CHINA'S COAL INDUSTRY - IMPACT OF REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00794R000200960001-2
• Release Decision: RIPPUB
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• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: May 12, 2011
• Sequence Number: 1
• Publication Date: December 1, 1986
• Content Type: REPORT

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Intelligence 25X1
Impact of Reform
China's Coal Industry
ential
EA 86-10048
December 1986
Copy 2 3 0
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Directorate of
Intelligence
China's Coal Industry
Impact of Reform
Division, OEA,
This paper was prepared by Office
of East Asian Analysis. Comments and queries are
welcome and may be directed to the Chief, China
Reverse Blank Confidential
EA 86-10048
December 1986
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Summary
Information available
as of 1 December 1986
was used in this report.
Impact of Reform
China's Coal Industry-
China produced a record 850 million metric tons of coal in 1985,
supplanting the United States as the world's largest producer. Because this
high output yielded a large surplus, we expect production in 1986 to
stabilize while China draws down enormous inventories.
We believe the rapid growth in China's coal production-28 percent
between 1982 and 1985-has resulted from reforms in price, ownership,
and wages. In our judgment, Beijing undertook its most important reform
in 1981 when it began encouraging coal production outside the state plan
by allowing coal to be sold at market prices. In this way, Beijing
encouraged efficiency and introduced indirect price reform without the
inflationary shock to the economy that an overall price increase would
deliver. Today as much as half of China's coal sells at prices three or four
times higher than the state price.
China has also encouraged surplus rural labor to set up small-scale coal
mines that have helped provide energy to rural areas and to industries
outside the state mine allocation system and where transport is difficult.
The Chinese press has reported that the number of small-scale mines
tripled between 1981 and 1985 and has now stabilized at over 60,000. We
believe this sector will probably not grow much more because the local
markets have become saturated, Beijing's administrative controls have
tightened, and easily mined reserves have become depleted.
We believe China is capable of meeting its goal of producing 1.2 billion
tons of coal annually by the year 2000. Most of this growth will be
achieved by further mechanizing existing sites and opening new large
mines. Higher productivity has already been achieved through the intro-
duction of piece wages and bonuses, and we expect additional gains from
mechanization.
Nevertheless,) (China may need 25X1
even more coal at the turn of the century to fuel its economy. Because it
has enormous coal reserves, we believe that China could produce more but
that financial and transport constraints will limit the pace of the coal
sector's growth. Beijing has sought foreign loans, investment, and assis-
tance to expand and modernize its larger coal mines, but falling interna-
tional coal prices have reduced Beijing's prospects of obtaining foreign
investment.
Confidential
EA 86-10048
December 1986
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Insufficient transportation and generator capacity are at the heart of
energy shortages that idle up to one-fifth of Chinese industry, and we
expect them to continue. Beijing is attempting to improve the transport of
coal by upgrading rail lines and ports, while building more electric power
plants adjacent to mines. However, we anticipate that coal transport
bottlenecks will persist because the rapid pace of nationwide economic
development will place additional demands on China's transport system.
China's drive to mechanize mining and improve coal transportation will
open markets for foreign equipment and technology. While prospects for
US sales are good, we expect strong competition from such countries as Ja-
pan, West Germany, France, and Italy for mining and hauling equipment,
processing machinery, coal gasification technology, and other coal-related
needs. At the same time, we expect Beijing to use its improved economic
ties-especially barter trade arrangements-to Eastern Europe and the
Soviet Union to obtain mining equipment and assistance at little cost in
foreign exchange.
To bolster foreign exchange earnings, China has announced plans to
quadruple its coal exports to 30 million tons annually in 1990-placing it in
direct competition with the United States and Australia, primarily in the
East Asian market-and we estimate that exports could reach 50 million
tons by 2000. We expect that Beijing will capture new markets-especially
in Japan-by offering significant discounts and naming coal a priority
export, much the way it did to expand its oil sales abroad. Port and rail ex-
pansion is under way to support increased coal exports.
