Zhu Yimin had hoped to get his planned ironworks going after the Spring Festival. He did not expect the local government to turn down his application. Municipal government officials told him that as per current regulations, a blast-furnace for smelting iron of less than 100 cubic meters could not be approved and even existing ones would be closed down.
　　Located in central China, Gujiao City of Shanxi Province has not only abundant coal, but also plenty of iron mines. Zhu began thinking of building a small ironworks last year, after being inspired by a friend, and had even drawn up the blueprint. “Now my dreams are shattered,” Zhu said.
　　
　　Zhu’s experience is not unique. Owing to overcapacity, the Chinese Government has begun restructuring industries to ensure sound economic development. Economists say this is China’s fourth economic restructuring, which aims to save energy, protect the environment and follow a safe development model. Energy guzzling enterprises that cause high pollution and use backward technology are to be closed down. Small enterprises, mostly privately owned, in sectors that have overcapacity are also being targeted.
　　“In this round of industrial restructuring, we will encourage the development of high-tech, innovative, and environmentally friendly and energy-saving enterprises. Those enterprises with underdeveloped means of production, equipment and technology will be closed down,” said Liu Zhi, Director of the Department of Industrial Policies of the National Development and Reform Commission (NDRC).
　　
　　Sectors with overcapacity
　　
　　According to NDRC Minister Ma Kai, since the second half of 2005, overcapacity has begun appearing in iron and steel, electrolytic aluminum, iron alloy, calcium carbide, coke, copper and auto sectors. The current production capacity in these sectors exceeds market demand. But, despite this, many projects are still under construction or being planned. Potential overcapacity also exists in the cement, electricity, coal-mining and textile sectors.
　　NDRC data show that last year China’s iron and steel capacity reached 470 million tons, which is 120 million tons more than total domestic demand and exceeds the combined capability of the United States, Japan and the European Union. Capacity in the electrolytic aluminum sector touched 10.3 million tons in 2005--a surplus of 2.6 million tons.
　　Overcapacity leads to pressure on prices, said Ma. At the end of October 2005, the comprehensive price index for iron and steel was only 105.2, equal to the level of 2003 and 20 points lower than at the beginning of 2005. Prices of many iron and steel products have fallen below costs.
　　Overcapacity increased the losses of loss-making enterprises by 57.6 percent year-on-year, particularly in petrochemical, electronic, machine-building, electricity and metallurgical sectors. The newly added losses of these five sectors accounted for more than 80 percent of losses of all state-owned enterprises and non-state enterprises with annual sales revenue exceeding 5 million yuan.
　　One way to prevent further overcapacity is industrial restructuring, said Lu Zheng, Director of the Institute of Industrial Economics of the Chinese Academy of Social Sciences.
　　Almost all the sectors with overcapacity are the ones that have seen frenzied investment in the past two years. In 2004, the government exercised macro-control over the excessive investment in iron and steel, electrolytic aluminum, coking and cement sectors, and this has had some positive impact. But it has not led to an optimization of the industrial structure.
　　
　　Key focus
　　
　　ENVIRONMENTALLY UNFRIENDLY: Illegal coal mines like this one in Inner Mongolia causing severe waste of resources and having hidden safety problems will be closed down
　　On November 9, 2005, the State Council passed new regulations on industrial restructuring, with a focus on fully implementing the concept of scientific development, boosting innovation and preventing blind investment.
　　The eight key points set for this round of industrial restructuring were spelled out as follows:
　　-- Consolidating and strengthening the status of agriculture as the basis of the national economy and facilitating the modernization of traditional agriculture.
　　-- Strengthening basic industries and infrastructure construction.
　　-- Vigorously developing advanced manufacturing industries.
　　-- Speeding up the development of high-tech industries and increasing their contribution to overall economic growth.
　　
　　-- Promoting the overall and rapid development of service industries and raising their proportion in the GDP.
