By Josephine Mason and Meng Meng

BEIJING (Reuters) - Beijing's city government ordered 1,200 factories near the Chinese capital, including a major oil refinery run by state oil giant Sinopec, to shut or cut output on Saturday after authorities issued the highest possible air pollution alert.

On Friday, China's environmental watchdog issued a five-day warning about choking smog spreading across the north and ordered factories to shut, recommended residents stay indoors and curbed traffic and construction work.

Red alerts are issued when the air quality index (AQI), a measure of pollutants in the air, is forecast to break 200 for more than four days in succession, surpass 300 for more than two days or overshoot 500 for at least 24 hours.

The Beijing Municipal Environmental Monitoring Centre showed an air quality reading of 297 by Saturday afternoon as haze started to envelop the capital, after an earlier reading of around 120. Levels in the 301-500 band are considered hazardous to health.

Traffic on the city's roads was lower than usual as residents complied with limits on car use and many of the city's 22 million residents sat out the haze at home.

"I'll just take a rest and not go outside," said Wang Jianan, a 23-year-old Beijing resident and teaching assistant.

With Christmas just a week away, others resorted to dark humour to help cope with the latest episode of toxic air.

One Beijing resident posted a cartoon on WeChat, China's mobile messaging platform, showing Santa Claus on his slay almost completely obscured by smog, saying: "I can't find China."

The city's municipal government said in a statement Sinopec's 10 million tonne-per-year Yanshan refinery, a Shougang Group steel product plant and a Cofco factory that makes instant noodles and crackers were among 500 companies it had ordered to limit output.

The statement also listed 700 companies that had been ordered to suspend operations altogether.

The national environmental watchdog was sending more than a dozen inspection teams to check that factories and heavy manufacturing plants were complying with the crackdown, it said.

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The hazardous air underscores the challenge facing the world's second-largest economy as the government battles pollution caused by the coal-burning power industry and other heavy industry after decades of breakneck economic growth.

The government's colour-graded warning system was adopted as part of its crackdown on smog.

More than 40 cities have issued warnings, with 22 on red alert, including top steelmaking city Tangshan in Hebei province around Beijing, and Jinan in coal-rich Shandong province.

In Shijiazhuang, Hebei's capital, the air quality reading was as high as 500. Steel plants there have been forced to cut output.

(Reporting by Josephine Mason and Meng Meng; Additional reporting by Natalie Thomas and Joseph Campbell; Editing by Paul Tait)