In a move designed to combat overcapacity in the steel sector, China will relocate some factories and encourage more companies to invest in overseas projects, said an official with the country's top planning agency.

Li Zhongjuan, an inspector of industrial planning for the National Development and Reform Commission, said the country will continue to optimize the steel sector through industrial transfers and directing capacity to areas with comparative advantages.

In the meantime, the NDRC will ratchet back new projects and take on existing outdated production through legal and market-oriented means, Li said at a recent conference of the China Iron and Steel Association.

She said authorities will create policies to boost domestic demand for high-end steel products and encourage steel companies to invest in overseas projects.

Miao Zhimin, deputy director of the raw materials department of the Ministry of Industry and Information Technology, also said at the conference that to support steel companies in their "going-out" strategy will be a key task for the MIIT.

"Overcapacity is now a universal phenomenon in the Chinese economy; some sectors are facing severe problems in waste and inefficient allocation of resources, which hinders industrial upgrading," she said.

Outdated capacity will face punitively high rates for electricity and water, Li said. A database will be established to provide early warnings of steel-making overcapacity. In a guideline published in mid-October by the State Council-China's cabinet, six provinces, including Hebei and Shandong, were targeted for the industrial restructuring of the steel sector. Together, they were asked to cut 80 million tons of steel production over the next five years.

Wang Guoqing, an analyst of iron ore futures with Beijing-based Lange Steel, said because of the surplus in steel production and low domestic prices, additional steel-making capacity may not be welcomed in other provinces either, so foreign countries will be a major direction for moving the capacity.

The price of steel is now on par with that of 20 years ago, while production costs have surged by five to six times, according to Liu Zhenjiang, vice-chairman of the China Iron and Steel Association.

"But China will not simply transfer its outdated capacity to other less-developed countries," Wang said, explaining that direct investment by companies will be a major part of such capacity relocation.

And it mainly will be undertaken by companies, because government-backed projects were shown to be less welcome and face more complex approval processes.

Moving more steel-making capacity overseas also will benefit domestic steel makers, Wang said. "China is now a net steel exporter, but Chinese products always face trade protectionism because of low production costs.

"To move both production and sales to overseas market will certainly lessen such trade frictions," Wang said.

Liu Yong, a researcher with the National Development Research Center, said project redundancy in different provinces is still an urgent issue. China needs an overall plan for the regional division of production.