De-Capacity Policy Effect on China’s Coal Industry

Abstract

Overcapacity in China’s coal industry has serious negative impacts on the rational allocation of coal resources and stable operation of the national economy. Since 2016, the Chinese government has implemented a series of de-capacity policies to optimise coal production capacity. Timely policy effect assessment is of great significance to the government to guide high-quality development of the coal industry. This paper first reviews the dilemma encountered by China’s coal industry prior to 2016, and then analyses the progress and effect of coal industry de-capacity. The main results are as follows: (1) The capacity reduction is mainly distributed in the central and southwestern regions. Most of the coal mines are state-owned, and there is a prominent worker resettlement problem. (2) The capacity optimisation policy has accelerated the implementation of the overall spatial planning of China’s coal supply. China’s coal production centre has shifted from the central and eastern regions to the west, and the industry’s high-quality development pattern has taken shape. (3) China’s coal industrial profitability has constantly been improving, industry concentration has increased significantly, and coal mining has become safer. (4) Due to the regional heterogeneity, the de-capacity policy effect has significant differences in coal production capacity and employee reduction in various regions. Finally, regarding the optimisation of China’s coal production capacity, some policy implications are given.

Full text

energies
Article
De-Capacity Policy Effect on China’s Coal Industry
Xuguang Hao, Mei Song *, Yunan Feng and Wen Zhang
School of Management, China University of Mining &Technology (Beijing), Beijing 100083, China;
hxg306@student.cumtb.edu.cn (X.H.); fengyn@student.cumtb.edu.cn (Y.F.);
zw.1994@student.cumtb.edu.cn (W.Z.)
*Correspondence: songmei6361@cumtb.edu.cn; Tel.: +010-6233-1763
Received: 9 May 2019; Accepted: 14 June 2019; Published: 18 June 2019


Abstract:
Overcapacity in China’s coal industry has serious negative impacts on the rational allocation
of coal resources and stable operation of the national economy. Since 2016, the Chinese government
has implemented a series of de-capacity policies to optimise coal production capacity. Timely policy
effect assessment is of great significance to the government to guide high-quality development of
the coal industry. This paper first reviews the dilemma encountered by China’s coal industry prior
to 2016, and then analyses the progress and effect of coal industry de-capacity. The main results
are as follows: (1) The capacity reduction is mainly distributed in the central and southwestern
regions. Most of the coal mines are state-owned, and there is a prominent worker resettlement
problem. (2) The capacity optimisation policy has accelerated the implementation of the overall
spatial planning of China’s coal supply. China’s coal production centre has shifted from the central
and eastern regions to the west, and the industry’s high-quality development pattern has taken shape.
(3) China’s coal industrial profitability has constantly been improving, industry concentration has
increased significantly, and coal mining has become safer. (4) Due to the regional heterogeneity,
the de-capacity policy effect has significant differences in coal production capacity and employee
reduction in various regions. Finally, regarding the optimisation of China’s coal production capacity,
some policy implications are given.
Keywords: coal industry; overcapacity; de-capacity; energy policy; China
1. Introduction
In 2016, China’s ensured reserves of coal were 249.23 billion tons, ranking third in the world [
1
].
China’s abundant coal resources are distributed across all provinces except Shanghai. China’s coal
resources are concentrated in northern China. In southern China, the coal resources are mainly
distributed in the Guizhou, Yunnan, and Sichuan provinces (Figure 1). Due to the abundant coal
resources and the shortage of other energy sources, China has been the largest coal producer and
consumer in the world for many years [
2
]. In the past 10 years, China has produced more than 40%
and consumed about 50% of the world’s coal (Figure 2), China plays an important role in the world’s
coal production and consumption system [3].
Coal is China’s basic energy source and an important raw material [
4
]. As one of the main
industries of the national economy, China’s coal industry is wide-ranging and employs many workers.
It is vital to the country’s economic development and social stability. In recent years, affected by
such factors as slowing economic growth and energy structure adjustment, coal demand growth was
significantly below expectations, supply capacity has remained excessive and supply and demand
have fallen seriously out of balance, resulting in a general decline in corporate profits, chaotic market
competition and increased safety production hazards. It has adversely affected economic development,
employment and social stability. China’s overcapacity problem was mainly structural rather than
Energies 2019,12, 2331; doi:10.3390/en12122331 www.mdpi.com/journal/energies

