China National Cereals, Oils & Foodstuffs Corporation (COFCO), the country's largest oil and food producer, is planning to build a soybean-processing plant in South China's Guangxi Zhuang autonomous region with a capacity of 1.2 million tons a year.

Sources familiar with the 1.85-billion-yuan project said construction is likely to start in September in Qinzhou, in the Beibu Gulf economic zone.

This is the second big soybean-processing factory built by COFCO. In April it opened a 4-billion-yuan oil-pressing project in Tianjin.

China's major edible oil producers, including Sinograin Oils & Fats Industrial Co and Jilin Grain Group, have also lined up plans to open new factories to boost capacity.

Overcapacity in the soybean-processing industry has become a chronic problem, distorting normal trading prices, Liu Denggao, deputy secretary-general of the China Soybean Industry Association, told China Business News.

To curb overcapacity in soybean oil production, the National Development and Reform Commission issued guidelines in August last year which have been ignored by the producers, said Liu.

Technical entrance criteria for the industry is still low and so are labor costs, said Wu Xiaodan, analyst, Everbright Securities.

Soybean and oil prices are experiencing a downward adjustment because of the global financial crisis, but the "demand elasticity" of oils is limited as consumers still need oil to cook, said Wu.

Almost all the new factories are located at seaports, allowing the easy delivery of cheap, imported genetically engineered soybeans for sale to both domestic and overseas markets.

"Overcapacity is a paradoxical topic now," said a sales manager of COFCO who declined to be named. "There are still potential markets for packaged refined oils in small cities and towns where many people are still using raw oils."

Per-capita edible oil consumption is 14.5 kg a year in China.