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A man rides a tricycle with his son past a cement plant in Baokang, Hubei province, in this file photo.STRINGER SHANGHAI/Reuters

China's cement industry, the largest on earth, needs to rapidly dismantle large numbers of factories as part of a newly urgent effort to cut overcapacity, the country's top administrative authority says.

China should slash 500 million tonnes of cement-making capacity in three years, an amount equivalent to more than four times total U.S. production, the State Council said in a policy document on boosting efficiency in the building materials sector.

Cement production is the third major industry to face the threat of major change in China, which began high-profile efforts earlier this year to cut back overcapacity in coal and steel. Dislocations in those industries threaten to displace millions of workers, and are among the most visible of the wrenching problems facing China as it struggles to move beyond the industrial-heavy growth that it relied upon for decades.

By the standards of any other country, 500 million tonnes of cement capacity is a staggering amount – in 2012, Canadian companies made 13 million tonnes.

But China's cement industry boasts 3.2 billion tonnes of capacity, and a utilization rate of 67 per cent. That leaves 850 million tonnes of slack already in the system.

It's a gap that's been growing. Last year, production fell 5.7 per cent in the fourth quarter alone, while the construction of 31 new cement plants meant capacity actually rose slightly, according to the National Bureau of Statistics of China and the China Cement Association.

Cement makers have continued to build in hopes China's slowing economy will resume the double-digit pace of growth that once made them rich. Hopes grew particularly strong in the first four months of this year, when debt-fuelled investment sparked a sudden property and construction rally, lifting cement output by 13 per cent, research by FitchRatings has found.

China has discussed the need to cut cement capacity since 2003.

But it hasn't happened, in part because the country has found old patterns used to stimulate growth hard to abandon. Fixed-asset infrastructure investments climbed 21 per cent in April on a month-over-month basis, and loans to industries running at overcapacity actually rose in the first quarter, although by just 0.1 per cent, China's Xinhua news agency reported on Monday.

China's total debt now stands at 237 per cent of gross domestic product, and the International Monetary Fund has warned that banks hold $1.3-trillion (U.S.) in risky loans, with potential losses equivalent to 7 per cent of GDP.

New borrowing has chased increasingly sparse returns. In the first quarter, for example, cement makers pumped product into a falling market, with prices tumbling 11 per cent. "Price and profitability recovery will come only when there is a more concerted effort to cut capacity," Fitch analysts Winnie Guo and Roy Zhang wrote earlier this month.

Even so, signs are emerging that China is attempting to wean itself from old dependencies. Earlier this month, an article from an unnamed "authoritative person" appeared in the state-run People's Daily warning that staying the course was risky for China.

"Trees cannot grow to the sky. High leverage will inevitably bring about high risks, which could lead to a systemic financial crisis, negative economic growth and even wipe out ordinary people's savings," said the article, which was widely seen as a high-level dressing-down to leaders unable to make painful economic adjustments.

"They are quite keen to, at the very least, change people's narrative about what's going on in China," said Louis Kuijs, the Hong-Kong based head of Asia economics with Oxford Economics.

"In that context, it's probably not surprising to see a beefing up, or a firming up, of plans to act in those areas, like cutting capacity."

What's not clear is whether grand proclamations will accomplish much.

China has, for example, allocated nearly $20-billion (Canadian) to support the 1.8 million coal and steel workers it expects will lose jobs from shuttered production. But in recent weeks, steel plants have been restarting to take advantage of a lift in prices.

In cement, by contrast, no money has been put toward helping workers, providing even less incentive for change.

"When the market is poor, people will stop producing," said Gao Zhi, dean of the cement industry consultancy at the China Development Strategy Institute for Building Materials Industry. But owners prefer a "zombie" factory – particularly one they can revive when conditions improve – over a dead one. "It will be difficult to really demolish the kilns or uninstall the grinders," she said.

Or, as Mr. Kuijs put it, in China "rewriting the narrative may lead to a greater mandate for doing things. But it could also mean only rewriting the story, and not the facts on the ground."

With reporting by Yu Mei

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