Laws of the People's Republic of China

State Council

Circular of the State Council on Accelerating the Structure Adjustment of the Industries with Production Capacity Redundancy

Guo Fa [2006] No.11

The people's governments of all provinces, autonomous regions and municipalities directly under the Central Government, all the ministries and commissions of the State Council and the institutions directly under the State Council:

It is a major and arduous task in the "11th Five-Year Plan" period to promote the strategic adjustment to the economic structure as well as to elevate the international competitiveness of all industries. At present, it has been a predominant problem on the economy development in parts of industries to make blind investments and low-level expansions that they have caused production capacity redundancy. If it is not solved in a timely manner, the problem may further aggravate the conflict on the irrational industrial structure and thus impede a sustainable, fast, balanced and sound development of the economy. In order to speed up and promote the structure adjustment in those industries with production capacity redundancy, we hereby notify the relevant issues as follows:

I.

The Importance and Urgency of Speeding up and Promoting the Structure Adjustment of the Industries with Production Capacity Redundancy

In recent years, the incessant upgrading of the consumption structure as well as the speeding up of the industrialization and urbanization process have motivated a fast growth of such industries as iron &steel, cement, electrolytic aluminum and automobiles. As a result of the extensive growth pattern of our economy, imperfect institution and mechanism, such problems as blind investment and low-level expansion have arisen in the fast development of the foregoing industries. In 2004, the state adopted, in a timely manner, a series of macro control measures so that the blind expansions in some industries has been preliminarily kept within limits, the over-increase of investment has shrunk and the relevant goals concerning the mergence and recombination, readjustment, closure and bankruptcy of enterprises as well as the elimination of laggard production capacities thereof have been fulfilled.

However, as a whole, the problem of production capacity redundancy in some industries caused by an over-investment has not been solved at all.. There is an obvious redundancy in the production capacity of such industries as iron & steel, electrolytic aluminum, calcium carbide, ferroalloy, coke and automobiles. For such industries as cement, coal, power and textile, although there is a balance between their production and demand for the time being, their ongoing construction scale is so large that there is a potential of production capacity redundancy. Under such circumstances, new projects still are introduced in the foregoing industries in some regions and enterprises, that will definitely further aggravate the conflict of the production capacity overwhelming the demand. Furthermore, except for the gross redundancy in such industries, there exit other serious problems concerning irrational enterprise organizational structure, industrial technical structure and product structure. At present, the unfavorable aftermaths caused by the production capacity redundancy of some industries, have visualized in such forms as decline of product prices, increase of inventory, decrease of enterprise profit margin and increase of losses. If such situation is not prevented from spreading, the conflict rooting in the binding force of resource scarcity will pop up further, the issue of structural imbalance will be worsen off, there will witness an obvious increase in enterprise bankruptcy as well as in unemployment. So we shall resolutely make efforts to solve all the problems as soon as possible. We shall adequately realize that, to accelerate the structure adjustment of those industries with production capacity redundancy, is not only an objective requirement to consolidate and advance the achievement in macro control but also an important and arduous task in this regard as well as is not only an urgent requirement to effectively shift the socio-economic development onto a track of scientific development but also an important measure to maintain the current economic growth in a stable, comparatively fast and sustainable way..

Though the production capacity redundancy in some industries has caused a negative impact on the socio-economic development, it, at the same time, offers an opportunity to promote the structure adjustment. Only under such condition that the market supply exceeds the market demand, and that the market competition is consequently aggravating, may the enterprises be willing to or rather be compelled to adjust their structure and eliminate their laggard production capacity. The state has, in the process of implementing the macro control, accumulated the relevant experience to coordinate the industrial policies with other economic policies so as to form comparatively perfect standard system for market access, which provide definite institutional standards and means to promote the industrial structure adjustment and eliminate the laggard production capacity. All regions and relevant departments shall further build up and carry out the scientific development concept, further advance their understanding in the necessity and urgency of an overall and sound development as well as transition of economic growth pattern, intensify their predictability, avoid any aimlessness, elevate their initiation and self-consciousness, improve the occasion and turn harm to profit so as to accelerate the structure adjustment of the industries with production capacity redundancy.

II.