Energies 2019,12, 2331 2 of 16
cyclical. If the structural contradiction of overcapacity was not resolved, the price of industrial products
would continue to decline, the efficiency of enterprises would not be improved, and economic growth
would be difficult to sustain. Therefore, at the end of 2015, both the Political Bureau of the Communist
Party of China (CPC) Central Committee and the Central Economic Working Conference named the
cutting of overcapacity—or, de-capacity—as one of the five major tasks in 2016 [5].
Energies 2019, 12, x FOR PEER REVIEW 2 of 16
improved, and economic growth would be difficult to sustain. Therefore, at the end of 2015, both the
Political Bureau of the Communist Party of China (CPC) Central Committee and the Central
Economic Working Conference named the cutting of overcapacity—or, de-capacity—as one of the
five major tasks in 2016 [5].
Figure 1. China’s ensured reserves of coal by province (2016).
Figure 2. China's share of coal production and consumption in the world.
In recent years, China has issued a series of policies on how the coal industry could reduce
excessive capacity and promote high-quality development. High-quality development refers to a
new development pattern in China that focuses more on economic quality. It is a shift from extensive
development to intensive development, reflecting the Five Major Development Concepts of
“innovation, coordination, green, openness and sharing”. On 5 February 2016, the State Council
issued the Opinions on Resolving the Overcapacity Problem of the Coal Industry to Realise
Development by Extricating the Coal Industry from Difficulties (the Opinions). The Opinions clearly
put forward the overall de-capacity target for the coal industry: on the basis of the elimination of
backward coal capacity in recent years, the coal industry will make a further capacity reduction of
about 500 million tons and have about 500 million tons of capacity reduced and restructured, with a
substantial compression of coal capacity and moderate reduction of the quantity of coal mines
within three to five years from 2016 for an effective solution to the overcapacity of the coal industry,
balanced market supply and demand, an optimised industrial structure and substantial progress in
40
42
44
46
48
50
52
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
(%)
Consumption Production
Figure 1. China’s ensured reserves of coal by province (2016).
Energies 2019, 12, x FOR PEER REVIEW 2 of 16
improved, and economic growth would be difficult to sustain. Therefore, at the end of 2015, both the
Political Bureau of the Communist Party of China (CPC) Central Committee and the Central
Economic Working Conference named the cutting of overcapacity—or, de-capacity—as one of the
five major tasks in 2016 [5].
Figure 1. China’s ensured reserves of coal by province (2016).
Figure 2. China's share of coal production and consumption in the world.
In recent years, China has issued a series of policies on how the coal industry could reduce
excessive capacity and promote high-quality development. High-quality development refers to a
new development pattern in China that focuses more on economic quality. It is a shift from extensive
development to intensive development, reflecting the Five Major Development Concepts of
“innovation, coordination, green, openness and sharing”. On 5 February 2016, the State Council
issued the Opinions on Resolving the Overcapacity Problem of the Coal Industry to Realise
Development by Extricating the Coal Industry from Difficulties (the Opinions). The Opinions clearly
put forward the overall de-capacity target for the coal industry: on the basis of the elimination of
backward coal capacity in recent years, the coal industry will make a further capacity reduction of
about 500 million tons and have about 500 million tons of capacity reduced and restructured, with a
substantial compression of coal capacity and moderate reduction of the quantity of coal mines
within three to five years from 2016 for an effective solution to the overcapacity of the coal industry,
balanced market supply and demand, an optimised industrial structure and substantial progress in
40
42
44
46
48
50
52
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
(%)
Consumption Production
Figure 2. China’s share of coal production and consumption in the world.
In recent years, China has issued a series of policies on how the coal industry could reduce
excessive capacity and promote high-quality development. High-quality development refers to a
new development pattern in China that focuses more on economic quality. It is a shift from extensive
development to intensive development, reflecting the Five Major Development Concepts of “innovation,
coordination, green, openness and sharing”. On 5 February 2016, the State Council issued the Opinions
on Resolving the Overcapacity Problem of the Coal Industry to Realise Development by Extricating
the Coal Industry from Difficulties (the Opinions). The Opinions clearly put forward the overall
de-capacity target for the coal industry: on the basis of the elimination of backward coal capacity in
recent years, the coal industry will make a further capacity reduction of about 500 million tons and
have about 500 million tons of capacity reduced and restructured, with a substantial compression of

