Published: Sunday, 18 Oct 2009 | 10:54 PM ET

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China on Monday launched the latest in a long list of attempts to rein in industrial overcapacity to keep its fast-growing economy on an even keel and prevent investment from going to waste.

The success of the new initiative is far from assured because local officials, who are still largely judged on their record in promoting growth and jobs, regularly ignore orders from Beijing.

AP Factory, Anshan, China

"In the near term, monitoring and supervision will be very tight," said Ken Peng, an economist with Citigroup in Beijing.

"Policymakers are concerned about over-investment. But it is not a uniform opinion. Implementation depends on local authorities, and it will not be easy," he added.

The government hopes to curb the expansion of six sectors by withholding approval for new investment and by starving them of financing. The industries are steel, cement, flat glass, coal chemicals, polysilicon and wind power equipment.

China would order banks not to finance projects in these sectors that do not meet government guidelines, according to a statement issued by 10 ministries, led by the National Development and Reform Commission, the main planning agency.

Investors would not be allowed either to raise money for unauthorised expansion through bonds, short-term bills, medium-term notes, convertible bonds or equity offerings.

The statement ordered local governments to pay attention to signs of overcapacity in aluminum, shipbuilding and soy-crushing but said they would not be subject to the same restrictions.

"Many sectors are still reporting serious problems of overcapacity and redundant construction, and some problems are even getting worse," the ministries said.

Apart from driving down prices and profits, overcapacity tempts manufactuers to sell their excess output overseas. As a result, trade tensions are high with the United States over Chinese exports of steel and tyres, and with the European Union over shoes.

Local Opposition

Monday's guidelines, which follow a directive last month from the State Council, China's cabinet, demonstrate concern that too much of the government's 4 trillion yuan ($585 billion) fiscal stimulus package is finding its way into the industrial sector.

The money is meant to go into infrastructure, affordable housing, rural development, technological upgrades and strengthening the social safety net.

But the clampdown also reflects confidence that Beijing can afford to turn its attention to deep-seated structural problems -- such as overcapacity and an excessive reliance on investment -- now that the economy is over the worst of the global crisis.

Xiong Bilin, a senior NDRC official, told a news conference that China would have no difficulty reaching the government's full-year gross domestic product growth target of 8 percent.

The NDRC has repeatedly tried to curb overcapacity in a range of sectors, and Xiong alluded to the difficulties the agency's campaigns have faced because of local opposition.

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China, the world's largest producer, has the capacity to make 600 million tonnes of steel a year, but 58 million tonnes of that total has been installed without Beijing's approval, he said.

"We're asking local governments to create a good environment for market development. We're not asking them specifically to shut down this or that," Xiong said.

Past measures to limit expansion have included lending curbs and bans on smaller plants. Size restrictions have often backfired, as executives expand to avoid getting shut down.

Efforts to limit runaway capacity growth by enforcing environmental regulations have also proven difficult to carry out because environmental protection bureaus often wield less power than local officials who back the investments.

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Peng, the Citigroup economist, said a lot of needed infrastructure construction in central and western China had been delayed in recent years for fear of economic overheating, so the surge in investment was partly just a process of catching up.

"What is making people nervous is that it is happening so quickly," Peng said. "When you do so much in such a short period of time, there is inevitably going to be some waste."

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