General Requirements and Principles to Promote the Structure Adjustment of the Industries with Production Capacity Redundancy

The general requirements to accelerate the structure adjustment of the industries with production capacity redundancy are: we shall, under the guidance of the scientific development concept, in virtue of the market, improve the occasion, control the increased capacity, optimize the structure, give differential treatment, and support the superior and eliminate the inferior so as to step forward substantially in the current year and achieve effective outcomes through years of efforts. The following principles shall be carried out in the specific work:

(1)

We shall give full play to the fundamental role of the market in allocating resources. We shall, based on the market orientation, utilize the restrictions on the market and resources to intensify the reversed transmission of the pressure for easing monetary condition so as to promote the gross balance and structural optimism. We shall adjust and rationalize the relationship on prices of resource products so as to better bring into play the regulation function of the price leverage in adjustment and thus promote enterprises' independent innovation and structural adjustment initiatively.

(2)

We shall employ the economic and legal means as well as necessary administrative means in a comprehensive manner. We shall strengthen the guidance of industrial policies, support of credit policies, adjustment of the policies for finance and taxes so as to promote the industrial structure adjustment. We shall enhance and strictly implement the relevant standards for market access concerning environmental protection, security, techniques, lands and comprehensive utilization of resources so as to guide the orientation of market investment. We shall improve and strictly implement the relative laws and regulations and regulate the acts of both enterprises and the government.

(3)

We shall insist on giving differential treatment and promote the support for the superior and elimination of the inferior. We shall, in accordance with the specific situation in an industry, region or enterprise, offer classified guidance as well as relative protection and restriction. We shall keep on the combination of supporting the superior and eliminating the inferior, the combination of upgrading and restructuring and eliminating the fall-behind, the combination of merger and recombination and closure and bankruptcy. We shall utilize and digest the present production capacity in a reasonable manner and further optimize the structure and allocation of enterprises.

(4)

We should improve the system guarantee that ensures a continuous structure adjustment. We shall combine the solving of current problems and long-term problems, accelerate the progress of reform, eliminate the obstacles in institution or mechanism on the way of structure adjustment, and promote the structure adjustment in the industries with production capacity redundancy in an orderly manner so as to promote a continuous, fast and sound development of the economy.

III.

Key Measures for Promoting the Structure Adjustment in the Industries of Production Capacity Redundancy

To promote the structure adjustment in the industries with production capacity redundancy, the key is to give full play to the fundamental role of the market in allocating resources and fully exert the market strength to promote the competition as well as the support for the superior and the elimination of the inferior. The people's governments at any level shall, in the process of structure adjustment, play the role of not only regulating the market order by means of further promoting the reform so as to create the relevant conditions to exert the function of the market mechanism but also employing the relevant economic, legal and necessary administrative means in a comprehensive manner to intensify the guidance and make positive promotion. In 2006, we shall, by means of restructuring, reforming and eliminating and etc. , accelerate the structure adjustment progress in the industries with production capacity redundancy.

(1)

We shall effectively prevent any rebound of the fixed-asset investment, which is a key prerequisite to promote smoothly the structure adjustment in the industries with production capacity redundancy. If the investment is inflated again, the fall-behind production capacity will be revival, and consequently the conflict caused by the gross redundancy and unreasonable structure will be more and more thorny rather than be solved. We shall continue carrying out the policies of the Central Government for macro control and strictly keeping watch on the strobes of land and credit, strictly control the investment scale of fixed assets so as to create the necessary prerequisites of and a favorable environment for the structure adjustment in the industries with production capacity redundancy.

(2)

We shall strictly control those newly initiated projects. We shall, in accordance with the relevant laws and regulations, formulate more strict standards concerning environment, security, energy consumption, water consumption, comprehensive utilization of resources as well as quality, techniques and scale and elevate the threshold for access. We shall give different treatments to projects under construction and those under the planning of construction and continue the relative straightening-out and rectification. As to any project that fails to meet the relevant requirements of the state for market access concerning the relevant planning, industrial policies, policies for land supply, environmental production and work safety, the construction thereof shall be stopped in accordance with law. In the case of refusal to carry out any relevant order, we shall employ the relevant economic, legal means as well as necessary administrative means to conduct it and investigate the liabilities of relevant personnel. As is the general principle, we shall not grant any approval for the setting up a new steel plant and shall implement strict examination and approval on a project concerning the relocation of a steel plant or concerning the elimination through selection on laggard production capacity of a steel plant. We shall elevate the standards for well-sizes in coal exploration and clarify the resource recovery rate as well as the requirements for work safety. As to a newly established automobiles & complete vehicle production enterprise as well as any investment project concerning the production of trans-category products by a current enterprise, both the requirements for the industrial policies and the requirements for independent brand and independent development of products shall be met. Where any current enterprise sets up a factory in a different place, its production and sales volume shall be not less than 80% of the approved production capacity, as required. We shall elevate our efficiency in utilizing foreign investment and prohibit the access of any foreign investment with poor techniques and security, high energy-consumption and heavy pollution.