Energies 2019,12, 2331 3 of 16
coal capacity and moderate reduction of the quantity of coal mines within three to five years from
2016 for an effective solution to the overcapacity of the coal industry, balanced market supply and
demand, an optimised industrial structure and substantial progress in transforming and upgrading [
6
].
At present, China’s coal industry supply-side reform has been in effect for three years. What changes
have occurred in China’s coal industry? Timely assessment of the subsequent effect of de-capacity
policy on coal industry and proper responses to them can not only accelerate the supply-side reform
and promote high-quality development of coal industry, but also provide experience and policy
implications for other countries to deal with overcapacity.
This paper is a part of the preliminary work of the Key Consulting Projects of China Academy of
Engineering “China’s Strategy of Coal Mine Safety and Abandoned Mine Resources Development and
Utilization”. Such consulting projects usually do not deliberately emphasize the use of quantitative
models, but need to analyse the problem with detailed and the latest data, consider the possible impacts
or changes of the policy from as many aspects as possible, summarize the achievements and identify
the problems that need to be further resolved. The core part of this research report will be reported to
the relevant departments of the State Council in the form of “Academician Opinions” for government
decision-making. Therefore, we finished this paper in the form of a case study.
The rest of this paper is designed as follows. Section 2reviews the existing literature related to
excess capacity. Section 3describes the policy background and China’s coal de-capacity progress since
2016. Section 4studies the de-capacity policy effect on the coal market, spatial distribution of coal
production, coal enterprises and the regional differences of the policy effect. Section 5summarises the
main conclusions and policy implications.
2. Literature Review
2.1. Excess Capacity and Its Causes
Coal production capacity, that is, the ability to produce coal, is the total amount of coal that
can be produced with the given resources and technical level of all fixed assets that coal enterprises
participate in during a certain planning period [
7
]. Capacity utilisation ratio (CUR) is the ratio of actual
output to design production capacity, reflecting whether the production resources of the enterprise
can be effectively utilized [
8
]. Excess capacity ratio (ECR) is a concept that is opposite to the CUR;
thus, ECR =100%
−
CUR. Referring to the U.S. criteria, the reasonable range of ECR is 5%–10%.
Overcapacity occurs when the ECR exceeds the threshold of 10%, while under capacity occurs when
ECR is below the threshold of 5% [9].
Overcapacity is a common phenomenon in a market economy. China is a socialist country.
Compared with the developed market economy in Europe and America, China’s market economy is
not yet a complete market economy. However, China did not fully copy the Soviet model and established
the socialist market economy with Chinese characteristics, which makes the market play a decisive
role in resource allocation and gives full play to the role of the government. Since China’s transition
from a planned economy to a market economy in the late 1990s, there have been three overcapacity
cycles: the first cycle (1998–2001), the second cycle (2003–2006) and the third cycle (since 2009) [
10
].
Meanwhile, China’s coal industry has shifted from a shortage of production capacity to overcapacity,
and the cycle is basically in line with the national overcapacity cycle [
11
]. The characteristics of China’s
coal overcapacity cycle can be summarised as long-lasting timespans, repeated occurrences, complex
causes and serious impacts [
12
]. Therefore, overcapacity always brought about vicious competition,
severe waste of resources, imbalance between supply and demand, plunging coal prices and overall
financial loss of coal enterprises [
13
]. If this problem cannot be solved in a timely and effective manner,
it will not only affect the high-quality development of the coal industry, but also hinder the optimisation
of China’s energy structure and the prosperity and stability of the national economy [14,15].

