The world's top aluminium producer and consumer has ordered a halt to all planned smelter projects and is considering cutting export rebates on some aluminium products as it tries to rein in the burgeoning energy-hungry industry.
If enforced, the moves could delay or eliminate some 7 million tonnes of planned smelting capacity, traders and analysts estimate, equivalent to about a third of existing capacity. But previous attempts to curb the industry have met with only limited success.
"Social stability means everything to the Chinese authorities," said Jonathan Barratt, managing director of Commodity Broking Services, in Sydney. "If local governments can argue these projects are needed to maintain order and employment, Beijing will find it hard to kill them off."
China had annual capacity of around 20 million tonnes in 2010, around 40 percent of the world's 50 million tonnes, Reuters Metal Production Database shows.
The market expects Chinese aluminium output to exceed consumption by 1 million tonnes. A concerted, effective crackdown would cut that, and if maintained, could turn the country into a net importer, with the potential to lift global prices.
But if Beijing takes a softer line, as many in the industry expect, oversupply may continue to hold back domestic prices, currently trading 5 percent above their long term average since 1994, while international prices are 45 percent above their average over the same period.
The latest statement by a senior industry ministry official signal renewed enforcement of a central government policy of controlling aluminium smelting capacity by denying approval to any new smelters.
Previous efforts by Beijing to rein in the sector had started to bite during late 2007 and 2008, but were relaxed during the financial crisis and in some cases replaced by incentives to expand output as China strove to maintain employment and growth.
"The concern they have is that as they tighten monetary policy there is a risk of overcapacity, which this looks to address," Barratt said.
"There is a more serious message buried within these moves -- that China is far more cautious about the future than the rhetoric suggests."
Even if successful, the current scheme is probably too late to prevent some 3 million tonnes of smelting capacity expansion underway from coming on stream this year, and another 3 million tonnes due online through 2013.
To enforce the measures in the provinces, where smelters are sources of income and employment, the central government would need to throw its full weight behind the policy, complete with sanctions against government officials who fail to enforce it.
The powerful state planner, National Development and Reform Commission, one of the ministries that issued the circular, has been the main body driving the policy.
Despite its political muscle, it has had little success in enforcing the curbs on aluminium's expansion. The sector has expanded from just 12 million tonnes per year in 2006.
Beijing would consider social stability concerns raised by the provinces but would tend to set these against factors such as strong Chinese semi-fabricated production in recent months and the need to keep an eye on targets, one analyst said.
"Thus far, it appears that these smelter plans have been put on hold, rather than cancelled," said commodities analyst Chen Xin Yi at Barclays Capital.
"And if capacity utilisation rises, those plans will be revived. Nevertheless, this direct action against smelters forms an important part of why we believe Chinese aluminium production has entered a period of much slower growth."
The government has yet another key weapon it could deploy, which could eventually drive production out of China -- a net energy importer -- to areas such as the Middle East, where supplies are greater.
If Beijing was determined to limit the growth of smelters, it could drive up their costs by mandating higher energy prices for the sector, analysts said, and pricing smelters out of the market would be more effective than legislating them away.
"The effort to cut excessive capacity in the aluminium industry, just like in the steel industry, is quite difficult," said Judy Zhu, an analyst with Standard Chartered Bank.
"The central government has good intentions, but when it comes down to local governments it will be very difficult to implement. For a small city, an aluminium smelter means jobs, financial revenues, and even social stability. The most effective method would be to raise energy costs significantly, to let the market filter out the inefficient capacity.
It was unclear how the policy notice would hit projects that have already begun, but the risk of burdening banks with bad debts was likely to mean many would be allowed to continue.
"A lot of planned projects that have not been approved are under firms that are owned by local governments, or even the central government. It is not easy to halt the projects," said a smelter official in the south-western province of Guizhou.
The bulk of planned new plants were in industrial or technology zones allocated by Beijing as part of special policies to boost local economies, he said.
The notice was probably just an official circular to urge local authorities to stop unapproved projects and questioned how much planned capacity would be removed from the pending list, another industry source said.
In the near term, at least, few analysts were shifting forecasts in response to the threat of restrictions.
"The notice would not have an impact on this year's production," said Li Yang, senior aluminium analyst at state-backed research firm Antaike, adding that he had not altered his forecast of 19.5 million tonnes of primary aluminium production this year, an increase of 11 percent from 2010.