China said on Friday it would cut off credit to force consolidation in industries plagued by overcapacity as it seeks to end the economy's dependence on extravagant investment funded by cheap debt.

In a statement from the State Council, or cabinet, Beijing laid out broad plans to ensure banks support the kind of economic rebalancing China's new leadership wants as it looks to focus more on high-end manufacturing.

President Xi Jinping and Premier Li Keqiang have flagged for some time that the rapid growth of the past three decades needs to shift down a gear, and analysts said Friday's announcement was a signal that they intended to press on with reforms despite evidence of a sharper-than-expected slowdown.

"The guideline shows China's policymakers will focus more on economic restructuring to stabilize the economy rather than providing more liquidity to support economic growth," said Li Huiyong, an economist at Shenyin Wanguo Securities in Shanghai.

The slowdown in the world's second-largest economy has started to put pressure on some businesses.

On Friday, China Rongsheng Heavy Industries Group, China's largest private shipbuilder, appealed for financial help from the government and big shareholders, after cutting its workforce and delaying payments to suppliers.

Analysts said the company could be the biggest casualty of a local shipbuilding industry suffering from overcapacity and shrinking orders amid a global shipping downturn. New ship orders for Chinese builders fell by about half last year.

The State Council said it would ensure credit kept flowing to businesses that it thought had competitive products, but it would work with banks to oversee a gradual winding down of other businesses.

"The government will adopt differentiated policies based on the varied situations in the industries plagued by overcapacity," it said.

It did not mention any specific industries or companies and there was no suggestion it was referring to Rongsheng.

CASH CRUNCH

Friday's announcement was the latest sign that China's policymakers are determined to bring debt-fuelled expansion under control, after the central bank allowed a cash crunch last month that sent short-term lending rates to record highs.

Ma Tao, an analyst with CEBM Group, an institutional investment research firm in Shanghai, said sectors such as construction materials, steel and aluminum suffered from overcapacity, as well as high debt and financing costs.

"The recent credit crunch also served as a catalyst for their cash flow problems to emerge as liquidity has not been eased," said Ma.

The State Council also said that, in future, so-called wealth management products issued by banks would have to be linked to specific projects, rather than being mixed together with banks' other pools of credit.

Such a move would prevent some of the riskier lending practices in the shadow banking market that the central bank has been trying to address.

Explosive credit growth, particularly in the opaque shadow banking system, is seen by analysts as one of the biggest risks to China's economy, along with a frothy property market and the run-up of debt by local governments.

Underlining the last of those risks, a senior official said on Friday that the government did not know precisely the extent of local governments' debt, and warned that it could be more than previous estimates.

Estimates of local government debt range from Standard Chartered's 15 percent of the country's GDP at end-2012 to Credit Suisse's 36 percent. Fitch put the figure at 25 percent when it downgraded China's sovereign debt rating in April.

Vice Finance Minister Zhu Guangyao said China had not released official figures since a 2010 auditing report that put local government debt at 10.7 trillion yuan.

"Currently, [according to] nationwide surveys, I think this number will rise," Zhu said, defending the debt as mostly geared toward fuelling infrastructure projects.