Energies 2019,12, 2331 4 of 16
Correct identification of the causes is the prerequisite and basis for addressing overcapacity.
Overcapacity usually can be attributed to the rigidity of capacity and the fluctuation of demand [
16
].
Accordingly, this paper reviews the present literature from the supply side and the demand side.
(1) Causes from the supply side
‘Wave phenomenon’ of enterprise investment. For a developing country like China in a rapid
development stage, enterprises in this country are more willing to invest in industries with mature
technologies and existing product markets [
17
]. Due to the latecomer advantage, it is easy for enterprises
to have a consensus on new and promising industries. They are prone to the ‘wave phenomenon’
in investment, and a large amount of money is concentrated in a few industries. Consequently,
these over-invested industries will experience overcapacity and related problems [18].
Entry deterrence strategy of existing enterprises. In a perfectly competitive market,
the manufacturer is the price taker and faces a horizontal demand curve. For a competitive enterprise
that aims to maximise profits, the upward-sloping marginal cost curve is its supply curve. In the
long-term equilibrium, when the fully competitive manufacturer determines its output at the level
of marginal cost equal to the price, it maximises profit. At this point, the marginal cost is equal to
the average cost, price and marginal benefit in a perfectly balanced position with zero profit. At this
moment, the production quantity of the representative enterprise is the output that corresponds
to the tangency point of the marginal cost, average cost and price; there is no surplus production
capacity [
8
]. However, in the imperfect competitive market, the existing enterprises and the new
entrants have a game of interests. The former will curb the latter by maintaining a certain excess
capacity and reducing the expected returns [
19
–
21
]. Although China’s large coal enterprises are
basically state-owned enterprises, there are also many small private coal mines. There is a certain
degree of game between private enterprises. In the late 1990s in particular, China’s small coal mines
boomed “everywhere”. In order not to allow more new entrants to enter the market to share the
benefits, they adopt the entry deterrence strategy and even vicious competition, resulting in the waste
of coal resources and the destruction of the ecological environment, along with an over-supply and
overcapacity in coal production [14,22].
Factor hoarding behavior of enterprises. Rational enterprises will maintain excess capacity when
faced with uncertain demand in the future [
23
,
24
]. On the one hand, it takes about five to 10 years for a
coal mine to go from investment to commercial operations. If the coal enterprises closes some mines
when they have excess capacity and the demand in the future surges, they cannot build new capacity
and increase production in such a short time, and thus they will miss the profits of maintaining excess
capacity. On the other hand, industries such as coal, which have high sunk costs, need to pay large
costs to adjust production factors. When the market demand is slack, enterprises are likely to sell the
equipment below the present value after depreciation, but they need to purchase the equipment at the
original price when demand surges [11].
Improper government intervention. Unlike other fully developed market economies, government
intervention is an important cause of overcapacity in China. In response to the global financial crisis
in 2008, the Central Government launched a 4 trillion RMB investment plan and other stimulus
policies, bringing huge demand to the steel, cement, non-ferrous metals and other industries. However,
overinvestment in these industries adds to the burden of digesting excess capacity in the coming
years [
25
]. Besides, due to the gross domestic product (GDP)-oriented performance evaluation
system, local government officials have strong incentives to intervene in corporate investment and
use various preferential policies (such as low land prices, tax breaks and low power prices) to attract
investment, thereby increasing fiscal revenue and relieving employment pressure to show their political
achievements [
26
–
28
]. Eventually, this kind of blind investment behavior will lead to overcapacity in
the entire industry.

