M&A activities encouraged to tackle sectors' overcapacity, say guidelines

China has set a cautious industrial output target for 2013, as the top industrial regulator beat the drum once again on industry consolidation to tackle overcapacity.

The Ministry of Industry and Information Technology is targeting 10 percent growth in industrial output this year, unchanged from last year's target, said Zhu Hongren, the ministry's spokesman, at a news conference on Wednesday.

Zhu said the target takes into account the changed industrial environment this year, its relation with GDP growth, and the internal cycle of the industrial economy.

"External demand will not recover in the short term, and the growth of domestic demand is constrained by several factors. Under this circumstances, it will not be easy to achieve the target in real terms," said Zhu.

China's industrial output rose 10 percent year-on-year in 2012, much lower than the previous year's 13.9 percent increase.

Industrial output growth slowed to 9.5 percent in the second quarter from 11.6 percent in the first, and further dipped to 9.1 percent in the third quarter, before it rebounded to 10 percent in the fourth.

Alaistair Chan, an economist with Moody's Analytics, said the country's industrial output growth would likely be slightly higher in the first half of the year, before slipping again in the second half, as the current growth base is weak and there isn't a strong-enough stimulus package from the government in place to maintain the momentum.

Meanwhile, overcapacity will keep haunting several heavy industries, Chan added.

For instance, China's machinery industry's output only grew 8.4 percent in 2012, compared with the 15.1 percent growth in 2011.

And China's steel industry had about 160 million metric tons of excess production in 2012, while 33.8 percent of China's steel plants are suffering from losses.

The Ministry of Industry and Information Technology has said it supports increased mergers and acquisitions to tackle overcapacity.

On Tuesday, the ministry - along with 11 other governmental bodies - issued a guideline, saying the government encourages M&A activity in the auto, steel, cement, shipbuilding, electrolytic aluminum, rare earths, electronic information, pharmaceutical and agricultural sectors.

In the auto sector, for instance, the guidelines call for the production of the top 10 automakers to account for 90 percent of the industry's total output.

But analysts said that authorities have been advocating higher industrial consolidation for years with limited results. They added that the M&A encouragements get stronger when the industrial sectors face a downturn.

"The main problem is that the companies are not interested," said Zhang Lin, an analyst with Lange Steel Information Research Center.

"Most of China's large steel companies' core business is in the red. They lack the capital to merge with other companies. And the equipment and technology of small steel companies are generally poor, making them unattractive to large companies," Zhang said.

Regional protectionism is another major reason stifling M&A activity, said Wei Zengmin, an analyst with industrial consultancy Mysteel.

According to Wei, steel companies contribute a sizable portion of local GDP and fiscal revenue, making cross-regional mergers difficult.

The central government is aware of these obstacles.

Zhu, the ministry spokesman, stressed at Wednesday's news conference that in the M&A process, companies should play a major role.

"Governments cannot make matches for M&A deals. Instead, they should create a fair environment, which includes removing some of the institutional barriers for M&A," Zhu said.

[email protected]

(China Daily 01/24/2013 page13)