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Date

China's Coal Industry Transformation:

Performance, Challenges and Prospects

Xunpeng Shi

A thesis submitted for the degree of

Doctor of Philosophy

of The Australian National University

June 2009

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Candidate Statement

I, Xunpeng Shi, hereby declare that, except where acknowledged, this thesis is my own

original work and has not been submitted for a higher degree at any other university or

institution.

26 Jun 2009

11

Acknowledgments

I am greatly indebted to the members of my supervisory panel: Dr. Ligang Song,

Professor Quentin Grafton, Professor Trevor Breusch and Professor Peter Drysdale.

Without their guidance, insightful advice, and constructive feedback, I would not have

been able to finish this thesis. Ligang accepted me into the PhD program and

continuously encouraged me to explore and expand my research and offered substantial

counsel and friendship. Quentin spent considerable time reading and commenting on the

thesis, especially Chapter 3 which he helped me to restructure for publication. He has

always been approachable, responsive and constructive. Trevor provided many

insightful comments about econometric methodologies. Peter gave me a lot of valuable

comments, suggestions and continuously involved me in the ongoing energy studies

related to China. In particular, he edited the thesis with great care.

I am grateful to many other ANU staff: Professor Tom Kompas, Dr. Michael Ward, Dr.

Robert Breunig, Professor Kaliappa Kalirajan, Dr. Jane Golley and many other staff

members of ANU Crawford School for their support during my candidature. lowe many

thanks to Crawford academic advisers for their help during my study. In addition,

thanks also go to Dr. Sue Holzknecht for her excellent editing of the thesis.

Debts are also owned to many participants from various seminars on ANU campus. I

would also like to extend my sincere thanks to the conference participants in the 18th, 19th

,

and 20th Annual Conference of the Association for Chinese Economics Studies Australia

(ACESA), Professor Yanrui Wu of the University of Western Australian in particular, for

their comments at these conferences where I presented several chapters of this thesis.

I would also like to thank my fellow students, Yu Sheng, Sizhong Sun, Dandan Zhang,

Ying Xu, and Nazneen K. Chowdhury. I have benefited much from many discussions

with them. I specially thank Hong Yu, Ligang's wife for her kindness, enthusiasm and

wonderful food.

I sincerely thank the Rio Tinto-ANU China Partnership for its financial sponsorship of

my Master and PhD studies. Thanks are also owed to Professor Philip Andrews-Speed

and Center for Energy, Petroleum, Mineral law and Policy (CEPMLP) at University of

Dundee, Rio Tinto, and British Foreign and Commonwealth Office (FEO) for the

Chevening Scholarship, which funded my Masters' degree at the University of Dundee in

2003. I am also grateful to staff in Rio Tinto: Lyall Howard, Peter Eccleston, Paul

III

Crowley, Michael Harvey, Steven Macmillan and others for the support of my

internship in the Business Development Unit, Rio Tinto Energy in 2008.

During the research, I participated in many academic conferences. I also visited the

China Center for Economic Research (CCER) at Peking University, hosted by Professor

Yao Yang. I am grateful to the support from the ANU-PKU exchange program, the

Vice-chancellor's travel grant and the funding to participate in various academic

conferences provided by Crawford School.

I also owe thanks to many friends and colleagues in Shenhua Group, State

Administration of Coal Mine Safety and State Administration of Energy, in particular, Dr.

Yuzhuo Zhang, Yichang Zhu and Yin Wu.

Finally, my acknowledgments go to my parents and my mother-in-law for their

patience, unconditional support, encouragement and understanding in the past few years.

My lovely wife, Xin Zheng, sacrificed her career and many other interests in the past

years in supporting my study and our family. Without her support, it would not have been

possible to complete this study. Our lovely son, Opal Bohan Shi, was born in Canberra

during my study and has brought lots of fun, enjoyment and relaxation to us.

June 2009

IV

Abstract

This thesis examines the perfonnance, challenges and prospects of the Chinese coal

industry under transfonnation in the market transition period from 1993 to date. The tenn

'transfonnation' is used intentionally to distinguish it from 'transition', which is more

commonly used. While issues arising from state-ownership are central in an economic

transition, the tenn 'transfonnation' also takes into account the existence of China's other

specific challenges including the many small scale mines, poor mining safety, and

pressure on the industry's prospects resulting from increasingly stringent environmental

regulations.

