05.11.2021
Along with the growing shortage of coal supplies, China faces an energy crisis that is not only impacting China’s economic performance but is also having a detrimental impact on global value chains. It is also reshaping China’s ambitious plan to become a global leader in “green development”. Putting international consequences to one side, let us look at the two main aspects in the country’s domestic affairs which are contributing to what is fast becoming an economic and reputational conundrum: firstly, inter provincial relations in the energy sector, and secondly, the possible rebirth of the early 2000s phenomenon – namely mei laoban – the “coal boss”.
Domestic crisis in energy
China is facing its worst power crisis in years due to a coal shortage. As reported by “Forbes”, over 100 mines have received approval to expand production, with a possible 55 million tons of coal to be mined in the fourth quarter. Moreover, in Inner Mongolia officials have ordered more than 70 mines to increase production by 100m tonnes, while Shanxi has promised to supply coal to 14 regions across the country. In contrast, the southern province of Yunnan has opted to limit aluminum production by almost 30 per cent. As the Lantau Group points out, the biggest energy problem is in the Northeast (Heilongjiang, Jilin, Liaoning). Other provinces which are experiencing electricity supply issues are Shandong, Anhui, Henan and Zhejiang, along with the two inland provinces of Hunan, and Guizhou where the local government is rationing power by cutting off electricity for three out of every ten days.
On top of this, in order to keep societal stability, winter heating is given priority by the central government. The share prices of coal mining companies such as China Coal Energy and Shanxi Coking Coal Energy have nearly doubled in 2021 as prices hit record levels – to quote Ariel Cohen.
Apart from opening more domestic production plants, the Chinese government needs to actively look for external sources. The example of the actions taken by the Jilin government illustrates the gravity of the situation. After they recognized that the local economy faced a crisis, Jilin province sent a special envoy to Inner Mongolia to negotiate coal contracts, while the local government promoted coal from Russia, Indonesia, Mongolia. Moreover, the banning of Australian coal imports, following tensions between the two countries, has further exacerbated the crisis. Although this issue is political and not economic by nature, it has still put the brakes on China’s ambitious plans to be a leader in green technologies.
The role of provinces: Yunnan-Guangdong relations
So, with China facing an energy crunch, the question is who is responsible for mitigating the problem? The answer, provincial and local governments. This brings us back to the logic of Chinese development: horizontal competition is the key factor behind this process. From the perspective of China’s domestic energy market, two issues should be mentioned: namely the instability of new energy power sources (renewable sources) and the change in the pattern of power transmission from west to east (xi dian dong song 西电东送). In the past, western China was perceived as a regional backwater and merely an energy base for eastern China, which provided sufficient energy resources to secure the coastal areas’ economic development. But today this is no longer the case.
Relations between South-West Yunnan and the coastal province of Guangdong serve as the best illustrative example. After 2018, due to cheap energy prices, the Yunnan provincial government addressed the importance of heavy industry for the future economic growth of the province. They have introduced improved conditions and incentives for companies in aluminum and silicon material production. When the China Aluminum Group and Weiqiao Group Production commenced production, it led to a sudden increase in electricity consumption in the province, with a peak electricity demand of as much as 150 billion kilowatt-hours. This affected the grid’s eastward transmission capacity. Yunnan, which exports more than half its power, cut back on the amount it sent to the province of Guangdong, according to energy tracker Wood Mackenzie. At the same time, from January to May 2021, electricity consumption in Yunnan Province increased by 23.3% year-on-year. However, the amount of electricity exported increased by only 0.4% year-on-year. Predictions regarding power supply are rather pessimistic. According to Chinese sources, power supply and demand in Yunnan Province will be tight in 2023, should balance out in 2026, but may not be in surplus until 2030.
Furthermore, due to the impact of the pandemic, a large proportion of the province’s ‘west-to-east power transmission’ has also been limited. This has now become an important problem for the southern Chinese province. One-third of Guangdong’s electricity relies on power production from the west of the country. The increasing demand and the decline in local power generation capacity, coupled with growing consumption in western China has caused supply and demand problems in Guangdong, which is especially felt in the summer months due to air conditioning and refrigerators.
According to “Wall Street Journal” Guangdong had almost 14 gigawatts of coal-fired plants on its priority-development list—one of the highest totals in China. But this September, after reprimands from Beijing, Guangdong stopped the new coal-fired plant construction in the Pearl Delta River region. As a consequence, Guangdong is among those provinces in China that have faced power outages. The province urgently needs energy in order to keep its status as the 12th largest economy in the world.
The possible rebirth of mei laoban from Shanxi
From a provincial perspective, the approval to expand coal production could result in the rebirth of the "Coal boss" – mei laoban, the phenomena of rich investors that made their fortunes by speculating on the price of coal. In Shanxi, involvement of private individuals in the coal industry began in the late 1980s. At that time, coal was regulated by the government. Coal prices had been low for a long time with state-owned key coal mines losing money. However, in 2002 the country abolished coal price controls in favor of a market-oriented model. In the following years, the price skyrocketed from 129 yuan per ton in 2000 to 330 yuan per ton in 2007. The people who invested their money in coal became rich overnight. According to the "2017 Hurun Wealth Report", as of 2017, the number of households with 6 million yuan in assets in Shanxi Province totaled 49,000, and the number of households with 6 million yuan in investable assets was 17,200. To put it simply, coal was good business.
However, since the central government started a “zero emission” campaign, Shanxi’s provincial government has been following directives to close, merge and modernize old and inefficient mines, shutting some 30% of the province’s coal-production capacity since 2016 and restructuring seven state-owned coal giants. Coal-related employment has fallen by more than a quarter to just over a million people during this period.
We need to acknowledge, however, that the coal mining industry still accounts for around 5.6% of Shanxi’s employment, 17% of economic output and around two-thirds of the tax revenue paid by large companies.
So local officials don’t have much incentive to change things on the ground. According to the “Wall Street Journal”, a 2019 World Bank proposal to spend $350 million on accelerating Shanxi’s transition to a more diversified economy that is less dependent on coal has not been taken up. Indeed Shanxi is proposing to build even more coal-fired power plants to increase its electricity exports to other parts of China. This suggestion should be enthusiastically received by local entrepreneurs from Shanxi, with the potential for a new “coal boss” generation to once again make its mark in China. Based on their experiences from the early 2000s, these local businesspeople may possibly be able to utilize the same illegal measures to make fortunes.
Going beyond this speculation, the critical issue for the government in Beijing is how to resolve the dilemma between the growth of power consumption in the west of the country and the ability to export power to provinces in China. In addition, the central government faces structural problems caused partly by strict restrictions on power investment in the east. However, the development of western China might be in line with Beijing's economic policy. Once Xi Jinping announced the Belt and Road in Astana, the majority of western provinces took this as a signal to develop their own economies. This is reminiscent of China under Mao when the inland had priority in economic development, while the coastal areas, to a certain extent, were left to languish. However, one thing is certain. As in the past, once the central government decides on a policy, it's down to the local governments to carry it out and it's the provinces which decide if a policy interferes with their number one priority, economic growth.