China makes more than half the world's steel but a slowdown in its economy and sagging global demand has left the industry with massive excess capacity.
It has been accused of dumping its production on world markets, depressing prices and violating international trade agreements.
Throughout 2016, authorities vowed to tackle excess production through consolidation and shutting idle or inefficient factories.
But while some steel capacity was cut, this was more than offset by China's opening of new factories or restarting of idle plants, according to a report by steel consultancy Custeel and Greenpeace East Asia.
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Eighty per cent of this increase occurred in three provinces bordering Beijing, causing air pollution to spike in the capital at the end of the year and early 2017, it added.
Steelmaking is the country's second largest emitter of air pollution, the report said.
Nearly three-quarters of plants affected by China's capacity cuts in 2016 were already idle.
Instead of shutting down firms, local officials manoeuvred to "shield zombie steel mills and minimise the impact of the policies" on cutting capacity, said Lauri Myllyvirta, Greenpeace global coal campaigner.
Earlier this month the US Department of Commerce imposed hefty tariffs on certain Chinese steel imports, with duties ranging from 63 per cent to 190 per cent on Chinese exporters accused of selling their products at below fair value or of being unfairly subsidised.
In January the European Union unveiled taxes of between 30.7 per cent and 64.9 per cent on certain Chinese steel products as it seeks to protect struggling steelmakers in Europe.
Factories should be demolished and not sealed up to prevent their reopening in the future, it said.
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