Over the past decade, the growth of China's steel industry has dramatically outpaced market demand. For example, in 2008, China's total steel production capacity nationwide stood at 680 million tons, while the market only required 530 million tons.

This sort of blind expansion has crippled the steel industry. According to the China Iron and Steel Association, the domestic steel industry's profits hit 2.39 billion yuan ($380 million) in the first half of this year, down 95.81 percent year-on-year, while more than one third of the country's steel makers were operating in a deficit during the same period.

But, with the output of Chinese steel makers accounting for nearly 8 percent of the country's yearly gross domestic product, local officials haven't let mills cut their production.

Beijing needs to act decisively to reduce steel output and keep prices stable.

The author is He Zhicheng, an economist from Agricultural Bank of China.