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Summary iii
IV Reforms in the Coal Industry
Ownership Reforms-The Debate Over Small-Scale Mines
1
Price Reforms-Breaking Out of Fixed Prices
4
Assessing the Coal Reforms
6
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Figure 1
Coal Industry
-Hailar
Yiminhe
Shenmji -
Ch6ngging,
Zhengzhou-
Hen
Shang
Changzhi
Hangzhou
1
17.
Xizang\_
Open pit mine
Large coal deposit
Coal port
Improved railroad
Province-level boundary
0 200 400 Kilometers
0 200 400 Statute Miles
Vientiane
-* f"
111,
Hanoic Zhanji
Hainan
Dao .
sndong
7Jining
/ 'US_un
Shenyang wo
5Liaonina
Sea
rth of
rea Japan
South
Korea
Darn-at,.,
Lee.
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China's Coal Industry-
Impact of Reform
million tons-are being drawn down.
Figure 2
US, USSR, and China Coal
Production, 1980-85
ducing market forces. Because China's transport
sector has been unable to cope with this increase,
there will be little or no growth in coal production in
1986 while enormous stockpiles-reported by the
Rapid Growth
China produced a record 850 million tons of coal in
1985, supplanting the United States as the world's
largest producer (see table 1 and figure 2). We believe
the rapid growth-28 percent since 1982-has result-
ed from reforms in price, ownership, and wages. These
reforms have provided strong incentives to producers
by easing central control over the industry and intro-
heating for many Chinese (see figure 3).
We believe the success of these reforms in China's
coal industry is critical because coal provides 70
percent of the country's energy supply, among the
highest of any major country (see table 2). It fuels
most of China's power plants as well as cooking and
? Piece wages and bonuses are widely used.
Reforms in the Coal Industry
In 1981 China instituted three major reforms of the
coal industry. It began allowing coal produced outside
the state plan to be sold at market prices. It encour-
aged peasants to open their own mines and transferred
many state mines to local control. And the Chinese
began using piece wages to improve productivity in
both state and local mines. These reforms have result-
ed in several significant changes in China's coal
industry:
? Over 60,000 small-scale mines operated by individ-
uals and collectives produce 30 percent of China's
coal.
? Another 20 percent of China's coal is produced at
locally owned mines, many of which were previously
controlled by the Ministry of Coal.
? As much as half of China's coal is sold at negotiated
prices, often three or four times the state price.
I I I I I I
0 1980 81 82 83 84 85
Ownership Reforms-The Debate Over Small-Scale
Mines. China's proliferation of small-scale coal mines
has been quite controversial, often pitting the Coal
Ministry against the small-scale miners. But press
reporting indicates that outside the Coal Ministry
support for the development of small-scale mines has
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Table 1
China: Raw Coal Output
Million metric tons
1981
335 160
127
622
1982
350 170
146
666
1983
363 182
170
715
1984
395 168
226
789
1985
416 179
255
850
Figure 3. Coal briquets are
still widely used in China for
Table 2
Share of Solid Fuels Consumption
in Selected Countries
South Korea 36
United Kingdom 34
West Germany 32
25X1
25X11
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Figure 4
China: Coal Consumption, 1983
Industry
44
been widespread, led by Premier Zhao Ziyang. Sup-
porters promote development of small mines because
they:
? Provide energy to rural areas and industries outside
the state mine allocation system and where trans-
portation is difficult. They allow Beijing to set up
rural industries in regions with surplus labor created
by the agricultural reforms.
? Economically work small or shallow deposits, which
could not be effectively done on a large scale. This is
particularly true for areas outside North China's
coal region that have only small pockets of coal
reserves.
by larger mines.
? Increase the recovery rate for deposits abandoned
The Coal Ministry, on the other hand, never favored
these mines, preferring that all production remain
under its control. Several Coal Ministry officials
expressed their contempt for the small-scale mines to
a visiting US official in May, criticizing them as
wasteful and dangerous. Small mines have also been
Ownership Reforms: China's Three
Types of Coal Mines
State Mines. The Ministry of Coal claims it directly
operates 600 large mines, which produce about half
of China's coal. Increased mechanization more than
o,/jrset a 5 -percent cut in the workforce in 1985,
resulting in an increase in state mine output of 5.3
percent. The Ministry of Coal sells most coal from
these mines according to the state distribution plan at
.fixed state prices. In addition, each mine may sell
above-quota production at market prices and retain
the profits, according to the Coal Ministry.
