China Tightens Up Financial Resources of Three Industries Including Steel

China’s official news agency Xinhwa reported on May 15 that China’s central bank, the People`s Bank of China, issued a moderate risk alert against its steel, cement, and aluminum industries.

According to Xinhwa, the People`s Bank of China expressed its concerns through the first quarter execution report on monetary policy announced on May 11, saying, “If the investment in these three industries continues as now, the production capability will exceed demands causing the squandering of the nation’s resources as well as financial crisis.”

In response to this, the Xinxiwang Group, one of the largest companies in China, announced that it would quit its expansion plan for the third and fourth aluminum plants, a plan with a cost of 15 billion Yuan, which was expected to be completed in 2008.

This forecasts a decrease in investment in related industries as well.

According to the report, last year’s investment growth rates of these three industries compared to the previous year are as follows: steel industry increased by 96.6%, cement, 121.1%, and aluminum, 92.9%. At the end of the first quarter of this year, steel increased by 107.2%, cement, 101.4%, and aluminum, 39.3%.

According to the investigation results conducted by the bank, 42% of invested money of these three overheated industries was loaned money from banks. Debt rates of these three industries exceeded, on average, 45%.

China was the largest steel production country in the world for seven years in a row until last year, and its production ability will largely exceed market demands at the end of next year.

In addition, its cement production amounts to more than 1 billion tons, causing over-supply, and aluminum production exceeds nine hundred million tons, surpassing its domestic demand of six hundred millions tons. Among money invested, loans from banks amount to 39% for cement and 48% for aluminum.

The People`s Bank of China plans to severely control loans to these industries by enhancing teller windows of banking institutions and collecting loaned money inappropriate with market principles.

According to the report, the investment growth rate of fixed assets of Inner Mongolia in the first quarter is 160.5%, which is three times higher than the national average of 47.8%.

Regarding investment rankings, Jiangsu, Guangdong, Zhejiang, Shandong, and Shanghai ranked first to fifth, respectively, with loaned money also the largest. According to the report, the People’s Bank of China plans to strictly examine and control loans in these regions.

Yoo-Seong Hwang yshwang@donga.com