Energies 2019,12, 2331 5 of 16
(2) Causes from the demand side:
In theory, the growth of capacity input does not necessarily lead to overcapacity. Only when
product demand does not catch up with the growth of capacity input does the overcapacity problem
occur [29]. The demand side causes of overcapacity are mainly reflected in the following aspects.
Relationship with the economic cycle. In general, when the economy is in a recession, shrinking
demand may lead to an increase in surplus capacity in most industrial sectors [
30
]. Because of
the cognitive bias of enterprises, impulse investment occurs when the economy is overheated,
while delaying investment when the economy is depressed, which leads to the synchronisation of
production capacity and the economic cycle. When the overheated economy recedes into depression,
conditions for overcapacity will eventually be formed [31].
Coal savings from demand-side management. The term ‘demand-side management’ (DSM)
refers to technologies, actions and programmes on the demand-side of energy metres that seek to
manage or decrease energy consumption, in order to reduce total energy system expenditures or
contribute to the achievement of policy objectives such as emissions reduction or balancing supply and
demand [
32
]. With reference to this definition, over the years, China has strengthened coal demand-side
management to improve coal utilization efficiency and thereby reduce coal demand. Specific actions or
projects include: supporting and promoting emerging clean and efficient coal-fired power generation
technologies such as the integrated gasification combined cycle (IGCC) [
33
,
34
], replacing direct coal
burning in households with natural gas and electricity [
35
,
36
], energy-saving renovation of existing
buildings [37], and technical transformation of industrial furnaces [38].
2.2. De-Capacity Policy and Policy Effect
China’s coal overcapacity is a joint outcome of oversupply and insufficient demand but given the
country’s economic transformation, energy structure optimisation and environmental constraints, it is
not realistic to tackle the overcapacity issue simply by stimulating coal demand. Overcapacity is a
common phenomenon and sometimes cannot be handled by simple market self-regulation [
31
]. For this
reason, the mandatory elimination of backward production capacity by administrative means has
become a commonly used regulatory tool for the Chinese government to optimise production capacity.
China has issued a series of coal de-capacity policies since 2016, but little research has been
done to evaluate the policy effects. In the few related studies, Xu [
39
] analysed the effectiveness of
the de-capacity policy from a national perspective and concluded that the coal industry’s operating
conditions were improved after de-capacity, but this was largely the result of the redistribution of
interests among the industries, and at the expense of raising the cost of other industries, it squeezed
the profit margin of other industries. Deng et al. [
40
] measured the CUR of China’s steel industry and
used breakpoint regression to evaluate the de-capacity policy. They found the implementation of the
de-capacity policy has solved the problem of overcapacity in the steel industry to a certain extent,
but the de-capacity policy has only played a relatively good effect when it was first introduced, and
the effect has declined in the long run. Shi et al. [
13
] explored the unintended consequences and causes
of China’s coal capacity cut policy using an extended version of the KAPSARC Energy Model (KEM)
of China and found full and partial compliance with the de-capacity policy results in a significant gap
between supply and demand, and the policy was technically infeasible, even allowing for a significant
increase in coal prices and economic costs. Yang et al. [
41
] summarised the effect of supply-side reform
policies in the coal industry from the aspects of coal price, coal inventory, capacity structure, supply
and demand pattern, etc.