In studying these transfonnation issues, both quantitative and qualitative methods are

applied. Qualitative methods include cases and institutional studies, comparative studies

and field investigations. In tenns of quantitative methods, the stochastic frontier approach,

index decomposition and advanced econometric models such as fixed effects, negative

binominal, are employed. In the stochastic frontier approach, the estimated impact of

refonns on mines' technical efficiency is considered to evaluate the effectiveness of

refonns.

The thesis finds consistent evidence of the effectiveness of refonns and transitional

policies applied to the sector, including privatisation, decentralisation, consolidation,

export liberalisation, changes in corporation governance, debt restructuring and

participation of the unemployment insurance. The relinquishment of state ownership is

also found to increase mining technical efficiency. The study shows that the level of

marketisation has been increased consistently during the sample period 2000-2005.

Overall, the industry has been subject to decreasing returns to scale during the sample

period.

The thesis also studies the issue of regularising China's infonnal small coal mines.

Through a study of global practice in regularising small-scale mining (SSM) and the

Chinese recent experience, the thesis proposes an appropriate governing framework to

regularise China's small coal mines. Three elements are found to be crucial to regularise

the SSMs: effective legal and fiscal frameworks; the capable enforcement of legislations

through alignment of interests and stakeholder participation; and technical and financial

capacity of small-scale mines. These elements are used to evaluate China's experience

in regularising small-scale mines. Based on the evaluation and the understanding of

roles and challenges in China's small coal mines, policy implications and a good

v

governance framework are proposed.

This thesis proposes and demonstrates the asynchronous effect of safety regulations

from the study of empirical data in China's coal industry. The safety regulations will be

effective in reducing the most serious accidents and will improve overall safety

performance over time.

The thesis also demonstrates that the development ofthe coal industry in China can be

reconciled with the strengthening of environmental regulations and on this base, suggests

the coal industry has a promising future. Through reviewing the past experiences of coal

industries in Western Europe, the United States and the world total, this study confirms

that there has been no decline of any coal industry resulting from strengthened

environmental regulation. The key factor that drives reconciliation is the application of

clean coal technologies. The thesis proposes and empirically demonstrates the declining

emissions intensity of coal in China, providing additional evidence that the coal industry

can be reconciled with the environment.

Based on the results of empirical and quantitative analysis, several policy

recommendations are proposed which include deepening market reforms of State-owned

coal mines through privatisation or relinquishment of state ownership, changes of

corporation governance and debt restructuring; and improving governance of small coal

mining through improvement of the legal and fiscal frameworks and building of SCM's

capacity. The participation of stakeholders is useful in the process of improving safety

and regularising small coal mining. The formulation of industrial policies such as

participating in the unemployment insurance system, promoting export liberalisation,

strengthening mining consolidation, are also recommended. The thesis also argues that

the policy of simply closing down mines in China is impractical and ineffective, and that

a better alternative is to govern their development through regularisation.

The thesis also outlines some directions for future research into the coal industry'S

transformation.

VI

Table of Contents

Acknowledgements ........................................................................... iii

Abstract ........................................................................................... v

List of Tables .................................................................................... xi

List of Figures ................................................................................. xiii

List of Abbreviations ......................................................................... xiv

1 The Transformation of China's Coal industry ...................................................... 1

1.1 Overview of China's coal industry ..................................................................... 3

The importance of China s coal industry ......... .............................................................. 3

Recent development of the Chinese coal industry ......................................................... 6

Policy towards and evolution ofSCMs in China ........................................................... 8

Dynamics of coal pricing mechanisms .................... ..................................................... 11

1.2 Issues in coal industrial 'transformation' .......................................................... 12

SOCMs 'restructuring and performance of reforms .. .................................................. 12

Challenges from SCMs and poor safety performance ................................................. 13

The impact of unbalanced economic transition ........................................................... 15

Interrelationships of issues in the transformation ....................................................... 16

1.3 Motivations and contributions .......................................................................... 17

1.4 Methodology and data ....................................................................................... 20

1.5 Structure of the thesis ........................................................................................ 22

2 Findings from the Literature: the Key Issues ...................................................... 26

2.1 Studies of productivity in the coal industry ...................................................... 27

Issues in estimations .................................................................................................... 29

2.2 Restructuring SOCMs: global experience ........................................................ 31

2.3 Concerns about small scale mining ................................................................... 36

2.4 Studies of coal mining safety regulation .......................................................... .41

2.5 Environment issues and methodology ............................................................. .43

3 Impact oflndustrial Reforms on China's Coal Industry ................................... 49

3.1 Reforms and technical efficiency in China's coal industry .............................. 51

Privatisation ................................................................................................................ 51

