Against a backdrop of steadily falling thermal coal prices across China, a coal boomtown in northern Shaanxi province, on the border with Inner Mongolia, now looks on the verge of outright economic collapse. A number of recent events, from the disappearance of several overleveraged local shadow lenders to the July 26 replacement of the county part chief, all portend the end of a speculative bubble built on the back of Shenmu County’s 50 billion tons of proven coal reserves. It is still unclear how far the effects of Shenmu’s crisis will reach. But the county offers a cautionary reminder of the increasingly fragile economic foundations of local governments across China at a time of slowing growth nationwide.
Seven years ago, Shenmu consisted of little more than a set of sleepy, largely unheard-of farming villages in northern China’s poor and heavily rural Loess Plateau region. Small-scale coalmines dotted the land, but poor transport infrastructure meant sales were mostly limited to local markets. Between 2007 and 2012, this changed dramatically as Beijing’s multitrillion dollar stimulus program drove Chinese coal demand — and prices — through the roof. Shenmu, home to between 18 to 23 percent of China’s total proven reserves, was transformed overnight into a coal miners’ and speculators’ mecca — second in extravagance only to Ordos, its Inner Mongolian neighbor.
Between 2005 and 2011, the price of coal from Shenmu rose more than ten-fold, attracting investment from a wide variety of mining operations. Leading the upper end of the pack was the state-owned coal conglomerate Shenhua Group, which currently operates the massive Shenfu Dongsheng coalfield straddling the border between Shaanxi and Inner Mongolia. Meanwhile, at the other end of the spectrum was a huge array of small-scale operations engaged in various forms of speculation tied — directly and indirectly — to coal. Especially popular was the practice of coalmine flipping in which coal speculators, much like their counterparts in real estate, would buy and sell mines simply as stores of value, skimming profits off the sales without ever touching the coal itself.
As long as demand and prices continued to rise, flipping mines proved highly lucrative. According to Caixin, a Chinese newspaper, a mine worth 200,000 yuan ($32,645) in 2002 could be sold for nearly 4 billion yuan in 2011. But when the price of coal began to drop in late 2011 and then plummeted throughout 2012 and into the first half of this year, the speculative bubble cracked. Suddenly Shenmu’s coalmine flippers and the entire informal financial infrastructure set up to support them — including several highly leveraged shadow lenders, who have since gone into hiding — found themselves mired in debts they could not repay. For the most part, these debts remain unpaid, even as locals who took part in such schemes demand their money back.
The worst effects of Shenmu’s bubble bursting will be felt within the county itself. The relatively localized nature of informal lending networks there makes systemwide contagion less likely, at least in the near term. Meanwhile, the region will continue to produce coal under the auspices of conglomerates like Shenhua. In this respect, Shenmu resembles Ordos, another classic Chinese coal town boom-and-bust story: dramatic but not game-changing on a national scale. Nonetheless, at a time of slowing growth across virtually all parts of China’s economy, the real risk is that Shenmu and Ordos become not exceptions, but the rule.