(Beijing) – China's top economic planner will unveil a policy in February aimed at cutting excess production capacity of crude steel by 100 to 150 million tons over the next five years, people with knowledge of the matter say.

The goal will be announced shortly before or after Spring Festival, the holiday also known as the Chinese New Year, which this year lasts from February 7 to 13, the sources said.

The National Development and Reform Commission (NDRC) and the Ministry of Industry and Information Technology, which co-authored the plan, had pushed for achieving the reduction in three years, but had to extend the period due to strong backlash from local governments, one person close to regulators said.

The source acknowledged that meeting the goal in five years will require overcoming "many uncertainties and difficulties."

The policy requires provincial governments to submit a plan for how much manufacturing capacity they will have steel firms trim, the sources said.

One of the sources, who participated in formulating the plan, said the NDRC wants proof that lower-level officials follow through, in part by videotaping the dismantling of facilities and equipment. In cases where factories will not be torn down, a court will be called upon to seal the properties and order utility companies to stop providing water and electricity to them, he said.

The NDRC plan will also have the Ministry of Finance give funds to local governments to help deal with the coming layoffs, another one of the sources said. The ministry will announce details of how it will make the payouts.

Cutting excess capacity is in line with the Chinese government's policy emphasis in the past few years and was listed as a top priority in guidelines for this year's economic policies set out by the Communist Party's Central Economic Work Conference in December.

The steel and coal mining industries were raised in the meeting as areas that merit special attention.

Steel factories around the country churned out 800 million tons of crude steel last year but could have made 330 million tons more, official data show. That means on average only 71 percent of existing manufacturing capacity was utilized.

The ratio in many developed countries where the steel industry is healthier usually falls into the range of 79 to 83 percent, analysts said. The NDRC policy aimed to increase China's ratio to 80 percent, the people close to the matter said.

Many steel factories in the country have struggled to make ends meet. Official data show that in the first 11 months of last year the industry's average profit margin stood at minus 1.99 percent – meaning that for every 100 yuan worth of steel products a firm sold, it lost nearly 2 yuan. The average ratio for all manufacturing industries in the country was about 5 percent, the data show.

Last year, firms tracked by the China Iron and Steel Association, an industrial organization, reported a net loss of 64.5 billion yuan on combined revenue of 2.89 trillion yuan. This compared with a profit of 22.6 billion yuan in 2014, underscoring the challenges the industry faces amid deteriorating market conditions.

Many local governments have shied away from closing loss-making steel firms because they fear it will leave too many people unemployed, said the source who participated in drafting the NDRC's plan.

In fact, he said, it was not uncommon for local officials to go out of their way to protect a big company from collapsing even if it meant wasting money.

(Rewritten by Wang Yuqian)