Market Segment

China Policy Cracks Down on Non-Compliance

August 16, 2016

China has issued a new policy that outlines steps it will take to address overcapacity in major industrial areas. The report focuses on adherence to market rules and environmental and energy guidelines with punishment for those who fail to meet governmental standards.

China has pledged to reduce overcapacity by 2020 in the iron and steel, coal, cement aluminum, plate glass, and other industries through tightening and enforcement of standards. The Ministry of Industry and Information, in a draft policy document published August 12, laid out a multi-step plan for supply-side structural reform.

Companies are directed to adhere to transparent market rules and regulations that optimize the supply structure, allocation of resources, and promote “survival of the fittest.” Attention is to be paid to energy consumption; environmental protection; quality, safety and technical standards; and local responsibility and cooperation.

Plants that are inefficient, produce substandard products, or do not comply with mandatory energy, environmental and safety standards will have six months to rectify problems or be shut down or demolished.

Viable companies will be extended “differential credit” to help with restructuring while funding is to be withdrawn from businesses slated for closure. Enterprises are urged to withdraw from financial support a soon as possible using market means to dispose of corporate debt.

The ministry also resolves to improve supervision and enforcement of regulations and require regular information disclosure on compliance.

Industries are encouraged to strengthen self-regulation through industry associations that “reflect the demands of enterprises, guide enterprises to self-discipline, and conscientiously implement the relevant laws, regulations and policies.”

The Ministry basic principles encourage following sound, open and transparent market rules to create a fair competitive market environment that will promote reduction of overcapacity while “strengthening policy guidance, and improve the institutional mechanisms to protect the legitimate rights and interests of enterprises and workers, to ensure social stability.”

A Bradford Research survey of 149 blast furnaces in China, with actual capacity of 700 million tons, revealed an average operating rate of 84.57 percent last week. Although plans to close Chinese mills have been accelerated, Bradford Research forecasts Chinese steel production will be 780 million tonnes in 2016 compared to 803 million tonnes in 2015. Said Charles Bradford, “We continue to believe that actual steelmaking capacity in China is closer to 900 million tonnes, not the “official” 1.2 billion tonnes.”