Photo: Associated Press
As China Extols Open Markets, Price Controls Sprout Back Home
New ‘color coded’ coal price controls are emblematic of deeper problems with China’s reform agenda
By Nathaniel Taplin
What is odder than watching the president of China, a nominally socialist nation, at Davos publicly assume the mantle of the global champion of unfettered markets?
Answer: watching the above, while the bureaucracy back home quietly churns out new price controls.
China has developed a new color coding system for coal prices, with increasing levels of intervention to control prices as they move outside a “green” zone of $70 to $80 a ton. The move follows intense volatility in global coal prices, which gained over 70% in 2016 after sharp Chinese capacity cuts collided with rebounding industrial electricity demand.
Coal price controls in China have a long and unhappy history, and there is little doubt that prices are far freer than at the turn of the century.
But further progress under the current administration has been scattershot. Under Xi Jinping, markets have been allowed to play a greater role in the economy—as long as they move in a direction policy makers like. When they don’t, however, rhetorical homage to free markets quickly goes out the window. That helps smooth short term volatility. But the costs are substantial. The government is willing to bear those costs because coal is China’s main energy source and rising prices have political and social implications.
For China, it means slower growth and a higher risk of a big financial blowup in the long run as, in the absence of proper market signals, capital allocation runs amok in the state-owned sector.
And for foreign investors eyeing Chinese firms, it often means poor returns, as state-owned firms are forced into national service or miss opportunities to profit off rising prices due to administrative diktats.
The recent struggle to control coal prices is a classic example of the latter. Chinese coal production has finally rebounded in response to rising prices, but big state-owned miners, which are easier to police, have largely missed the bonanza. Output from key state-owned mines in November was still down 8% on the year following forced capacity cuts in early 2016.
But production for the country as a whole was only down 4%, suggesting that more flexible small and midsize mines have actually reaped much of the benefits of rising prices.
One result: lagging share prices for listed Chinese miners. Hong Kong-listed China Coal Energy’s sales were still down almost 6% on the year in the third quarter, even though coal prices were up 35% over the same period. China Shenhua and China Coal Energy shares are up 33% and 39% since end-December 2015 respectively, against gains of more than 100% for Glencore, Yancoal Australia and Rio Tinto.
On scale and market size alone, China and its key state-owned enterprises should be leaders of the next phase of globalization. But unless the nation is prepared to put more faith in markets back home, it is hard to see other nations following its lead.