Market participants said the government was clutching at straws and that few firms in the world's largest aluminium consumer and producer would move capacity overseas in the short-term as oversupply is an international problem.

But the possibility of a longer term shift could spook international smelters such as Alcoa and Rusal, who would fret that Chinese players could undercut their businesses - especially if they receive subsidies as some currently do domestically.

China accounts for about half of global production and oversupply in its aluminium sector has helped push the world's inventories to a record high and prices to a four-year low below $1,800 a tonne in June.

It has been scrambling to come up with solutions to the problem of overcapacity at home, looking to balance aluminium firms' desire for long-term expansion with the grim reality of the market.

Industry sources said the Ministry of Industry and Information Technology (MIIT) and National Development and Reform Commission (NDRC) had been in discussions with aluminium smelters and that new measures would be announced soon.

They said that along with the plan to encourage shifting some production overseas, the measures would reinforce previous steps to boost aluminium consumption domestically and phase out outdated capacity.

"Smelters will not take it too seriously for now," said a trading manager at a large smelter, when asked about the call to move capacity abroad. He declined to be named as he is not authorised to speak with media.

The outlook for aluminium prices is bleak, with rule changes for industrial metals warehouses and increased scrutiny by regulators threatening to unleash a wave of stored aluminium.

TOP PRIORITY

Beijing has been issuing broad brush rules aimed at reining in overcapacity in sectors such as aluminium and steel for about a decade, but plans have usually faltered due to resistance from local governments anxious to boost growth.

But with a burgeoning supply glut dragging more firms into the red and boosting their reliance on loans from banks, China's new leaders have made solving industrial overcapacity one of their top priorities.

But market participants said the latest plan showed the government was running out of ideas in its battle with aluminium oversupply.

Reflecting China's overcapacity problem, official data showed that about 22 million tonnes of aluminium smelting capacity operated in July, out of more than 27 million tonnes of capacity in the country.

Although Beijing has ordered capacity cuts, analysts said China's aluminium output is expected to grow strongly as smelters expand in the northwest region of Xinjiang, where abundant coal makes power cost cheaper.

And the shaky track record of state aluminium companies looking for opportunities abroad will not inspire confidence in other aluminium smelters.

This week, top producer Aluminum Corp of China Ltd (Chalco) said it had suspended its first overseas smelter project, in Malaysia, due to global oversupply.

Two analysts said, however, that a push to shift capacity overseas could help a broader policy to boost the usage of China's currency in global markets, noting that investment abroad could be made in the yuan.

"The plan may link to the government's policy to internationalise the yuan, which Beijing has been pushing very hard," said Liang Lijuan, a Bejing-based analyst at COFCO Futures.