China Economy

The chill wind blowing through China’s ailing coal industry

PUBLISHED : Tuesday, 05 January, 2016, 3:21pm
UPDATED : Monday, 30 May, 2016, 5:09pm

It was not until December, about a month later than usual, that the first snowstorm alert was raised in Hegang, a city in the north of Heilongjiang province in northern China. Yet its people had been feeling the cold long before then – from a chilly wind blowing through the regional economy.

Lao Xie, an equipment maintenance worker at a coal mine, needed to wait until early December to get his 2,000-yuan (HK$2,388) pay cheque from August. Despite the wait, finally receiving it gave him some relief.

“It is quite normal for payroll delays. Some of my colleagues haven’t been paid for eight months,” said Xie, 52.

He said there was little work at the coal mine, adding that he sometimes took part-time jobs such as bricklaying to earn extra money.

Xie and his colleagues work for the Hegang unit of the Heilongjiang Longmay Holding Mining Group, the biggest coal enterprise in China’s northeast. Unfortunately for them, it is also one of the biggest loss-making coal producers in the country.

READ MORE: Cooking the books: Government officials in China’s ‘rust belt’ falsified economic figures

The coal sector was among the most severely hit industries in the northeast as China’s old rust belt took a beating from the economic downturn, confronted by excess capacity, falling prices and weak demand.

Hegang, home to 1.09 million people and heavily reliant on coal mines, has acknowledged its fiscal situation was “unprecedentedly severe” and difficulties were “out of expectations” due to the downturn in the coal industry.

Coal prices fell to 200 yuan per tonne. It is even cheaper than potatoes, but still we cannot find enough buyers
Sun Jin, coal miner

Fiscal income fell 20 per cent to 1.08 billion yuan in 2014, dragged down by a near 60 per cent drop in corporate income tax. Business tax receipts fell 30 per cent and value-added tax receipts 20 per cent, according to government data.

“They were hard days even for government employees. Some of them were told that they could only [be on the payroll] for four months while the cash-strapped government said it would do its best to extend that to six months,” said Xiao Cai, a 36-year-old father who closed his underwear shop a year earlier and now works as a taxi driver.

Life in Hegang offers a glimpse of the painful process that President Xi Jinping and his cadres have launched to gear China’s growth model way from heavy industry to environmentally-friendly, high-tech manufacturing and advanced services.

Xi has made addressing excessive industrial capacity one of four key economic goals in 2016.

However, this is not the first time that Beijing has attempted to tackle the issue and there has been little progress so far.

Deflation in manufacturing industry is actually deepening, with drops in the Producer Product Index extending to 45 months in November.

“Coal prices fell to 200 yuan per tonne. It is even cheaper than potatoes, but still we cannot find enough buyers,” said Sun Jin, a coal miner at the Yixin coal mine in Hegang.

His salary peaked at 10,000 yuan a month in 2010, but fell to 3,000-4,000 yuan recently despite him being promoted to lead a group of more than 100 miners.

Hegang, alongside Qitaihe, Shuangyashan and Jixi, the other three coal producers under the management of Heilongjiang Longmay, is at risk of exhausting its coal resources and has yet to find any industry or business model that could act as a replacement for coal.

China’s GDP growth has slowed to the lowest level in more than six years and appetite for resources and industrial products have shown no solid signs of recovery.

This is a shared problem for the northeast, the birthplace of China’s heavy industry.

READ MORE: For China’s struggling economy, 2016 may be worse than 2015

China’s traditional reliance on a planned economy has resulted in the dominance of state-owned enterprises.

Public records show Heilongjiang Longmay, which runs hospitals and schools, has 240,000 employed workers and 180,000 retired employees.

Longmay has suffered losses for more than three years, which extended to 6 billion yuan in 2014 from 830 million yuan in 2012. But its tax payments – it used to contribute 5 per cent to the fiscal income of Heilongjiang – may mean there is a strong willingness from the government to lend a hand.

Liu He, a economic policy adviser to Xi, called to accelerate the retiring of “zombie firms”, in a reference to profit-losing state firms.

But for cities like Hegang, a direct bankruptcy or sizable layoffs could prompt social unrest, a political prospect unbearable for party leaders.

READ MORE: China’s coal sector set to suffer more economic chills this year

That’s why, when Longmay was at risk of defaulting on its debt repayments in November, the provincial government intervened, again.

The government said it would give 3.8 billion yuan in fiscal support to the coal producer. Together with the 2.3 billion yuan Longmei raised by itself, the money would be used to repay debts of 5.8 billion yuan to mature in December.

It was the second time that the government had agreed to bail out Longmay on a massive scale. It offered 3 billion yuan in a fiscal subsidy to Longmei in 2014, but the support does not appear to have stopped the coal giant from bleeding.

The latest solution to rescue the coal producer was a plan to relocate 100,000 workers, announced in September by Longmay chairman Wang Zhikui. The plan was to transfer coal workers to positions in forestry, farming and public services.

Longmay also set up job training centres to accept non-operational staff, offering minimal wages and helping employees find job vacancies.

It was not an abrupt decision – the group has been at pains to ease staff redundancies in the past couple of years.

Huang Yiping, an economist at Peking University and an adviser to the People’s Bank of China, foresaw a big push to tackle overcapacity in 2016 and warned that places such as the northeast – where cities are usually dominated by a single state firm – might pose a big problem.

He said such governments should guarantee basic social security to the unemployed.

“Shutdowns are the most passive choice while we can use other measures such as restructuring and acquisitions, but [retiring overcapacity] will proceed in a gradual manner,” said Huang.

According to a document issued in 2014 by Longmay’s unit in Hegang, employees are allowed to take long periods of leave lasting up to five years. Mid-level managers and researchers are also allowed to leave their positions earlier than the mandatory age for retirement.

Lao Xie’s elder brother chose earlier retirement.

“He stays at home, with pay of 400 yuan per month and is waiting for formal retirement. But there are many workers doing nothing during work hours except confirming their attendance on the fingerprint scanner.”

The Hegang [economy] won’t get a breath of new life in years. I have told my son not to return to Hegang when he retires from the army next year
Zhang Quan, taxi driver

The Hegang unit of Longmay group said that by the end of July it had cut management by 42 per cent to 393 people and reduced the number of non-production organisations by nearly two thirds to 51.

But the company turned a blind eye to wrongdoings, such as employees selling coal to residents.

Taxi Driver Zhang Quan was one such client. He bought big parcels of coal from an employee at the Yixin coal mine to warm his shabby house in a shanty area.

“He carried the coal out of the factory and sold it for 20 yuan a big parcel last year. This year, the price fell to 15 yuan,” said Zhang.

Longmay chairman Wang Zhikui said at a meeting in December that overcapacity in the coal sector would not change in the short term for Heilongjiang. He said transferring labour to other sectors was key for the survival of the company.

READ MORE: China’s once-booming rust belt now stuck in reverse amid economic slowdown

“Longmei had good days, but all the profits were wasted in blind investment, amusement and corruption,” said an observer familiar with the situation.

In the last week of 2015, the Communist Party's all-powerful Politburo approved plans to revive the economy in the northeast, one of many such plans in the last decade or so. It defended its previous policies for the region, saying they were correct, effective and necessary to turn the region into an important pillar of the country's economy by 2030.

But Zhang has given up any hope for reviving Hegang’s economy.

“The Hegang [economy] won’t get a breath of new life in years. I have told my son not to return to Hegang when he retires from the army next year,” he said.