Local Mines. Approximately 20,000 mines are run by
provincial, county, or special zone authorities. Some
are former state mines that have been transferred to
local control but continue to produce coal for alloca-
tion under the state plan at state prices. According to 25X1
the Coal Ministry, almost half the output of local
mines (70-80 million tons) was distributed this way
last year and the remainder was sold at market
prices.
Small-Scale Mines. Over 60,000 small-scale mines
have been established throughout China. Of their
approximately 5 million employees, many werefarm-
ers displaced by earlier reforms in agriculture.
25X1
25X1
Many of these mines had been part of the commune
system and are now run as township enterprises.
However, the greatest growth has been in the develop-
ment of small mines operated by individuals or small
groups. These have mushroomed since Beijing en-
couraged collectives and individuals to mine coal for
sale at market prices in 1981 and again in 1983. The 25X1
resulting "coal rush" tripled the number of small-
scale mines and doubled their output between 1981
and 1985. All small-scale production is outside the
state plan.
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The political fight over small-scale coal mines occa-
sionally has led to apparently isolated but violent
confrontations between state and small-scale miners.
In February the Beijing Economic Management jour-
nal provided an unusually revealing account of sever-
al such incidents. In one case in 1982, 100 peasants
reportedly wrecked a state coal mine director's office
because they had been refused permission to mine
near the state mine. The article also reported that in
early 1985 officials from another state mine blew up
the entrances to eight small-scale mines adjoining
their site after they were unable to convince the
peasant miners to leave.
criticized in the Chinese press for causing environ-
mental damage, overlapping onto larger state mines,
and being highly inefficient. In several cases, mine
shafts and aboveground buildings were reported to be
undermined because nearby small-scale mining opera-
tions had weakened the surrounding earth. The press
also has reported several violent confrontations be-
tween state and small-scale mines (see the inset). F
Nonetheless, the high-level support suggests that the
coal reforms will continue, though they will be more
carefully controlled to prevent the overlapping claims
and environmental damage that the indiscriminate
opening of some small-scale mines caused. To this
end, the National People's Congress (NPC) passed a
mining law in March 1986 to control the proliferation
of small-scale mines.' This law, which took effect on 1
October, requires individuals and collectives to obtain
a license, pay a resource exploitation tax, and reclaim
affected land.
We believe that licensing and taxation of these mines
and tightened credit for all rural industries, as well as
saturation of the rural coal market, have stabilized
the number of small-scale mines. According to the
China Daily newspaper, small-scale coal production
' In a highly unusual move, the NPC Standing Committee sent the
original draft of the law back to the State Council in the fall of
1985, apparently because it was regarded as being too restrictive of
Table 3
China: Official State Coal Prices
34 yuan ($9)
19 yuan ($5)
in the first half of 1986 dropped 10 percent from the
same period last year. Localized oversupplies of coal
and the resulting lower prices may also have prompted
some peasants to switch out of coal mining into other
industries. We, nonetheless, expect small-scale miners
to resist efforts to restrict their operations because
these mines have been quite profitable, and demand-
and therefore prices and profits-will continue strong
because many new rural industries rely on small-scale
coal mining.
Price Reforms-Breaking Out of Fixed Prices. China
has not raised its official coal prices since 1981 (see
table 3), but the effective price of coal has risen
dramatically because about half of production now
sells outside the state plan at significantly higher
market prices. a two-
tiered system has evolved under which state-run and
other large, established enterprises pay the traditional
low prices for coal allocated by the state, but use the
higher priced free market coal for production above
official plans. New small enterprises, mainly the small
rural industries, generally must buy all their coal at
market prices.
We believe China's leaders chose to use this dual-
price structure to implement coal price reform gradu-
ally because they wanted to avoid the criticism that
would probably have been generated by the inflation-
ary shock of an across-the-board increase in coal
prices. Man economists and senior leaders, arguing
in the press that coal
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attempts to draw down its huge surplus.
