China’s State Council (its cabinet) has carried through with a warning made in late August to start cutting over-capacity in several  industries that either pollute or have surplus capacity.

It will do this by executive decision and by turning off the financing tap.

With all banks state-owned and on the funding teat from the $A67 billion ($US585 billion) stimulus spending package, it should be quite easy to do.

Provincial and local governments were warned in the State Council not to attempt to frustrate the central government decision.

“Some regions have acted illegally. We are again seeing cases of illegitimate approvals, of construction starting before it has been approved, and of construction starting even as the approval process is under way,” it said.

Judging from the media reports, the news could have the capacity to cut China’s consumption of steel, aluminium, glass-making materials and other metals and that in turn could cut many of the big plans by Australian companies to ship iron ore and other commodities to China in coming years.

At the same time, the country’s central bank said on Tuesday, that while the current easy monetary policy would be continued, “credit to high energy-consuming and environment-polluting industries would be strictly controlled”, according to some reports in Chinese English language official media.

The China Daily website said that the State Council had said in “unusually blunt” statement that highly polluting sectors including steel, coke, cement and plate glass must cut capacity, while silicon and wind-power producers should pursue more orderly development.

In what was portrayed as a reiteration of existing policy targets, the State Council said meeting the government’s long-standing goal of reducing overcapacity was urgent because the result of inaction would be factory closures, job losses and rising bad bank loans.

Without giving a specific timeframe, it banned the building of new steel plants and any projects to expand steel-making capacity; in the allied coke sector, certain expansion projects would not be allowed to proceed for the next three years and outdated facilities would be eliminated.

The government said it planned to toughen regulatory standards to restrict entry in these sectors, strengthen environmental protection, control land use and limit access to bank loans, among other measures.

In the cement sector, the State Council said it would suspend and review all new projects in the pipeline.

“Proposals for new plate glass projects have been banned and all ongoing construction plans put under review. Plate glass and silicon manufacturers, as well as wind power producers, would be placed under stricter environmental guidelines.” And no new aluminum smelters and docks will be built in China for the next three years, according to the statement.

The announcement fleshes out the announcement on August 27 from the State Council that it would ask local authorities to “resolutely [curb] overcapacity and redundant construction”, after the country’s massive stimulus measures and excess bank lending led to unchecked expansion in several  industries.

It said industrial overcapacity could cause intense competition and derail the country’s economic recovery if no action was taken.

According to the latest State Council statement (which was posted on the council’s website in Chinese), investment in steel production, which hit Rmb140.5 billion in the first half, was expected to lift capacity by more than 100 million tonnes (more than Japan would produce in a year) to more than 700 million tonnes this year, compared with domestic demand of about 500 million tonnes last year.

For the steel industry, the government set a firmer tone of clamp-down by calling 10% of the country’s crude steel capacity illegitimate, but did not elaborate what it would do about it.

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