(3)

We shall eliminate the laggard production capacity through selection. We shall, in accordance with law, close down those small-sized enterprises that destroy resources, pollute the environment and fail to meet the relevant requirements for work safety, eliminate through selection the laggard production capacity by stages and batches and dispose of the laggard production equipments by means of destruction. We shall, gradually, eliminate through selection the laggard production capacity of cement such as vertical kiln, close or eliminate small open furnaces of calcium carbide or those with a production capacity of not more than 10, 000 tons; eliminate, as soon as possible, ferroalloy submerged arc furnaces with a power of not more than 5, 000 kilovolt/ampere (except special ferroalloy), ferroalloy blast furnaces with a volume of not more than 100 cubic meters; iron-smelting blast furnaces with a volume of not more than 300 cubic meters and steel-smelting converters and electronic furnaces with a production capacity of not more than 20 tons. We shall eliminate thoroughly the facilities concerning indigenous coking and improved coking; stop the use of mini petrol engines and condensing coal-fired mini-set of 50, 000 kilowatts gradually and eliminate those small coal mines that fail to meet the requirements for scale as prescribed in the industrial policies and standards for work safety.

(4)

We should promote the technical innovation. We shall support large-sized enterprises' projects concerning technique innovation according to the relevant industrial policies, of high technical level and conducive to industrial upgrading. We shall put emphasis on elevating the technical level, improving the varieties, protecting the environment, ensuring the security, debasing the consumption and elevating comprehensive utilization, so as to carry out reforms and innovation in the traditional industries. We shall promote the project of taking the place of smaller thermal power generators with larger ones and applying coal instead of petrol as well as any other project alike. We shall support automobile enterprises in their building a research and development system and develop, in the light of assimilating the relevant techniques as introduced, those techniques with independent intellectual property right. We shall support the development of key textile techniques, research and development of the whole-set equipments and the public innovation platform of clustered industries as well as independent costume brands. We shall support the major technical innovation of large-sized iron & steel conglomerates as well as their new product projects, accelerate the development of grain-oriented cold rolled silicon steel sheets, elevate the production of automobile sheets, and promote the domestic production of large-sized cold/hot continuous rolling sets. We shall also support the construction of coal mines with high production and efficiency as well as the technical innovation concerning the security of coal mines.

(5)

We shall promote the merger and recombination. We shall, in accordance with the market principles, encourage those large-size enterprise groups with competitive strength to carry out trans-regional and trans-industrial merger and recombination by employing their assets, resources, brands as well as the market mechanism and promote the centralization of industry and the macro-scale and large bases. We shall promote the joint recombination between a predominant large-sized iron & steel enterprise and other iron & steel enterprises in the same region so as to form several iron & steel enterprise groups with an annual production capacity of not less than 30 million tons. We shall encourage large-sized cement enterprise groups to make merger, recombination and combination over middle/small-sized cement plants so as to enhance its influence on the regional market. We shall break through the production and business allocation of current carbonization enterprises, carry out merger and combination between carbonization enterprises and iron & steel enterprises and chemical industrial enterprises and therefore develop them towards those featured by integration of production and application, on-scale business operation, diversification of products and comprehensive application of resources. We shall support large-sized coal enterprise to acquire, merge, recombine and re-construct a batch of small coal mines so as to realize the integration of resources, elevate the mining return extraction rate and work safety level.

