Marketization to overcapacity policy framework

Abstract According to information from authoritative sources, the joint meeting of the National Development and Reform Commission (NDRC) and other relevant departments is set to further refine a market-based policy framework aimed at addressing overcapacity. This includes implementing differentiated pricing strategies, enforcing stricter credit policies, and establishing clear industry standards. It has been reported that industrial projects with serious overcapacity that have not followed legal procedures will be prohibited from obtaining loans, issuing bonds, or going public.

Chen Bin, director of the Industry Coordination Department at the NDRC, who is involved in developing policies to tackle overcapacity, stated that although the government has introduced a series of control measures in recent years targeting industries like steel, electrolytic aluminum, and cement, these initiatives have not met expectations. “Initially, we relied heavily on restrictions and controls over approvals, assuming that limiting investment would solve the issue of overcapacity. However, after several years, the problem has only worsened.”

According to data from the NDRC and the Ministry of Industry and Information Technology, China's steel, cement, electrolytic aluminum, flat glass, and shipbuilding industries operate at utilization rates of 73%, 75%, 71.9%, 73.1%, and 75% respectively—significantly below the global average. Profits in these sectors have sharply declined, and many enterprises are struggling to remain operational. Notably, there are still numerous projects under construction or planned in these industries that face severe overcapacity, further intensifying the problem.

Zheng Lixin, director of the Industrial Policy Department at the Ministry of Industry and Information Technology, mentioned that state authorities are studying foreign experiences in resolving overcapacity, emphasizing a combination of market mechanisms and government intervention.

An expert involved in drafting the policy framework noted that future market-oriented measures will focus on three key areas: pricing, credit, and standards. In terms of credit, projects with severe overcapacity that lack proper legal procedures will be excluded from lending, bond issuance, and stock market financing. At the same time, commercial banks are encouraged to support mergers, restructurings, and technology upgrades in overcapacity sectors, following risk management and sustainability principles.

Officials from the NDRC emphasized that future meetings will aim to distinguish between advanced and outdated production capacity within overcapacity industries. They plan to establish scientific credit criteria that include profit margins, carbon emissions, safety performance, resource consumption, labor productivity, and technical standards. Additionally, they intend to improve a "unified credit and limit management" system, centralizing approval authority for new projects in industries with serious overcapacity.

In the past month, regulatory bodies such as the China Banking and Insurance Regulatory Commission and the China Securities Regulatory Commission have held discussions on appropriate credit and capital market policies to address overcapacity. The CSRC has issued a special report highlighting the role of the capital market in resource allocation. It stressed the need to fully leverage market functions in reducing overcapacity, while implementing strict financial safeguards, controlling bond issuance, and tightening capital market financing reviews.

Regarding pricing policies, relevant departments will enhance differential electricity pricing and eliminate preferential rates for industries with severe overcapacity. Zhu Hongren, chief engineer at the Ministry of Industry and Information Technology, said that high-energy-consuming industries such as steel, cement, and electrolytic aluminum will face punitive electricity and water prices if they fail to meet industry standards. By the end of 2015, those failing to meet standards will see a 10% increase in electricity costs. The government also encourages electrolytic aluminum companies to sign long-term power purchase agreements and promote the use of lightweight aluminum in transportation. Domestic firms are being urged to establish production bases in energy-rich regions abroad.

The Industrial Policy Department of the Ministry of Industry and Information Technology stated that it is setting technical and access standards for overcapacity industries to guide upgrades and phase out outdated facilities. For example, the shipbuilding sector will raise entry requirements and implement differentiated policies for companies failing to meet standards or lacking new orders. Standards for flat glass and its products are being developed, with a push for energy-efficient windows in both new and renovated buildings. Low-emissivity insulating glass is encouraged to support the upgrading of existing production lines. Meanwhile, efforts are underway to develop higher-grade cement and concrete standards to improve quality and efficiency.

Promoting mergers and acquisitions is a crucial step in addressing overcapacity. This year, the government plans to focus on restructuring the steel industry in provinces like Shandong, Hebei, Liaoning, Jiangsu, Shanxi, and Jiangxi. Local governments will be encouraged to consolidate dispersed steel production, relocate urban steel plants, and optimize industrial layouts. The target is to reduce total steel capacity by over 80 million tons. The government also aims to develop deep processing hubs for glass and accelerate structural adjustments in key areas and environmentally sensitive regions in Hebei, Guangdong, Jiangsu, and Shandong. It supports joint restructuring to form strong, integrated enterprise groups with comprehensive industrial chains.