Decentralisation .......................................................................................................... 52

Establishment of social security system ....................................................................... 53

Consolidation and 'Big Group Strategy' ..................................................................... 55

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3.2 Theoretical framework and modelling .............................................................. 56

3.3 Data and variable construction .......................................................................... 60

Construction of variables ............................................................................................ 61

Data description .......................................................................................................... 63

3.4 Empirical Results .............................................................................................. 66

Production junction estimations .................................................................................. 66

Estimations of technical efficiency and policy implications ........................................ 70

Exporting and Technical efficiency......................................... ............................ ......... 72

Technical progress, technical efficiency and regional heterogeneity .......................... 74

Sensitivity analysis ....................................................... ................................................ 76

3.5 Concluding remarks .......................................................................................... 77

Appendix 3-1: Data A4justment .................................................................................. 79

4 Restructuring and Performance of China's State-owned Coal Mines .............. 81

4.1 SOE restructuring in China's coal industry ...................................................... 83

Privatisation and gaizhi ........................................................................................... 83

Corporatisation ........................................................................................................... 85

Debt restructuring ..... .................................................................................................. 86

4.2 Model specifications and the estimation strategy ............................................. 88

4.3 Data and variables ............................................................................................. 90

Construction of variables ........ .................................................................................... 90

Data summary ............................................................................................................. 92

4.4 Empirical results ............................................................................................... 95

The impact of restructuring on the technical efficiency of SOCMs ............................. 95

Determinants of SOCM restructuring....................................................................... 100

SOCMs' total factor productivity ............................................................................... 103

4.5 Conclusion ...................................................................................................... 105

5 Regularisation of China's Informal Small Coal Mines .................................... 107

5.1 The significance of China's SCMs: a benefit-cost analysis ............................ III

5.2 Recent experience of SCMs' regularisation in China ..................................... 115

5.3 The global experience and an evaluation of China's recent practice .............. 118

Regulatory framework and legal regime .................................................................... 119

Enforcement: implementers and stakeholders 'participation .................................... 121

Capacity building and providingfinance .................................................................. 124

5.4 Challenges to the regularisation of China's SCMs ......................................... 127

5.5 Policy implications .......................................................................................... 129

5.6 Conclusions ..................................................................................................... 133

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6 The Effectiveness and Economics of Safety Regulations .................................. 135

6.l China's coal mining safety and regulations .................................................... 139

Changing safety regulatory regime ........................................................................... 139

Safety deficits and "Chao C'han" ................................................ .............................. 141

6.2 Methodology and data ..................................................................................... 142

Hypothesis ................................................................................................................. 142

General issues of model specification .. ..................................................................... 144

Safety regulations and overall safety performance ............. ...................................... 146

Regulations and the frequency of disastrous accidents ............................................. 148

Economic impact on and of safety performance ....................................................... 150

Data .............................................................................. ............................................. 151

6.3 Empirical results ............................................................................................. 153

Estimation results of the fIXed effect model ......................... ...................................... 154

Estimation results ofNB model .................................................................. ............... 156

Estimation results of economics issues ................... ................................................... 158

6.4 Discussion and policy implications for China ................................................ 160

6.5 Conclusions ..................................................................................................... 164

7 Coal and the environment: the prospects for coal ............................................ 166

7.1 Introduction ..................................................................................................... 166

7.2 Coal and the environment: a historical experience ......................................... 168

Coal industry grew despite increasing environmental regulations ............................ 168

Misleading relationship in Western Europe ............................................................... 171

The British case: production costs and import prices are responsible ...................... 173

7.3 The coal industry and the environment in China: empirical evidence of declining

emissions intensity ...................................................................................................... 175

Hypothesis of declining emissions intensity .............................................................. 175

The Data ........................ ............................................................................................ 177

Two alternative empirical models ......... ..................................................................... 178

Econometric results ...... ............................................................................................. 180

Index decomposition results ...................................................................................... 183

7.4 Factors harmonising coal and the environment.. ............................................ 186

Coal will become more valuable over time ............................................................... 186

Internalisation of costs by environmental regulations .. ............................................. 187

Benefits of environmental regulation to the coal industry ......................................... 188

Coal and its alternatives .................................................................. .......................... 189

7.5 Discussion ....................................................................................................... 191

IX

Coal in a carbon-constrained future: issues of climate change ................................ 191

Managing the challenge: role of clean coal technology ............................................ 193

Policy implications .................................................................................................... 196

