SHANGHAI — The Chinese government is pushing for a drastic shakeout of the country’s overcrowded solar cell industry, supporting only a quarter of players and practically telling the rest to get out of the business.

The Ministry of Industry and Information Technology has announced a list of 134 producers of silicon materials, solar panels and other components of photovoltaic systems as meeting certain conditions, as measured by 2012 production, capacity utilization and technical standards.

In a sector said to have more than 500 companies, the ministry’s move means that three-quarters didn’t make the cut — including the core subsidiary of Suntech Power, which went bankrupt in March, and Jiangsu Shungfeng Photovoltaic Technology, Suntech’s startup rescuer.

These firms will not be able to get credit lines from financial institutions and thus will have a tough time borrowing, according to industry insiders. They will also no longer be eligible for refunds of export tariffs, a huge blow to companies that depend on overseas business. On the home front, it will be difficult for them to participate in state-run utilities’ auctions, sharply curtailing their opportunities to win orders.

“This will help eliminate the industry’s excess capacity,” says Jian Xie, chief operating officer of leading cell maker JA Solar. “The list will be reviewed every six to 12 months based on business development and technology standards.”

China’s photovoltaic industry has been facing stiff headwinds since 2012 amid slowing demand in Europe, the world’s largest market. The country’s trade friction with the U.S. and Europe is not helping, either. Even Suntech, which became the world’s top solar cell producer at one point, saw its core subsidiary go under. Midsize businesses are staying afloat only because of support from local governments.

Rays of light peeking through

But the market is finally showing signs of life of late. Yingli Green Energy, the world’s largest player, reported a 60% year-on-year jump in sales for the July-September quarter, while Trina Solar swung to the black on a net basis.

The average solar module price tumbled in the April-June and July-September quarters of 2012, but the decline was milder than 1% during the same period this year, according to U.S. market research firm NPD Solarbuzz. Shakeouts in the U.S. and Europe, including ailing German firm Q-Cells, gained traction, relieving oversupply.

Global demand rose to a record 9 million kilowatts in the July-September quarter of this year amid growth in China, Japan and the U.S. A Solarbuzz analyst sees demand jumping 30% from this year’s projected level to reach 45 million kilowatts in 2014.

In China, markets offering high margins tend to attract scores of entrants, often resulting in oversupply situations. The government has declared excess capacity in several other industries, including steel, cement and shipbuilding, and is calling for consolidation.

But it’s unusual for the government to weed out weak-performing players and hinder their continuation. The focus going forward is on whether the same scheme will be used in the steel and other sectors that are dominated by state-owned companies backed by municipal governments.