MIIT an­nounces new ca­pac­ity-cut­ting plan

China Daily (Canada) - - BUSINESS - By ZHENG YANGPENG zhengyang­peng@chi­nadaily.com.cn

China un­veiled a de­tailed over­ca­pac­ity re­place­ment pol­icy on Thurs­day that will pro­mote cuts in the iron and steel, elec­trolytic alu­minum, ce­ment and glass in­dus­tries.

In a key doc­u­ment last Oc­to­ber, the State Coun­cil (cabi­net) es­tab­lished the prin­ci­ple of re­plac­ing ob­so­lete or ex­cess ca­pac­ity with an equal or smaller amount of new ca­pac­ity. It said any re­gion that wanted to es­tab­lish new fa­cil­i­ties in any of these sec­tors would have to shut out­dated or ex­cess fac­to­ries be­fore new lines would be per­mit­ted.

The idea was to cre­ate in­cen­tives for lo­cal gov­ern­ments to ad­dress con­cerns that de­spite years of talk about cut­ting ex­cess pro­duc­tion lines, new fa­cil­i­ties were ac­tu­ally adding more ca­pac­ity than was be­ing elim­i­nated. The re­sult was un­bear­ably high lev­els of ca­pac­ity that squeezed man­u­fac­tur­ers’ prof­its.

For ex­am­ple, in 2011 and 2012, a to­tal of 37 mil­lion met­ric tons of steel ca­pac­ity was shut. But in those same years, 125 mil­lion tons of new steel ca­pac­ity was built, ac­cord­ing to the China Iron and Steel As­so­ci­a­tion.

The lat­est plan ham­mered out by the Min­istry of In­dus­try and In­for­ma­tion Tech­nol­ogy will put the prin­ci­ple into prac­tice.

First, the plan puts three eco­nomic hubs — the Bei­jing-Tian­jin-He­bei re­gion, the Yangtze River Delta and the Pearl River delta— into a cat­e­gory of their own. In these re­gions, new ca­pac­ity will re­place at least 1.25 times that much elim­i­nated ca­pac­ity.

In other re­gions, new­ca­pac­ity will re­place old ca­pac­ity on at least a one­for-one ba­sis.

In early July, the MIIT an­nounced the first batch of ca­pac­ity to be closed, which cov­ered 1,181 com­pa­nies in 15 in­dus­tries. Those fa­cil­i­ties were told to close by Sept 30. More such lists are ex­pected soon.

Feng Fei, head of the min­istry’s de­part­ment of in­dus­trial pol­icy, told China Daily that the “swap­ping” of new fa­cil­i­ties for old ones in­cludes not only those fac­to­ries to be elim­i­nated this year, but also in the fol­low­ing two years.

The idea is to avoid a re­peat of the pre­vi­ous sce­nario “where old ca­pac­ity was phased out, but new ca­pac­ity far ex­ceeded it”, he said.

Sec­ond, the plan of­fers the op­tion for lo­cal gov­ern­ments and en­ter­prises to trade quo­tas. So if one province has good con­di­tions for the devel­op­ment of the steel in­dus­try, which might mean build­ing new fa­cil­i­ties, but it doesn’t have suf­fi­cient ca­pac­ity to be elim­i­nated, it could trade with another re­gion that has ex­cess ca­pac­ity to be elim­i­nated but fewnew­pro­jects in the pipe­line.

The swap would give the first province a larger quota while pro­vid­ing the other province with money to fund its ca­pac­ity elim­i­na­tion process.

The trad­ing prices will be de­ter­mined by the par­tic­i­pants them­selves, Feng said.

In a sign of the se­ri­ous­ness of this round of ca­pac­ity cuts, the plan stip­u­lates that only fa­cil­i­ties des­ig­nated by the MIIT as ob­so­lete or ex­cess ca­pac­ity af­ter 2013 may be used to trade. And ca­pac­ity can only be used once.

Some­an­a­lysts have ex­pressed con­cern­aboutwhether there is suf­fi­cient “out­dated” ca­pac­ity to trade. Feng es­ti­mated that amount is less than 5 per­cent of the to­tal af­ter years of cuts. Another con­cern is whether in­vest­ment in these four sec­tors will be sup­pressed and hurt the econ­omy.

But Zhang Liqun, a re­searcher with the Devel­op­ment Re­search Cen­ter of the State Coun­cil, said China has to bear “tran­sient pain” if it wants to up­grade its in­dus­trial sec­tor.

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