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How China’s bid to curb coal output has backfired, encouraging production and increasing mining accidents

Government efforts to curb coal production capacity in China have backfired, according to analysts, driving up prices, encouraging production and increasing the risk of mining accidents in the rush to produce more of the fuel.

A rise in electricity production last month, mainly produced by coal-fuelled power stations, is also contributing to the smog smothering much of the north.

The government wants to reduce the amount of coal produced as part of attempts to reduce the economy’s previous reliance on heavy industry and cheap manufacturing in favour of the service and high-technology sectors.

The curbs in coal production, however, have led to shortages of the fuel and a rally in prices, encouraging higher production.

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Beijing’s failure to keep a lid on coal prices and the wide swings in the market reflect the inherent contradiction between state planning and a market economy, analysts said. The government has taken control of the industry to a level rivalled only by the days of the command economy decades ago.

China’s economic planning agency directly decides how many days large coal mines can operate, but the government often finds itself behind the curve, forced to encourage output when oversupply is great and squeeze supply when demand picks up.

Larry Hu, the head of China economics at Macquarie Securities, said the National Development and Reform Commission was working in vain to accomplish two opposite goals.

If it continues to cut capacity, the price rally will probably continue. If it wants to keep a lid on prices, efforts to reduce capacity must be shelved. “In essence, it’s not a market-driven economy but a planned one,” Hu said.

Beijing has set a target of eliminating 250 million tonnes of coal output in 2016 and said in the first nine months of the year it had shut down more than 1,600 mines.

The closures, however, helped spark a rare price rally.

The benchmark steam coal price at Qinhuangdao, the country’s major coal port, has doubled from a year ago. The rally encouraged many private coal mines to restart idled pits, sometimes illegally, and to dig deeper and faster to fill trucks waiting at their gates.

The hastened production has come at a human cost. An accident at an “illegal” mine in Liaoning province killed at least 11 in July. Two months later another accident occurred in Ningxia, killing at least 18 miners. Two weeks ago, an explosion at a small mine in Chongqing killed 33 workers, according to the nation’s production safety watchdog.

As coal prices rise, mine owners have a strong incentive to reopen facilities “leading to a noticeable increase in coal mine accidents”, the State Administration of Work Safety said after the Chongqing accident. An investigation found the mine had dug in areas it was not permitted to in an effort to extract more coal.

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The fuel is in such strong demand partly because Beijing abruptly stepped up efforts to limit production in July after the economic planning agency found that less than 30 per cent of its annual coal reduction target had been achieved. By the end of September, the agency declared 80 per cent of the yearly target had been met.

China’s output of coal dropped 12 per cent in October from a year earlier, according to data from the National Bureau of Statistics on Monday.

At the same time, however, electricity output rose eight per cent with thermal power generation, a major consumer of coal, up 11.9 per cent.

The agency was also caught off guard by the price rally. Over the past two months, it has held meetings with managers and bosses from state-owned coal mines on a weekly basis telling them to work longer hours to produce more coal and bring down prices despite the strong demand.

The agency has acted as an energy matchmaker, encouraging mines and power plants to sign “long-term supply contracts” to stabilise prices. It also forced an industry website to suspend the publication of a daily coal price index, which had pointed to strong price growth.

Xu Kunlin, a economic planning agency official, said at a press conference last Wednesday that the market had temporarily lost its sanity but economic planners remained rational.

“We must have a clear understanding of the recent price rises. It’s a result of temporary demand change fuelled by speculative individuals,” Xu said. The price rally “contains irrational elements and is not a long-term trend”, he added.

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The government could well be right. A market crash took place in coke and coal futures trading in China on Friday evening on reports that the government will investigate speculative trading.

Fu Minjie, an associate professor at the National Academy of Economic Strategy, said it may be wrong to solve an economic problem by relying on government officials and state firms answering to government commands instead of relying purely on market forces.

“Overcapacity reduction, ultimately, is a political assignment,” he said.