toward slower, more-sustainable economic growth.

Steel, ferroalloys, electrolytic aluminum, copper smelting, cement and paper are among areas affected, the Ministry of Industry and Information Technology said in a statement yesterday, in which it announced the first-batch target of this year to cut overcapacity. Excess capacity must be idled by September and eliminated by year-end, the ministry said, identifying the production lines to be shut within factories.

China’s extra production has helped drive down industrial-goods prices and put companies’ profits at risk, while a survey this week showed manufacturing weakening further in July. Premier Li Keqiang has pledged to curb overcapacity as part of efforts to restructure the economy as growth this year is poised for the weakest pace since 1990.

“This is a real move and is very specific compared with previous high-level conceptual framework for economic restructuring,” said Raymond Yeung, a Hong Kong-based economist at ANZ Banking Group Ltd. “They maintain the overall tone that they’re not focusing on the quantity of growth but the quality of growth.”

Keeping Promise

The move also reflects that Li has settled in the job and is willing to deepen the reform on overall economic structure, which he promised after taking over the premiership in March, Yeung said.

The Shanghai Composite Index fell 0.4 percent as of 2:25 p.m., while Hong Kong’s Hang Seng China Enterprises Index of mainland companies dropped 0.2 percent.

More than 92 million tons of excess cement capacity and about 7 million tons of excess steel production capacity are expected to be wiped out under the government’s plan, Zhang Zhiwei, chief China economist at Nomura Holdings Inc. (8604) in Hong Kong, wrote in an e-mailed research note yesterday. Nomura maintained its forecast of 7.4 percent economic growth for China in this quarter and 7.2 percent in the fourth quarter.

China also plans to shut 654,400 tons of copper and 260,000 tons of aluminum capacity as part of its first-batch target, according to Bloomberg calculations based on the ministry’s statement yesterday.

Bigger Target

The first-batch target for cement is bigger than a full-year number the ministry had announced April 11. In the April statement, China ordered the closing of 73.45 million tons of cement, 7.81 million tons of steel, 273,000 tons of aluminum and 665,000 tons of copper this year.

Xinjiang Tianshan Cement Co. (000877), which trades on the Shenzhen Stock Exchange, is among companies on lists published by the MIIT accompanying the statement. It was told to phase out 450,000 tons of capacity. One factory of state-owned Wuhan Iron & Steel Group Corp., has been told to eliminate 400,000 tons of steel capacity, according to the MIIT.

“Many of these companies who are running overcapacity problems may actually have the production line in idle for a long time,” ANZ’s Yeung said. “So the actual impact on the growth number may not be as big as many people have expected.”

China’s economic planners have sought to rein in steel industry growth since at least 2004, when work on a 10.6 billion yuan project in the eastern province of Jiangsu was halted. Yet annual capacity has risen to 970 million metric tons, according to the steel association, exceeding the industry’s output of 716.5 million tons in 2012. Output is seven times larger than that of Japan, the No. 2 producer.

Steel Capacity

The steel capacity to be shut accounts for less than 1 percent of the nation’s total, according to Bloomberg calculations.

Shandong Chenming Paper Holdings (1812) has been ordered to shut production lines that can make a combined 284,200 tons of paper products. The company has sold or closed down some outdated facilities over the years to focus on high-end products and the government’s curbs won’t have an impact on its operations, Chenming said in a filing to the Hong Kong stock exchange today.

Separately, China central bank Governor Zhou Xiaochuan wrote in People’s Daily today that the nation still faces large downward pressure on the economy. He reiterated that the country will pursue a “prudent” monetary policy and “reasonable” levels of money supply and credit, according to the article in the Communist Party newspaper.

The industry ministry said on July 24 that China will accelerate the phase-out of overcapacity in the second half of this year.

China is struggling to meet its annual economic growth target amid signs of weakening manufacturing. A preliminary reading on July 24 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics was 47.7, which if confirmed in the final report Aug. 1, would be the lowest in 11 months. Readings below 50 indicate contraction.

To contact Bloomberg News staff for this story: Aibing Guo in Hong Kong at aguo10@bloomberg.net; Li Liu in Beijing at lliu255@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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