Plunge In Global Coal Prices Threatens To Trigger Financial Crisis In Northern China’s Coal-Producing Counties

A steep fall in the price of coal, which has led to a drop in miners’ profits, may put China’s coal-producing regions in jeopardy and precipitate a gradually worsening downturn in the Asian economic powerhouse.

After reaping the benefits of the commodities boom of the last decade, Shenmu, the largest county in China’s coal-producing heartland, Shaanxi, could be headed for a financial crisis, stemming from a credit crunch, which has caused undue delays in construction projects and impediments in a local government-funded health insurance scheme, while bankers desert the region, Beijing-based Caixin Online reported.

The city of Ordos, in Inner Mongolia’s autonomous territory, which used to be one of the richest cities in China, has also been hurt by the nationwide slowdown, made worse by the slump in coal prices.

Among 27 provinces in China that produce coal, the northern province of Shaanxi and Inner Mongolia hold the majority of China’s easily-recoverable coal reserves and contain almost all of the large state-owned coal mines.

“Both Shenmu and Ordos used the development model of over-reliance on natural resources, which is not sustainable, so now they are suffering a painful transition,” Tian Yun, chief of Macro China Information Network, a Beijing-based think tank told the Global times, in July, noting that other local governments would do well to understand that a well-balanced industrial structure is crucial for sustainable development.

The impending economic crisis in Shenmu is widely attributed to its reliance on private lenders, who promise high returns on deposits, by lending money at high rates to businesses. But, as the slowing economy hurts businesses, such private lenders find their business models unsustainable.

Private, unregulated lenders, widely used by small businesses to raise funds and by depositors to earn high rates of interest on their funds, do not follow the government mandate that the interest rate should not be more than four times the interest rate offered by commercial banks.

And, because of a slump in coal prices, business at such lending agencies is suffering, and in turn, hurting depositors who are not receiving interest on their funds. And, local businesses that rely on such lenders for funds are suffering too.

Shenmu’s realty market also has taken a hit from the financial downturn, with housing prices dropping significantly since April 2013, and many new or un-finished apartments have been seized from owners unable to repay their debt.

The hurting local economy has led to social unrest in Shenmu, resulting in the ouster, on July 26, of Lei Zhengxi, the county's Communist Party secretary, following rumors that the government was planning to stop free medical services to offset growing fiscal deficit.

China is the world’s largest consumer and producer of coal and holds the world’s third-largest coal deposits -- representing about 13 percent of the world's total coal reserves -- after the U.S. and Russia, according to the World Energy Council.

As financial troubles grow in the coal-producing provinces, they are increasingly finding it difficult to manage the problem after a crackdown by the central government to rein in the increasing debt burdens of provincial governments, which have borrowed heavily for housing, commercial, transportation and infrastructure projects, without the desired results expected from these projects.

The central government, which faces increased pressure to reduce industrial pollution by cutting coal consumption, also has been attempting to regulate coal-mining to control environmental damage and to cut the damage inflicted by a slump in global coal prices.

And, in the first quarter of 2013, only seven coal mines in Shenmu were functional, after work was suspended at 42 mines, the Global Times reported.