China's Sichuan Coal Group, a provincial state-owned enterprise, is just one in a sea of small to middling Chinese coal businesses on the perpetual verge of bankruptcy. The company announced July 27 that it had completed a nearly 1.06 billion-yuan ($159.5 million) bond payment that it had missed in June, a rare piece of positive news from an industry battered by sluggish demand, low coal prices and the central government's increasingly stringent attempts to cut excess capacity. But Sichuan Coal's payment, which averted a bond default, hardly augurs an upswing for the industry that has powered China for a century and that still supplies 64 percent of the country's energy mix today.
On the surface, China's coal industry in some ways appears to be doing better this year than last, when 80 percent of coal mines were unprofitable. Coal prices, though nowhere near their 2010-11 peaks, have climbed by 7 percent so far in 2016. But profitability and prices are rising not because demand is strong but because supply is tight. In June, Chinese raw coal output was down by 15 percent, measured year-on-year. Meanwhile, investment in coal assets has plunged by 34.1 percent in the first half of the year. During the same period, power demand from heavy industry, which accounts for the vast majority of nationwide power use and coal demand, rose by just 0.5 percent year-on-year. China's coal sector is contracting, and supply is tight because miners have stopped mining.
For China's leaders, these developments are at once fortuitous and ominous. For well over a decade, the central government has struggled with increasing vigor but no more success to consolidate the notoriously fragmented coal industry. Now, the growing threat of bond defaults and restricted supply suggest that market forces are starting to do what government initiatives largely could not. At the same time, these developments also portend higher rates of joblessness in the months ahead. The central government in recent years has grown more tolerant of unemployment for the sake of accelerating economic reforms. But local governments, which must deal with the social, political and economic fallout from job loss, rarely share that tolerance. For most local officials, preventing unrest is the single most important task since failure to do so almost automatically bars officials from advancing professionally. And as Chinese authorities have learned, stable employment is the best means to avoid unrest. Though macroeconomic conditions finally favor Beijing's vision of a consolidated coal sector, local politics in many places do not. In China, where political imperatives often overpower market dictates, resolving that discrepancy will take more than pronouncements from the central government. It will require reworking the incentive structure for local governments and dealing with the results.
