China Moves To Cut Steel Overcapacity Days After US, Other Countries Asked For Production Curbs

Days after a meeting of over 30 countries, including China, to discuss the crisis afflicting the global steel industry, following which the United States pointedly accused China for overproduction and failure of the talks earlier in the week, China announced Thursday indirect measures to curb overcapacity in its oversized steel sector. It has asked banks to tighten lending to steel companies, and to stop lending to companies that do not perform.

The new banking guidelines, also applicable to the country’s bloated coal industry, were jointly issued by the People's Bank of China, the China Securities Regulatory Commission, China Banking Regulatory Commission and China Insurance Regulatory Commission.

“Steel and coal industries are the main area where China is trying to slash capacity and the circular underlines the financial regulators’ role in pushing forward the move,” said Lu Zhengwei, chief economist of Industrial Bank.

The circular containing the guidelines asked banks to continue lending to companies that were competitive or could stage a turnaround, and also help with deleveraging, according to South China Morning Post. It also asked financial service companies to assist healthy companies expand globally, helping them with raising capital in overseas markets.

The circular added that banks played a key role in removing poor performers from the system, and asked banks not to extend credit to new projects not encouraged by current policy.

And current policy is clearly geared toward cutting capacity in the steel and coal industries. About 1.8 million jobs were expected to be cut in the two sectors, according to the China’s ministry of human resources and social security. Hebei province in northern China is the hub of the country’s steel production and according to Hebei Governor Zhang Qingwei, 60 percent of steel companies there “would be closed or merged by 2020.”

However, some of the shuttered mills in Hebei are resuming production, after being closed as part of the provincial government’s efforts to cut capacity.

“Some of the ‘overcapacity’ that was eliminated has found its way back after mills resumed production following a marginal recovery in steel prices during the first quarter of this year,” said Laura Zhai, an analyst with global ratings agency Fitch Ratings.

The country is the world’s largest producer of steel and contributes over half of the global production. It has already cut its steel output by about 90 million tons in the last few years and plans to reduce it by another 100 million to 150 million tons in the next five years. It has recently been accused of dumping its steel in other countries, and its steel exports have come under harsh scrutiny since Tata Steel’s decision to sell its U.K. operations.