Despite a potential steel glut, the Chinese government has approved plans to build two new steel plants in an effort to stave off an economic slowdown.

Writing for the Wall Street Journal, Bob Davis explained:

Premier Wen Jiabao said Tuesday the government's primary task is to promote investment. Although policies to stabilize growth 'include stimulating consumption and diversifying exports,' he said in a statement posted on the government website, 'currently the main task is to promote reasonable investment growth.'

To do that, Beijing is turning to giant state-owned companies that hold monopolies in energy, construction, steel and banking. It recently approved construction of two new steel plants despite a world-wide steel glut. It also has increased the pace of approval for wind-power projects, although that industry, too, is plagued with overcapacity.

Davis cites the view of economists who think China should switch to a consumption-led growth model, as worldwide demand for Chinese-made products is declining.

There is widespread agreement both inside and outside China that if the country is going to reach the ranks of wealthy nations, it must look less to exports reliant on cheap labor and focus more on innovative economic activity involving branded goods and advanced services aimed at domestic consumers.

The state-owned Baosteel Group will move ahead with the building of an $11 billion steel plant, a project the company had initially intended in 2008, but decided against amidst concern that it would lead to steel overproduction.

To account for the existing steel glut:

Baosteel said it would help China restructure the industry by eliminating less-productive plants but didn't comment on how much capacity it would cut or where.

Chinese workers at existing steel plants are not convinced that will happen. Davis quoted one:

'These are just rumors. They can't cut a huge amount of people here—it would affect the whole economy."

Read more here.

Photo of Baosteel by Flickr user Erik Charlton, used following Creative Commons license guidelines.