China Lays Out Plans to Restructure Ailing Shipbuilding Sector

China has laid out a detailed three-year plan to restructure its massive shipbuilding industry, urging local governments to halt approvals of new projects and companies to move up the value chain by building high-tech vessels.

The plan, issued late on Sunday, is the latest move by Beijing to crack down on industrial overcapacity and shift away from its old investment-driven economic growth model to focus on boosting productivity and domestic consumption.

Local authorities and governments need to strictly control new capacity by halting approvals of new shipbuilding facilities as well as stopping projects that had gone ahead without securing necessary permits, the State Council, or China's cabinet, said in a plan for 2013-2015.

The cabinet also called on financial institutions to stop all lending to companies embarking on new shipbuilding facilities.

However, shipbuilders that are restructuring their business and moving toward mergers and acquisitions are encouraged to issue corporate bonds to secure funds.

The cabinet said in early July it would cut off credit to force consolidation to a range of industries struggling with sluggish demand and severe overcapacity to rebalance the economy and focus more on high-end manufacturing.

As part of the consolidation plan, Beijing urges to accelerate dismantling aging ships and wants shipbuilders to build high-end offshore engineering products, which it expects will have higher demand in China's domestic market.

"We still have a lot of old and fuel-intensive vessels currently being used in the market. Scrapping those old ships would be crucial to solving the overcapacity problem," said a senior executive with a shipowner in southern China, declining to be named as she's not authorised to speak to media.

Chinese shipbuilders should aim to secure 25 percent of the global market share for high-tech ships and one-fifth for the global offshore engineering product market by 2015, the cabinet said.

China's shipbuilding sector, the world's largest, has been plagued by overcapacity, a severe shortage of new orders, a persistent decline in prices for building ships and a slump in the freight market, forcing many shipbuilders out of business in recent years.

However, analysts said it would take a long time for China to clean up excess capacity in the labour intensive shipping industry as any large-scale closures would hurt employment and could threaten social stability.

The China Association of the National Shipbuilding Industry said on its website that the combined profits of 80 major shipbuilders slumped 54 percent to 3.58 billion yuan ($584 million) for the first half from a year ago.

The association said in last year's report that China had 1,647 shipbuilders and some analysts expected about one-third could be shut down over the next few years. In contrast, China's main rivals South Koreaand Japan have only 10 and 15 active shipyards respectively.

Holding export orders of Chinese shipyards fell 23 percent in the first half from a year earlier, the association said, while new orders dropped to a seven-year low in 2012.

The value of orders held by Chinese shipyards was estimated at $3 billion for the first half of this year, equivalent to about two-thirds of the total value of Chinese orders last year, global shipping services provider Clarkson Research said in a note.

China Rongsheng Heavy Industries Group, the country's largest private shipbuilder, warned of a net loss in the first half and has appealed for financial help from the Chinese government and big shareholders to cope with slumping orders and high debt.

($1 = 6.1294 Chinese yuan)

By Ruby Lian and Fayen Wong; Editing by Matt Driskill (C) Reuters 2013.