Jan 15, 2015 | 18:35 GMT

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China's New Coal Tax Will Affect Regions Differently

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China's New Coal Tax Will Affect Regions Differently

On Jan. 1, China instituted a new value-based tax on coal production to be implemented nationwide at a variable rate of 2 to 10 percent per ton. The tax is one of several fiscal reforms Beijing has put forward to ease local governments' reliance on land sales for revenue generation. That reliance helped drive China's post-2008 housing construction boom, but now, as home prices and sales fall steadily, it threatens local governments across the country with financial insolvency. Along with pilot programs in municipal bonds and property taxes, value-based resource taxes are meant to give local governments new ways to raise capital while unwinding the political and economic incentive structures that generated the worst excesses of China's government investment- and construction-led growth model.

With the new coal production tax, provinces and regions are allowed — at least officially — to decide their own rates. According to a Jan. 5 report from Reuters, most provinces opted, unsurprisingly, for a tax rate between 2 and 3 percent in an effort to relieve some of the pressure on local coal businesses already suffering from weak demand, high inventories at power generators and stiff competition from overseas suppliers. Notably, however, Inner Mongolia, Shanxi and Shaanxi, which collectively account for 65 percent of China's roughly 3.7 billion metric tons of annual output, set their rates much higher — at 8 percent, 9 percent and 6.1 percent, respectively.

The impact of the new tax will likely be muted in the first few months of 2015 as Chinese authorities struggle with enforcement and troubleshooting. Even when fully in place, the tax is unlikely to alter core conditions for coal mining companies and local governments in most regions. The 2 to 3 percent taxes in place in the majority of coal producing provinces could add 4 to 12 yuan per ton, and for producers selling coal on annual supply contracts to power generators, this could cut into earnings. But for the most part, the tax will not boost costs substantially above present levels or, for instance, force producers to sell at a loss to power generators, which account for more than half of the final coal demand in China. The tax also will not render Chinese coal uncompetitive with comparable Australian supplies.

The consequences of higher tax rates in Inner Mongolia, Shanxi and Shaanxi are potentially further reaching, but even so the effects of the new tax will vary substantially between and within regions. Large and inexpensive producers such as Shenhua will remain competitive with all but the cheapest overseas suppliers, and average mine mouth prices at its major fields in Inner Mongolia and Shanxi are not likely to exceed 150 yuan per ton even after a 10 percent tax. But for smaller producers with average production costs closer to 400 to 450 yuan per ton, a tax of 6 to 9 percent could boost the price anywhere from 24 to 40 yuan per ton. Even with a tariff of 3 to 6 percent on coal imports, that is easily enough to make coal from inland Shanxi or from Shaanxi uncompetitive with supplies from Australia in markets such as Guangdong or the Yangtze River Delta.

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