China orders firms to slash output

Beijing, July 28 – China has ordered companies in 19 sectors including cement and steel to slash production capacity as growth in the world’s second largest economy slows. Beijing’s industry ministry ordered around 1,300 firms to shut down outdated facilities by September and eliminate excess capacity by year-end, state media said on Friday.

In China’s partly state-directed economy, firms often fail to heed economic signals by cutting output even as their performance weakens or turns loss-making, analysts say. “The government is serious in its efforts to restructure the economy and is prepared to tolerate the necessary pain,” Zhang Zhiwei, an economist with Nomura Securities, wrote in a research note.

“This reinforces our view that aggressive policy stimulus is unlikely in 2013 and that growth should trend down,” he said. The ministry on Thursday ordered 527 cement producers to slash nearly 93 million tonnes of excess capacity and 24 steel makers to cut seven million tonnes of capacity, according to a statement on its website.

Other industries affected include glass, paper and copper. Analysts said the move could hit already weak manufacturing activity, which contracted to a 11-month low in July, according to HSBC’s preliminary purchasing managers’ index.

“Manufacturing data will fluctuate at low levels with downside risks as China continues to eliminate overcapacity and reduce inventories,” Minzu Securities analyst Xu Yiding said. Shares of companies involved fell on Friday. Cement producer BBMG lost 3.33 per cent, while Inner Mongolia Baotou Steel Union fell by 2.03 per cent. China’s economy is already slowing, expanding by 7.5 per cent year-on-year in the April-June period, down from 7.7 per cent in the first quarter and 7.9 per cent in the last three months of 2012. Government has set a full-year growth target of 7.5 per cent for 2013.

China’s cabinet on Wednesday unveiled a package of measures, dubbed a ‘mini-stimulus’ by economists, to boost growth by scrapping some taxes for small firms and speeding up railway investment. Economic planner introduced rules to facilitate financing for small firms and encourage the development of financial institutions.

AGENCE FRANCE PRESSE