(6)

We shall intensify the coordination between the policies for credit, lands, construction, environmental protection and security and the relevant industrial policies. We shall earnestly implement the Decision of the State Council on Promulgating and Implementing the Interim Provisions on Promoting the Industrial Structure Adjustment (Guo Fa [2005] No.40) and make efforts to detail the measures formulated to implement all the policies. For the relevant development planning of as well as industrial policies for such industries as iron & steel, electrolytic aluminum and automobiles, we shall intensify the implementation of these policies, strengthen the examination thereover and improve them in practice as well. For any industrial development planning or industrial policy that has not been promulgated, we shall make efforts to formulate and perfect it as soon as possible. Such departments as financial institutions and state land resources, environmental protection and security supervision shall, in the light of the requirements of the state's macro control as well as the relevant industrial policies strictly, optimize the credit system and the structure of land supply, support those projects and enterprises, which meet the relevant state industrial policies and requirements for market access in the supply of land and loans, and simultaneously, shall prevent changing up and down radically in the credit industry and positively support any merger or recombination bringing favorable market prospects, producing good benefits and conducive to the formation of a scale economy. For any project or enterprise that fails to meet the concerning state industrial policies, land supply policies and requirements for market access or which has been clearly eliminated by a state order, no loan or land shall be provided thereto and the departments in charge of urban planning, construction, environmental protection and security supervision shall not conduct the relevant formalities therefore. We shall firmly stop any act of attraction of investment by unlawfully lowering the land price or playing down the standards for environmental protection or security, or any act of blindly initiating a project. We shall improve the relevant policies and measures for restricting the export of those products of high energy-consumption, heavy pollution or resource products.

(7)

We shall further carry out the reform in such aspects as the administrative administration, investment system, pricing mechanism and market exit mechanism. We shall, in accordance with the requirements for establishing a socialist market economic system, further promote the reform in the administrative administration and investment system, implement conscientiously to separate government function from enterprise management, improve and strictly carry out the system concerning the check and archival filing of enterprise investment so as to achieve the goal of enterprises making their own decisions about investment, undertaking by themselves the relevant risks and banks carrying out independent credit assessment. We shall promote the price reform for resource products in an active and stable manner, improve the pricing mechanism that reflects the market demand and supply as well as the scarcity of resources and set up and improve an ecological compensation mechanism. We shall establish and perfect an enterprise exit mechanism and formulate as well as promulgate the relevant policies for reform concerning personnel arrangement, land use, asset disposal and guaranty for the employees' rights and interests, which shall be conducive to promoting the merger and recombination of enterprises and to enterprises' exiting the market and conducive to maintaining employees' legitimate rights and interests. We shall accelerate the setting up and improvement of the relevant system of laws and regulations that preserve a fair market competition and break the regional blockade as well as regional protection.

(8)

We shall improve the industrial information release system. The relevant departments shall improve the relative statistical and monitoring system and do well in the follow-up analysis on the dynamic operation of those industries with production capacity redundancy. We shall set up, as soon as possible, the relevant indicators to measure the production capacity redundancy as well as the data collection system and set up, in a well-planned and step-by-step manner, an information release system so as to offer guidance regularly for investment prediction in the market. We shall intensify the guidance for information concerning the industrial development and bring into fully play the function of the industrial associations, do well in the market research and disclose, at a proper time, the information on the supply and demand of products, current production capacity, ongoing construction scale, development tendency, raw material supply and price fluctuation. Simultaneously, we shall pay close attention to the production and investment of other relative industries and the development of their market supply and demand so as to find and solve any up-coming problem and prevent the emergence of serious production capacity redundancy in any other industry.

The task of accelerating the readjustment in the industries with production capacity redundancy involves many aspects, concerns strong policy orientation, and is difficult and complicated. All regions and relevant departments shall build up the concept of the overall situation, strengthen the organization and leadership, carry out close coordination and do well in an active and orderly manner. They shall correctly conduct the relation between reform, development and stability and, on the basis of the real situation of a specific region or entity, improve the supporting measures, earnestly solve any difficulty or problem incurred during any merger, bankruptcy or recombination of enterprises, do a good job do well in the personnel arrangement and asset preservation, minimize the losses so as to avoid any societal instability. All regions and relevant departments shall report the implementation of the present Circular to the State Council in time. The National Development and Reform Commission shall, together with the relevant departments, make efforts to formulate the specific policies and measures and do well in the relevant implementation.

The State Council

March 12, 2006