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China is likely to adopt stricter measures to tackle its overcapacity problem as low investment returns take their toll on the economy.
Although the country's efforts to promote urbanization have boosted market confidence, industries such as steel are facing an arduous task to digest inventories, said the country's top economic planning agency.
Steel products inventories in 26 monitored cities increased by 84.57 percent in the first quarter, compared with the beginning of this year, the National Development and Reform Commission said in a statement.
The fundamentals for demand growth are positive as relevant industries such as automobiles and appliances are on track to maintain modest growth this year, but it would be difficult to improve steel enterprises' profit margins due to their large capacity and high costs, it said.
The NDRC and the Ministry of Industry and Information Technology are working on a regulation to resolve the issue of overcapacity, Economic Information Daily said on Monday.
Besides traditional industries, emerging sectors such as polysilicon, wind power facilities and new materials will also come under the remit of the regulation, it said.
"Due to economic problems both at home and abroad, overcapacity has again raised policymaker's concerns," said Zhou Jin, an industrial researcher at the NDRC's Academy of Macroeconomic Research.
Dealing with overcapacity was set as a priority for economic restructuring and rebalancing at the Central Economic Work Conference at the end of 2012, which set the tone for economic development this year.
Traditional industries such as steel, cement, electrolytic aluminum and plate glass suffered a low capacity utilization rate of around 70 percent to 75 percent in China, while the regular utilization rate overseas is around 10 percentage points higher.
Overcapacity also troubled China's emerging solar and wind industries, with solar seeing a capacity utilization rate of 60 percent and the wind turbine industry's rate at less than 70 percent.
Such a low utilization of capacity has caused a great deal of losses and waste of investment. For instance, around half of China's electrolytic aluminum companies were in the red in 2012.
The overcapacity problem was aggravated in some industries after a round of investment boosted by the massive stimulus package launched by China to counter the impact of the global financial crisis in 2008, said experts.
"Some investors cared more about scale and speed, instead of costs and earnings, and some industries were overinvested due to industrial monopoly and limited financing channels," said Zhou.
Those unreasonable, non-market means also caused unhealthy investment. Some investors were attracted by local governments' preferential policies on land and mineral resources rather than the project itself.
Local governments need to re-examine their comparative advantages in attracting investment, rather than simply replicating each other's investment models, said experts.
Regions with advantages in agriculture should not be indiscriminately trying to become manufacturing bases. A more varied approach to provincial economic structure and investment is likely to be more fruitful, said a recent working paper on China's investment from the International Monetary Fund.
Zhang Ping, former minister of the NDRC, said some of the excess capacity could be absorbed through mergers and reorganization, improving companies' innovation capacity and encouraging Chinese businesses to expand overseas.
(China Daily 05/14/2013 page14)