The merger of China's two major steelmakers, Baosteel Group and Wuhan Iron and Steel Group, has been approved by the State Council, the State-owned Assets Supervision and Administration Commission said Thursday.

Shanghai-based Baosteel Group, China's second-largest steelmaker, will issue new stock to shareholders of Wuhan Iron and Steel Group to absorb the other company, according to the merger plan announced Tuesday evening.

Last year, the crude steel output of Baosteel and Wuhan Iron and Steel was 34.94 million tonnes and 25.78 million tonnes, respectively. After the merger, the output of the newly merged company will exceed that of Hebei Province's HeSteel Group to rank first in China and become the world's second largest steelmaker, after ArcelorMittal.

Wuhan Iron and Steel was China's first giant steelmaker when it started production in 1958. Its listed arm posted a net loss of 7.5 billion yuan (1.1 billion U.S. dollars) in 2015, with total debts of 70 billion yuan.

The move is the latest effort by the Chinese government to cut steel overcapacity and continue the country's economic restructuring.

China is the world's largest producer and consumer of steel. The industry has long been plagued by overcapacity, which has become a major drag on China's growth in recent years.

Annual steel production in China is 1.2 billion tonnes, but the country aims to reduce steel production by 45 million tonnes in 2016.

China has shut down steel plants with a total capacity of over 90 million tonnes over the past five years and plans to reduce output by an additional 100 million to 150 million tonnes by 2020.

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