In our judgment, the most serious obstacle to in-
creased coal consumption in China is transportation.
China's long overburdened transport system has been
unable to cope with the tremendous increases in coal
production. We attribute China's chronic shortage of
electricity-which idles onef'th of its industrial
capacity-to transport problems and the lack of
generator capacity. Most of the huge stockpiles are at
the state and local mines that rely on rail transport,
and the Chinese press has reported that stockpiles are
so large that many of these mines have slowed
production this year. Indeed, total output through
June reached only 403 million tons, nearly 2 percent
less than the same period in 1985. Although part of
the decline was caused by the lower output of small-
scale mines, we anticipate that coal production at the
state mines will grow little, if any, in 1986 as China
To improve the transport of coal, Beijing is upgrading
rail lines and ports and building more electric power
plants at coal mines with electricity transmission
lines to power-consuming areas. These efforts will
help, but we believe that coal transport shortages will
persist as the rapid pace of economic development
places additional pressures on the system. Coal
makes up 40 percent of all rail freight, and in the
heart of China's coal belt, Shanxi Province, it
accounts for 90 percent. Because three rail lines
prices have been kept far too low as a subsidy to
industry, favor a hike in official prices as well. They
believe that higher coal prices would, in the long term,
encourage higher coal output and more efficient
consumption. They also have insisted that higher coal
prices will encourage China's transport sector to give
greater priority to moving coal instead of other goods,
especially using private transport on China's high-
ways. Nonetheless, according to the US Embassy in
Beijing, a 1984 push by reformers in the leadership to
hike official prices failed, in part because it would
place an undue burden on most enterprises, which are
not permitted to raise the prices on their products. At
the same time, maintaining artificially low coal prices
between Shanxi and the coast are being improved,
we believe Beijing will be able to reach its goal of
shipping 200 million tons out of Shanxi annually by
1990, almost 60 percent more than now. New port
facilities will enable China both to export more coal
and to ship greater amounts to central and south
China.
We believe that small-scale coal mine production will
largely be unaffected by the transportation bottleneck
because this coal primarily serves local-more acces-
sible-markets. Most small-scale coal is transported
privately by peasants, who have found the business
lucrative. Beijing encouraged their efforts to provide
local transportation in 1985 by increasing short-haul
railroad freight rates. Private enterprises and individ-
uals have bought vehicles ranging from trucks to
carts, and, according to the Chinese press, these 25X1
businesses account for nearly 80 percent of all high-
way freight on a ton-per-kilometer basis. Although
many of these private companies transport small-
scale coal, the State Planning Commission has also
established the China Clean Coal Company, which
uses information about nationwide supplies and de-
mand to serve as a broker for the nonstate mines,
buying their output and arranging transportation to
customers willing to pay a premium for additional
coal.
by subsidizing coal-consuming industries costs Beijing
perhaps billions of yuan annually.
Although plentiful supplies have depressed market
coal prices from their initial high levels, the growing
use of free market coal nationwide has had some of
the same effects as a price rise. In 1984 the Chinese
press reported market prices for coal delivered outside
North China's coal belt exceeded 150 yuan ($60) per
ton; the price for a ton of market coal in 1986 runs
about 100 yuan ($26) in Shanghai and Jiangsu Prov-
ince. Most of this cost is for transportation. According
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Figure 5. Mechanization is im-
proving productivity at China's
to the Coal Ministry, the Ministry of Railroads is
obligated only to transport coal produced under the
state plan; as a result, mines must negotiate transpor-
tation of above-quota coal, for which the railroad
charges a premium.
Wage Reforms-Building Incentives. As in other
industries, Beijing has tried to tie wages in the coal
sector to output to improve productivity. Many of
China's coal mines use piece wages or divide profits
from extra production among the miners. One-third of
wages for production workers at state mines are based
on productivity, whereas before the reforms wages
were based on attendance, seniority, and responsibil-
ity. People's Daily reported in mid-1984 that an
"ironman" at one small-scale mine in Liaoning where
earnings were exclusively piece wages earned-at 5
yuan per ton-800 yuan ($320) during his best month,
about five times the average wage at these mines.