7.6 Conclusion ...................................................................................................... 197

8 The Sustainability of the Coal Industry ............................................................. 200

8.1 Main findings .................................................................................................. 20 1

Performance in the transformation of Chinas coal industry .................................... 201

Impacts of reforms ..................................................................................................... 203

Regulations and enforcement ..... ............................................................................... 204

Coal and the environment ............ .............................................................................. 205

8.2 Policy implications for advancing the industrial transformation .................... 207

Transitional polices and reforms ............................................................................... 207

Regularisation ofSCMs ........................................................ ..................................... 208

Safety regulations and supervision ....... ..................................................................... 209

Environmental policies ...................................................................................... ........ 210

8.3 The required changes of broader policies ....................................................... 211

The role of government ................................................................................ ............... 211

Cracking down on regionalism ..... ............................................................................. 213

Stakeholder participation and unionisation .............................................................. 214

Some economic policy instruments .................................................................... ........ 215

8.4 Contribution .................................................................................................... 216

8.5 Limitations and future studies ......................................................................... 218

x

List of Tables

Table 1-1 Major economic indicators of China's SCMs, 1996-2001 ..................... 9

Table 1-2 Comparison of typical 'great transformation' ...................................... 15

Table 2-1 Major indicators of coal industry restructuring in 12 transition

economies, 1990-2000* .................................................................................. 32

Table 2-2 Experience from transition in the coal industry in selected countries .. 34

Table 2-3 Small-scale mining in selected developing countries ........................... 36

Table 2-4 Costs and benefits of China's small scale coal mining ......................... 37

Table 2-5 Selected governments' experiences in the regularisation ofSSMs ...... 39

Table 3-1 Descriptive statistics: mean value by years .......................................... 63

Table 3-2 Descriptive statistics: mean value, in various classifications ............... 65

Table 3-3 Sample compositions* .......................................................................... 66

Table 3-4 Generalized LR tests of specifications for the production frontier models

......................................................................................................................... 67

Table 3-5 Estimated results of production function in the reference model ......... 68

Table 3-6 Summary of input elasticity and returns to scale .................................. 69

Table 3-7 Determinants of technical inefficiency, in various specifications ........ 71

Table 3-8 Test of causality between exporter and technical efficiency ................ 73

Table 3-9 Mean growth rate ofTFP and its components over years .................... 74

Table 3-10 Sensitivity of estimations for technical inefficiency ........................... 76

Table 3-11 New classification of firm scales for industrial enterprises ................ 80

Table 4-1 Descriptive statistics: mean value by years .......................................... 92

Table 4-2 Descriptive statistics: mean value, in various classifications ............... 93

Table 4-3 Sample composition (percentage) by years and classifications ............ 94

Table 4-4 Generalized LR tests of specifications for the production frontier ....... 95

Table 4-5 Estimated results of production function in the reference model ......... 96

Table 4-6 Input-output elasticity and returns to scale ........................................... 97

Table 4-7 Determinants of technical inefficiency, in various specifications ........ 99

Table 4-8 Differences between restructured and non-restructured coal mines .. 102

Table 4-9 Mean growth rate of TFP and its component over years .................... 103

Table 5-1 Criteria used for defining SSMs in various countries ......................... 109

Table 5-2 Shares ofSCMs' production by provinces (%),1995-2007 .............. 112

Table 6-1 Fatality rates in Chinese coal mines in the international context.. ........ 139

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Table 6-2 Statistical summary of the estimated data .......................................... 153

Table 6-3 Estimated results of mortality rate model ........................................... 155

Table 6-4 Estimated results of frequency model with NB model ....................... 157

Table 6-5 Estimated results of economic development and safety ..................... 158

Table 6-6 Estimated results of market shares and regulations ............................ 159

Table 7-1 Coal production and employment for selected countries .................... 172

Table 7-2 Estimated results of the fixed-effects SUR model.. ............................ 181

Table 7-3 Factors that affect the changes in emissions (AWGE), 1997-2007 .... 183

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List of Figures

Figure 1-1 China's energy mix in consumption, 1953-2007 ................................. .4

Figure 1-2 China's coal productions in three categories of mines, 1949-2007 ...... 7

Figure 1-3 China's coal imports and exports, 1955-2007 ....................................... 8

Figure 3-1 Mean returns to scale, by ownership and scale ................................... 70

Figure 3-2 Mean TFP growth rate and technical efficiency, by regions ............... 75

Figure 4-1 Mean returns to scale, in various categories ....................................... 98

