China allocates 100 billion yuan to deal with job losses from capacity cuts: ministry

BEIJING (Reuters) - China will allocate 100 billion yuan ($15 billion) over two years to relocate workers laid off as a result of China’s efforts to curb overcapacity in sectors like steel, the Ministry of Industry and Information Technology said on Thursday.

China has vowed to tackle price-sapping supply gluts in major industrial sectors, and said earlier this month that it would close 100 million-150 million tonnes of steel capacity and 500 million tonnes of coal production in the coming three to five years.

The government intends to eliminate hundreds of so-called “zombie enterprises” - loss-making firms in struggling sectors that are being kept alive by local governments trying to avoid job losses and a surge in bad debts.

“The central government has decided to establish dedicated industrial enterprise restructuring funds of 100 billion yuan ($15.31 billion) over two years, which will be used to solve the problem of worker placement,” said vice minister of industry Feng Fei.

Feng told reporters the “main principle” of the restructuring policy would be the deployment of market forces, but the central government needed to offer a helping hand to local authorities to deal with layoffs.

Feng said China was trying to encourage mergers rather than bankruptcies in a bid to reduce the risk of unemployment, but the central government had to act to remove some of the obstacles that were impeding the restructuring efforts.

“Local governments have to stop extending credit to zombie firms, and banks need to stop offering loans,” he said. “Second, we need to strengthen the enforcement of environmental protection, energy efficiency, quality, safety and technology standards.”

He said the restructuring process would also require the disposal of bad assets, but China would use “market methods” to handle the problem. He did not elaborate.

China’s steel sector has an annual capacity surplus of around 400 million tonnes, nearly half of the country’s total output in 2015, and the China Iron and Steel Association said it was likely to rise further in 2016.

Officials from China’s coal industry association estimate that total annual production capacity now stands at 5.7 billion tonnes, compared to last year’s 3.7 million tonnes.

While some estimate that a capacity cut of 100 million tonnes of steel a year could lead to around half a million job losses, Feng said the government was not expecting widespread lay-offs.

The restructuring of China’s lumbering and mostly state-owned industrial sectors has emerged as one of the government’s key priorities this year as it tries to rejuvenate a flagging economy.

China is set to announce further state-owned enterprise reform measures, with the government aiming to push through more mergers as well as corporate governance steps, including the use of market-based hiring and compensation practices, designed to make the firms more competitive.

($1 = 6.5325 Chinese yuan)

Reporting by David Stanway; Editing by Shri Navaratnam