Beijing has also issued large cash awards to reward
productive units. For example, in December 1985 the
Datong mining bureau in Shanxi Province received a
cash prize of 1.8 million yuan ($580,000) for produc-
ing a record 30 million tons of coal that year.
Assessing the Coal Reforms
The coal reforms have increased supplies, encouraged
efficiency, and improved productivity. We attribute
most of the coal output growth in the 1980s to the
reforms, particulary ownership and price reforms.
While large mine production increased at an average
annual rate of less than 4 percent in 1981-85-
because of new mine openings and mechanization-
small-scale output rose 17.5 percent yearly. Coal
supplies have improved in many areas, especially
outside North China's coal regions. In 1985 Sichuan
Province produced a surplus for the first time, and
even supplied coal to neighboring provinces. More
than 60 million peasants have gone to work in rural
industries, and many of these jobs were made possible
by the new supplies of coal in rural areas.
We are less certain of the effect of wage reforms, but
we believe higher wages and greater mechanization
have boosted productivity. In July the Coal Ministry
25X1
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tons annually of washed coal as its share.
In recent years, China has sought foreign loans,
investment, and assistance to expand and modernize
its larger coal mines, but we believe that falling
international coal prices have reduced Beijing's pros-
pects of obtaining foreign investment. Several large
joint ventures have been indefinitely postponed (see
table 4). Occidental Petroleum's Pingshuo joint ven-
ture was delayed several years by financing problems
related to the falling coal price, but in June 1985
Occidental signed the $650 million deal to produce
15 million tons a year beginning in 1988. Located in
Shaanxi Province, it will be the world's largest open
pit coal mine. Over half of Pingshuo's production will
be exported, with Occidental receiving 4.5 million
arrangements.
In spite of setbacks, we expect China to continue to
seek foreign expertise, technology, and equipment to
build new coal mones and upgrade older ones. Senior
Chinese coal officials told the Secretary of Energy
last spring that China needs US technology, including
continuous extraction and coal gasification equip-
ment. However, we believe that Chinese will buy coal
equipment and technology from a variety of sources,
with European countries, particularly West Germany,
France, and Italy, well placed to pick up a significant
share of the market. Because Beijing's foreign ex-
change shortage will limit its ability to pay for these
goods, we expect China to offer coal in barter trade
1986 visit to Poland by China's Minister of Coal.
Beijing's interest in barter trade will probably lead to
more acquisitions of equipment and assistance for
China's coal industry from Eastern Europe and the
Soviet Union. The Soviets are helping the Chinese
build a large open pit coal mine and an adjoining
power plant at Yiminhe in Inner Mongolia, the
USSR's largest project in China, for which Beijing
will pay barter goods. Poland also has increased its
sales of mining equipment to China, and prospects are
good for continued cooperation following the May
reported that for the first time miners at the state
mines produced an average of 1 ton per miner per day.
Price reforms have, in our judgment, significantly,
bolstered output especially in rural areas where the
extra coal supplies have given additional impetus to
rural industrial development outside the state plan.
The higher prices of coal have encouraged its efficient
use and conservation. For example, in 1985 Jiangsu
Province reported in its press that it recovered enough
coal dust and fragments to save 800,000 tons of coal.
On the debit side, the growing use of coal throughout
China creates an increasingly obvious need for pollu-
tion controls. According to the Chinese press, Beijing
Municipality burned more than 20 million tons of coal 25X1
last year; almost 23 tons of coal dust fell on each
square kilometer, and the winter air was nearly
unbreathable. While the press reports that the pollu-
tion rate was down 23 percent from 1980, the coal
dust problem remains serious. Larger cities such as
Beijing are switching to natural gas for household
heating and cooking, but it will take years before this
becomes widespread.
The growth in small mines has also raised concerns
about safety. China Daily reported in early December
that more than 200 people had been killed in acci-
dents at small-scale coal mines during the first half of
1986. The small-scale mines have frequently been
criticized in the press for being particularly dangerous 25X1
and subject to cave-ins. The Chinese have not indicat-
ed that they have had any major coal mine disasters in
recent years, but they do not always report such
incidents.
