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China Orders Firms to Cut Capacity as Economy Slows

July 26, 2013
The ministry on Thursday ordered 527 cement producers to slash nearly 93 million tons of excess capacity and 24 steel makers to cut seven million tons of capacity.

SHANGHAI -- 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Beijing's industry ministry ordered around 1,300 firms to shut down outdated facilities by September and eliminate excess capacity by year-end, state media said Friday.

In China's partly state-directed economy, companies 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 tons of excess capacity and 24 steel makers to cut seven million tons of capacity, according to a statement on its website.

Other industries affected include glass, paper and copper, it said.

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 told Dow Jones Newswires.

China's economy is already slowing, expanding 7.5% year-on-year in the April-June period, down from 7.7% in the first quarter and 7.9% in the last three months of 2012.

The government has set a full-year growth target of 7.5% 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.

The nation's top economic planner on Thursday also introduced rules to facilitate financing for small firms and encourage the development of financial institutions to cater to their funding needs.

Despite persistent sluggishness in the domestic economy, China's finance chief earlier this month ruled out the possibility of introducing any major stimulus this year and said the country would focus on structural reforms.

"This year, China will not introduce any large-scale financial stimulus policies but will fine-tune its policies to promote economic growth and employment," finance minister Lou Jiwei said.

Copyright Agence France-Presse, 2013

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