"Excess capacity is a common market phenomenon, which will have the consequence of driving out the worst enterprises while companies that have advantages will survive," said Chen Naixing, a researcher at the Institute of Industrial Economics of the Chinese Academy of Social Sciences.

Chen added that the government is trying to control the situation, but the problem will eventually be resolved by the companies themselves as they restructure and modernize.

At the meantime, companies in the target industries are struggling with falling production.

"Most small and medium-sized steel companies are experiencing their toughest times, with profits at the lowest in the past three years as market demand and prices keep declining rapidly," said Wu Yue, a manager at Shanghai Zaiwang Steel Co Ltd.

In April, the company cut output by about 15 percent, and it's desperately waiting for a market recovery.

"The government's tightening of credit for infrastructure construction has curbed the start of new projects, which directly cuts demand for raw materials, especially steel," said Wu.

Wu added that an effective solution is to encourage mergers and acquisitions in the industry, which will improve market concentration and competitiveness.