　　-- Boosting the development of the cyclic economy and encouraging the use of energy-saving and environmentally friendly methods.
　　-- Adjusting regional industrial distribution and optimizing the organic structure of industry.
　　-- Planning domestic development and opening-up as a whole and promoting the optimization and upgrading of the industrial structure.
　　According to the Soft Science Research and Knowledge-Sharing Platform under the Institute of Scientific and Technical Information of China, the main problems of China’s industrial structure include a weak agricultural base, slow growth of farmers’ incomes, inadequate infrastructure, low level of the processing industry, insufficient market demand, an underdeveloped tertiary industry, and irrational technological, enterprise organizational and regional industrial structures. The key to China’s industrial restructuring lies in setting up a new industrial pattern with agriculture as its base, high-tech industries as the leading force, basic and manufacturing industries as its prop and the overall growth of service industries, to realize sustainable development.
　　Lu Zheng pointed out that current restructuring will focus on two aspects: eliminating shortages and severe overcapacity, and solving the inefficiency in resource allocation. “The key point of restructuring is to raise the competitiveness of enterprises and their products,” said Lu.
　　
　　Measures to be taken
　　
　　On February 7, the State Council put forward the catalog for guiding industrial restructuring, including 399 kinds of outdated techniques, equipment and products to be phased out within the prescribed time, 539 kinds of projects to be actively encouraged and 190 kinds of projects to be subject to restrictions.
　　For projects on the banned list, no investment will be allowed. If the companies operating in these sectors do not make necessary changes to their technology, equipment and products within the prescribed time, local governments at all levels and relevant departments can order them to be shut down.
　　For projects that will be encouraged, the NDRC will look into how well investment in them is supervised. Financial institutions can provide credit support, and some preferential tax policies will apply.
　　For projects placed under restrictions, new investment is forbidden. Whatever production capacity is there can be utilized after the necessary upgrading is done.
　　“Energy consumption is an important aspect of the classification,” said Liu Zhi. Projects that can save energy and resources through advanced technology will be encouraged, he added.
　　
　　History of China’s Industrial Restructuring
　　
　　China has thus far undergone three rounds of industrial restructuring.
　　1978-84: Boost to agriculture. During this period, the proportion of primary industry in the gross domestic product (GDP) rose quickly and that of secondary industry dropped. In 1978 when reform and opening-up began, primary industry accounted for 28 percent of GDP, while in 1984, the proportion rose to 32.2 percent. Meanwhile, the proportion of secondary industry in GDP dropped from 48.2 percent in 1978 to 43 percent in 1984. In 1978, tertiary industry made up 23.7 percent of GDP, while in 1984, the proportion was 24.8 percent. This shows that agricultural reform had led to higher agricultural productivity and promoted the development of primary industry.
　　1985-92: Rapid growth of non-agriculture sectors. The proportion of secondary and tertiary industries in GDP rose rapidly, while that of primary industry dropped. In 1985, primary, secondary and tertiary industries accounted for 31 percent, 44 percent and 25 percent, respectively. In 1992, the proportion of the three industries changed to 23 percent, 48 percent and 29 percent, respectively. During this period, labor moved in large numbers from primary to secondary and tertiary industries, especially promoting the development of the tertiary industry.
　　1993-2005: Sharp rise of secondary industry. The prominent characteristic of this period was the rapid development of infrastructure facilities, particularly those in the energy, transportation and communication sectors. The proportion of secondary industry in GDP soared. In 1993, the proportion of primary, secondary and tertiary industries in GDP stood at 22.4 percent, 48.3 percent and 29.3 percent, respectively. In 2005, the rates changed to 12.5 percent, 47.3 percent and 40.2 percent, respectively.
　　The share of primary industry in GDP dropped to below 20 percent in 1997, while that of heavy industry rose sharply. Electric power, iron and steel, machinery and equipment manufacturing, automobile, shipbuilding, chemical, electronic and construction material industries became the main engines of economic growth.

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