Lithium-ion batteries are a form of rechargeable energy storage used in everything from electric cars to scooters, laptops and motorised wheelchairs.
China is the world's largest lithium battery market, accounting for some 57% of global demand in 2022, according to the Economist Intelligence Unit.
The country's exports have also risen sharply in recent years, including a 33% on-year jump in 2023, according to state media reports.
Guidelines issued by the Ministry of Industry and Information Technology on Wednesday -- which will not be legally binding and are instead aimed at "encouraging and guiding" the sector -- stressed that lithium battery companies must avoid "projects that purely expand capacity".
They should instead "strengthen technical innovation, raise product quality and lower production costs", the document said.
The guidelines also urge firms against building production facilities on protected farmland or ecologically important areas.
Existing factories in protected areas should be shut down or "strictly control their scale and gradually move away", according to the document.
The ministry also called on companies to obey national workplace safety laws and comply with existing product standards.
Foreign officials have warned that with Chinese government support creating more production capacity than global markets can absorb, a flood of cheap exports in key sectors including renewable energy and lithium batteries could hurt industries elsewhere.
Beijing has hit back at Western fears, with Chinese President Xi Jinping this week telling European leaders the "so-called 'problem of China's overcapacity' does not exist either from the perspective of comparative advantage or in light of global demand."
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