OREANDA-NEWS. China's central bank the PBOC has ordered lenders to cut back on issuing credit to lossmaking steel and coal firms, as well as those that use polluting production equipment and are uncompetitive.

The PBOC issued a series of guidelines for banks in support of the government's plans to reduce excess capacity in the steel and coal sectors.

Banks will strictly control loans for any capacity expansions. Steel mills are already been barred from adding new production capacity that has not been previously approved, under rules introduced in 2013.

It is unclear whether the restrictions will affect lending to large state-controlled steel mills such as Baosteel and Wuhan Iron & Steel, which are building new plants in south China.

But banks will also step up efforts to ease credit problems faced by solvent steel mills, such as by extending loan repayment periods and restructuring debt. And banks will dispose of non-performing assets in the coal and steel sectors by "comprehensively" using debt restructuring, writing off bad loans and reaching bankruptcy settlements, the PBOC said.

The financial sector will help absorb laid-off employees from steel and coal firms and extend loans to affected workers who want to start their own businesses.

The Chinese government says its push to cut production capacity in the steel and coal sectors is expected to result in the loss of 1.8mn jobs over the next five years.