Figure 4-2 The Mean TFP growth rate and technical efficiency, by regions ...... 101

Figure 5-1 Comparison of death rates (dr) in different kinds of coal mines ...... 114

Figure 5-2 Appropriate framework of governance for regularising SCMs ........ 132

Figure 6-1 Safety situation in the Chinese coal industry, 1995-2007 ................ 137

Figure 6-2 China's coal mining safety, 1986-2007 ............................................ 140

Figure 7-1 World coal consumption (Quadrillion Btu), 1990-2030 ................... 169

Figure 7-2 Coal prices in four representative markets ........................................ 170

Figure 7-3 US coal production and real prices, 1977-2007 ................................ 171

Figure 7-4 Coal production, consumption and imports in the UK, 1980-2007 .. 173

Figure 7-5 Average prices of fuels purchased by the major UK power producers

....................................................................................................................... 174

Figure 7-6 Coal consumption and air pollution emissions in China, 1997-2007

....................................................................................................................... 176

Figure 7-7 The impact of different emissions intensity ...................................... 176

Figure 7-8 Decomposition of sulphur dioxide emissions changes, 1997-2007.184

Figure 7-9 Decomposition of soot emissions changes, 1997-2007 .................... 185

Figure 7-10 Decomposition of dust emissions changes, 1997-2007 .................. 185

Figure 7-11 Economic impacts of environmental regulations ............................ 187

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List of Abbreviations

BP British Petroleum

CASM Community and small-scale mining

CCB China Construction Bank

CCIl China Coal Information Institute

CCS Carbon Capture and Storage

CCT Clean Coal Technology

CEYP China Environment Yearbook Press

COE Costs of Electricity

CNCA China National Coal Association

CIAB lEA Coal Industry Advisory Board

CTL Coal-to-liquids

DEA Data Envelopment Analysis

DFID Department for International Development (UK)

EIA Energy Information Agency

EPA Environment Protection Agency (US)

EU(C) European Union (Community )

EKC Environmental Kuznets Curve

FBC Fluidised Bed Combustion

FGD flue-gas desulphurization

FSU The Former Soviet Union

GDP Gross Domestic Product

lEA International Energy Agency

IGCC Integrated Gasification Combined Cycle

ILO International Labour Organization

IPCC Intergovernmental Panel on Climate Change

ITDG Intermediate Technology Development Group

JSLC Joint stock Limited Liability Company

KSOCM Key State-owned Coal Mine

LCM Large Coal Mine

LMDI Logarithmic Mean Divisia Index

LLC Limited Liability Company

XIV

LSM

LSOCM

MINERCOL

MLR

MMSD

MOF

Mt

NBS

NDRC

NGO

NSC

OECD

OSHA

PBC

PCC

POCM

PMB

PMC

PNG

R&D

RTS

SACMS

SASAC

SAWS

SCM(s)

SEPA

SETC

SLLC

SMC

5MB

SOCM(s)

SOE(s)

SSM (s)

Large-scale Mining! Mine

Local State-owned Coal Mine

The Colombian (state-owned) Mining Company

Ministry of Land and Resources

Mining, Mineral and Sustainable Development (Program)

Ministry of Finance

Million Tonnes

National Bureau of Statistics

National Development and Reform Commission

Non-government Organization

National Steering Committee of Service Providers (Southern

Africa)

Organisation for Economic Co-Operation and Development

Occupational Safety and Health Act

People's Bank of China

Pulverised Coal Combustion

Pri vate Coal Mine

Private Marginal Benefit

Private Marginal Cost

Papua New Guinea

Research and Development

Returns to scale

State Administration of Coal Mine Safety

State-owned Assets Supervision and Administrative Commission

State Administration of Coal Mine Safety

Small coal mine (s)

State Environmental Protection Agency

State Economic and Trade Commission

Solely State-funded Limited Liability Companies

Social Marginal Cost

Social Marginal Benefit

State Owned Coal Mine (s)

State Owned Enterprise (s)

Small-scale mine (s)

xv

Seemingly Unrelated Regressions

Technical Efficiency (Change)

Total Factor Productivity

Tax Rebate Rate

Technical Progress (Change)

Township, Village and Individually owned Mine

Value-added Tax

Waste-gas Emission

World Coal Institute

SUR

TE(C)

TFP

TRR

TP(C)

TVCM

VAT

WGE

WCI

Yuan Chinese Money Unit, RMB (CHY). the default monetary unit

Note: All government agencies are Chinese unless explicitly noted.

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