China to curb over-capacity in sectors to even out growth

China today took an important step to curtail industrial overcapacity in sectors with adequate capacity to balance out investments across sectors and prevent waste stemming from over investment. However, how much success the step will meet remains to be seen as officials tend to be less than discriminating in such matters and are known to ignore orders from Beijing.

While analysts say the near term monitoring and supervision is expected to be tight with policymakers concerned about over-investment, with implementation of the directive open to interpretation at the local level, it may, it getting the sectors to co-operate may be easier said than done.

The government has earmarked six sectors viz steel, cement, flat glass, coal chemicals, polysilicon and wind power equipment to cut back investment. It has adopted a two pronged strategy comprising withholding approval for new investment and starving them of financing to bring about the required changes.

China would restrain banks from financing projects in the sectors that fail to meet government guidelines, according to a statement issued by 10 ministries, led by the National Development and Reform Commission, (NDRC) the main planning agency.

Over capacity not only drives down prices and profits it also tempts manufacturers to dump products overseas which results in trade tensions as in the case of Chinese exports of steel and tyres and with the EU over shoes.

According to analysts, the clampdown symbolises Beijing's willingness and ability to address deep-seated structural problems including over capacity and investment dependent growth, now that the economy has weathered the worst of the global crisis.