Five years after an 8.0-magnitude earthquake hit Wenchuan in Southwest China's Sichuan Province on May 12, 2008, reconstruction work in the disaster areas has been completed, leaving local cement plants facing shrinking demand.

According to estimates from local authorities, 100 million tons of cement was required for reconstruction work in earthquake-stricken areas between 2008 and 2010. To meet the demand, local authorities postponed a plan to shut down outdated factories, and at the same time, a large number of companies sought to seize the opportunity by setting up new plants and production lines in the province.

As a result, the province's cement output grew to 132 million tons in 2010, double that of 2007 before the earthquake, data from the China Cement Research Institute showed.

"The overcapacity problem in the province's cement industry began to emerge in 2009 and has continued to weigh on the industry," Mao Chunmiao, an analyst with the institute, told the Global Times Thursday.

Local cement plants have suffered losses or profit slumps in recent years due to overcapacity. For instance, the province's two A-share listed cement companies - Sichuan Shuangma Cement Co and Sichuan Golden Summit Group - posted losses of 8.07 million yuan ($1.31 million) and 1.16 million yuan respectively in the first quarter of 2013.

"The province's cement plants currently only operate at about 70 percent of their total capacity," Mao said.

According to international standards, normal market competition features 80 to 85 percent utilization of capacity, while a capacity utilization of less than 70 percent could trigger vicious competition.

Mao expects that the reconstruction work following a 7.0-magnitude earthquake in the province's Ya'an city on April 20 will boost demand for cement.

"But the Ya'an earthquake is smaller than the Wenchuan quake in terms of scale, so the reconstruction still cannot help solve the overcapacity," he said.

Nationwide problem

The cement industry in Sichuan is just a reflection of China's broader overcapacity problem.

Across the country, it's not only traditional sectors such as cement, steel and electrolytic aluminum that have suffered from overproduction, but also some emerging sectors including photovoltaic and wind power.

This overcapacity has taken a toll on industrial profits. China's major industrial companies saw profits grow by 5.3 percent in March from a year earlier, down sharply from a rise of 17.2 percent in the first two months of this year, latest data from the National Bureau of Statistics showed.

The central government's fiscal revenue was also dragged down by slower industrial output growth and worsening corporate profit. It fell 2.2 percent in April from the previous year, after slipping 0.2 percent in March, according to the Ministry of Finance.

"Overcapacity, which leads to waste of resources and low return on investment, is becoming an increasingly big obstacle to the recovery of China's economy," said Luo Zhongwei, a researcher at the Institute of Industrial Economics under the Chinese Academy of Social Sciences.

The problem has drawn the attention of China's policymakers. At a State Council meeting held on May 13, Premier Li Keqiang vowed to curb blind expansion of industries hit by severe overcapacity. Vice Premier Zhang Gaoli also said during a visit in North China's Inner Mongolia Autonomous Region last week that new projects in sectors struggling with overcapacity such as steel, cement and shipbuilding will not be approved.

The National Development and Reform Commission and the Ministry of Industry and Information Technology are mulling a guideline to resolve overcapacity, Economic Information Daily reported on May 12, without elaborating.

Key reason

Overcapacity has plagued China's economy since the country adopted a socialist market economy in the 1990s. Although excess capacity is inevitable in a market economy, experts hold the view that in China, overcapacity is a result of the government-led, investment-driven growth model.

"Weakening domestic and global demand as well as companies' low-level expansion are factors contributing to China's overcapacity," Luo said. "More importantly, the country's 4 trillion yuan economic stimulus package launched in 2008 to counter the impact of the global financial crisis worsened the problem." "Government industrial policies also resulted in excess capacity in some emerging industries," Teng Tai, an economist at West Brothers Asset Management Co, told the Global Times Thursday.

He cited a batch of policies aimed at boosting the development of the photovoltaic industry that have led to overcapacity in this sector.

"For speculative investors, governments' preferential policies for land and bank loans are more attractive than the project itself," Luo said.

The central government rolled out of a batch of measures to tackle the overcapacity problem in 2009, including strict controls on market access, strengthening environmental protection supervision and encouraging industry consolidation. But their effect has so far been limited.

"Local governments' blind pursuit of economic growth and regional protectionism have hindered the central government's efforts to curb excess capacity, because such a move would hurt local GDP growth and employment," Luo said.

"Some local officials even complained to me that they had not benefited from implementing the central government's measures to rein in overcapacity, and those who did not implement the rules have not received any punishment," he noted.

Deeper reforms needed

"To address the overcapacity problem, China's top decision-makers usually stimulate demand through fiscal stimulus and monetary easing, or adopt administrative measures to curb overcapacity, but neither has completely solved the problem," Teng said.

"Market forces should play a more important role in solving the issue," he said. "Governments at all levels should reduce administrative meddling and create a healthy environment that allows the market to weed out unsustainable capacity."

The State Council's recently announced moves to simplify governmental procedures in approving business projects indicated its efforts to bring market forces more into play, Teng said.

And he noted that broader and deeper reforms including the breaking of State monopolies in certain sectors and further tax reduction for enterprises is urgently needed, which could spur enterprises to innovate, increase efficiency in the allocation of resources and foster new industries.

"Eliminating excess production capacity cannot be done overnight and will bring painful effects such as bankruptcy and layoffs, but both the central and local governments should have a long-term perspective to tolerate a slower but more balanced economic growth," Luo said.