Meeting Future Needs
Beijing plans to continue relying heavily on coal for its
energy supply well into the next century, and we
believe China is capable of meeting its target of
producing 1.2 billion tons annually by the year 2000.
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Table 4: Postponed or Canceled Open Pit
Coal Joint Ventures
Jining
Shandong
4 million tons annually
Royal Dutch Shell
Canceled a
Jungar
Inner Mongolia
25 million tons annually
Japanese consortium
Indefinitely postponed
Shenmu
Shaanxi Province
30 million tons annually
French and US firms
showed interest
Postponed by China because
of high costs
Figure 6. The Fushun open pit
coal mine in Liaoning Province
was begun in 1914, and it is
currently China's largest open
pit mine. It is 13.2 square
kilometers and produces 3.3
China-estimates its reserves at 781 billion tons, which response to the reforms, and, therefore, we expect
would make them the world's largest. market saturation, tighter administrative controls,
these abundant supplies are mostly and depletion of easily mined reserves will limit
good-quality coal, which can be mined at relatively further growth.
low cost. We anticipate Beijing will achieve most of
its growth by further mechanizing existing state and However, even at the target level, Beijing's production
local sites and by opening new large mines. in the year 2000 may be insufficient to fuel China's
ambitious modernization program.
We are less certain that small-scale mines will be able
to increase their output. The spectacular growth in
the output of such mines was essentially a one-time
25X1
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Table 5 Metric tons
China's Coal Exports, 1985
a As reported in Chinese statistics.
b Estimate.
c South Korea exports may not be included in Beijing's total
exports.
billion tons of coal annually by then, suggesting that
production will have to increase faster if economic
growth continues to exceed the target rates.' We
believe China could expand coal production beyond
1.2 billion tons annually by 2000, but Beijing would
have to accomplish several costly tasks that make this
goal unlikely:
while giving coal transport priority over other goods.
? Heavily invest in new large coal mines, taking
resources away from other industries.
? At least double state coal prices, which would
promote more mine development, but would also
significantly raise the expenses of many industrial
enterprises.
? Build additional railways, highways, and vehicles,
Boosting Exports. Moreover, we anticipate that Beij-
ing will try to export more coal to help pay for foreign
technology and equipment (see the inset), even if it
means holding back some domestic consumption,
much as China has done with oil.' China's recently
announced goal of quadrupling its coal exports to 30
million tons annually by 1990 will put it in direct
competition with the United States and Australia in
an already weak international energy market. We
believe China will offer significant discounts to cap-
ture new markets, much the way it did to expand its
oil exports. The World Bank is helping to finance
several of the transport infrastructure improvements
that will facilitate greater exports.
Beijing has aggressively sought new markets for its
coal throughout the world, including countries with
which it has no diplomatic relations; South Korean
businessmen have told the US Consulate in Hong
Kong that Seoul bought approximately 1.7 million
tons of China's coal last year. In August, Indonesia
signed a $14 million deal to import 400,000 tons of
Chinese coal in exchange for 100,000 tons of cement.
In November 1985, China signed a five-year agree-
ment to supply the Netherlands with 4 million tons of
coal. Beijing recently sent a coal trade delegation to
Western Europe to try to market its coal in countries
beginning to boycott South African goods. China has
25X1
25X1
Nevertheless, China's coal exports will probably re-
main concentrated in East Asia, especially Japan,
where we expect Beijing to be a strong competitor
against other suppliers such as the United States and
Australia because China has proximity and price
advantages. On the basis of China's planned growth
in output and transport infrastructure, we estimate
that China could become an internationally signifi-
cant exporter by the year 2000-exporting as much as 25X1
50 million tons worldwide annually-or 4 percent of
China's forecast output.4
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200960001-2 __
 Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200960001-2
Confidential
Confidential
Declassified in Part - Sanitized Copy Approved for Release 2011/12/30: CIA-RDP04T00794R000200960001-2