Joerg Wuttke, President of the European Chamber of Commerce, presented their report on China’s overcapacity in Beijing on Monday, Feb. 22, 2016. [Photo:CRIENGLISH.com/Xu Yaqi]

The latest report from the European Union Chamber of Commerce in China has suggested that the Chinese government should do more when it comes to cutting industrial overcapacity.

The report released on Monday also said that China's crude steel sector is facing a tougher situation than other overcapacity-ridden industries in the country.

As the world's biggest steel producer, China generates over half of global output every year, or more than twice the combined output of the next four leading steel makers: Japan, India, the United States and Russia put together.

It's estimated the country's steel output for this year will reach 1.2 billion tonnes, but only half of this can be used.

One of the priorities of the Chinese government is to eliminate outdated capacity in the industry, but so far efforts to achieve this don't seem to be paying off, largely due to regional protectionism.

In many cases, local steel makers have even expanded their production levels to avoid being shut down.

Joerg Wuttke, President of the European Chamber of Commerce, has suggested more financial support on the ground locally might be a better choice when it comes to solving such regional concerns.

"Why do local governments support companies beyond their shelf life? Because they don't have enough money. They are worried about loss of business. They are worried about unemployment. So they keep going. So Beijing has to fiscally put the local government in a position that they have the money to serve the social obligations they have."

The new report comes around seven years after the chamber published its original report on this topic.

It provides a detailed examination of the causes and consequences of overcapacity in eight key industries and analyzes the developments that have taken place over the past years.

Wuttke also says apart from regional protectionism, weak regulatory enforcement has also played a role in hindering policy implementation.

"Very good laws coming from central government, the laws in most cases are tougher than Europe. Than you look around locally. Local governments see things in another way. And companies keep polluting. It's getting covered up in many ways."

The report provides 30 recommendations that should be taken to address the deep-rooted problem, including cutting expenditure in industries with excess capacity; expanding dividend payments by state-owned enterprises to reduce unneeded expansion; and the further opening up of the service industry to reduce the reliance on industries with overcapacity.

In the latest step to address steel overcapacity, China's State Council has released a policy outline aimed at cutting steel production by up to 150 million tonnes over the coming five years.

At the same time, the Ministry of Land and Resources has said it will control land used for new coal and iron and steel projects in 2016.

European Chamber of Commerce president Joerg Wuttke said tackling overcapacity is now more urgent than ever, and the worst thing that can happen, is that nothing is done at all.

But he also said European Union companies would be more willing to invest in China if the country's overcapacity problems are reduced.