Energies 2019,12, 2331 6 of 16
2.3. Comments in the Literature and Possible Academic Contributions
Previous studies on overcapacity have mainly focused on the causes and the measurement of
overcapacity. Because some scholars have carried out a detailed summary, this paper does not list
the literature on overcapacity measurements [
40
,
42
,
43
]. Since 2016, China’s coal industry has made
great efforts to cut excess capacity, but there has been relatively little research on the effect of the coal
de-capacity policy. The possible contributions of this paper entail two aspects. (1) This paper analyses
the overall goal completion and the spatial distribution characteristics of production capacity reduction
since 2016, as well as the classification of closed mines. This is expected to deepen the understanding
of China’s energy policy and provide a reference for the formulation of differentiated employment
and training policies for these miners. (2) This paper comprehensively discusses the effect of the
de-capacity policy on China’s coal industry from three aspects: coal market, spatial distribution of coal
production and coal enterprises, and then presents the regional policy effect differences due to regional
heterogeneity. Objectively evaluating the policy effect is the premise of using market-based means
to optimise production capacity and the basis for ensuring the high-quality development of China’s
coal industry.
3. Policy Background and De-Capacity Progress
3.1. Policy Background
3.1.1. Severe Overcapacity
The period from 2002 to 2012 was called the ‘Golden Decade’ of China’s coal industry. During
this period, a large amount of funding entered the coal industry, and China’s coal production capacity
increased rapidly. According to the data from the China National Coal Association, China’s coal
production capacity in 2015 was about 5.7 billion tons, among which the normal and updated production
capacity accounted for 3.9 billion tons, the new and expanded 1.5 billion tons and the discontinued 308
million tons [
44
]. Apart from the 308 million tons that were discontinued and the 700 million tons
that had not yet been produced, China’s effective coal production capacity was about 4.7 billion tons
in 2015, much higher than the coal output of 3.7 billion tons, and the coal production capacity was
seriously excessive.
3.1.2. Low Market Demand
Since China’s coal consumption reached a historical peak of 4.24 billion tons in 2013, coal demand
has been sluggish due to factors such as economic downturn, environmental constraints and energy
structure adjustment. In 2014, China’s coal consumption was 4.12 billion tons, 2.88% lower than the
previous year. In 2015, the coal demand of high-energy-consuming downstream industries such as
electricity, steel, building materials and chemicals was significantly weakened to 1.84 billion tons of coal
used in the power industry, down 6.2% year-on-year; 627 million tons of coal used in the steel industry,
down 3.6% year-on-year; 525 million tons of coal used in the building materials industry, down 8%
year-on-year; and the 253 million tons used by the coal industry itself, down 8.4% year-on-year [
45
].
In addition, the unit energy consumption of coal-fired power decreased from 378 g/kWh in 2003 to
316g/kWh in 2015. For these reasons, China’s coal consumption in 2015 continued to drop to 3.97 billion
tons, a decrease of 3.64%.
3.1.3. More Coal Enterprises Suffered Financial Losses
Since 2011, due to the deteriorating market environment, the profitability of coal enterprises
has declined and the losses have become increasingly heavy. In 2015, the total profit of China’s coal
industry was 44.1 billion yuan, a decrease of 390.1 billion yuan compared with 434.2 billion yuan
in 2011, a drop of 89.84%. By the end of 2015, there were 2027 loss-making enterprises in the coal
industry, an increase of 1,182 compared with 2011; the proportion of loss-making enterprises was

Energies 2019,12, 2331 7 of 16
31.52%, an increase of 20.42% over 2011 (see Table 1for details). In 2015, 20 of the 38 listed coal
enterprises suffered losses, with a loss rate of 52.63%.
Table 1. Enterprises operating situation in China’s coal industry during 2011–2015.
Year Total
Enterprises
Loss-Making
Enterprises
Loss Rate
(%)
Total Profit
(hundred million yuan)
2011 7611 845 11.10 4342
2012 7790 1290 16.56 3555
2013 7975 1788 22.12 2370
2014 7098 1929 27.18 1268
2015 6430 2027 31.52 441
Data source: [45].
3.2. De-Capacity Progress
3.2.1. Overall Goal Completion
From Table 2, according to incomplete statistics, China eliminated 620 million tons of backward
coal production capacity during the period from 2016 to 2018. Capacity eliminated means the mining
facilities and equipment being physically demolished and, in general, the closed coal mine will not
restart. The target of eliminating 500 million tons in three to five years from the Opinions had been
achieved by the end of 2017. Specifically, in 2016, China planned to cut 250 million tons and finished
at 290 million tons; in 2017, it planned to reduce 150 million tons and cut 250 million tons; in 2018,
it planned to eliminate 150 million tons, and from January to July, a production capacity of 80 million
tons was eliminated. More than half of the 2018 annual plan was completed, and the work of coal
capacity reduction progressed smoothly [46].
Table 2. Completion of China’s coal de-capacity target (hundred million tons).
Year 2016 2017 2018 Total
Plan target 2.5 1.5 1.5 5.5
Actual completion 2.9 2.5 0.8 * 6.2
Note: The data with* denotes the January-July 2018 data. Data source: [47].
3.2.2. Spatial Distribution of De-Capacity
As can be seen from Figures 3and 4, the province with the largest coal de-capacity in China
during 2016–2018 was Shanxi with a total reduction of 69.2 million tons over three years. Overall,
the overcapacity withdrawn is concentrated in the central and southwest regions. The intensity
of de-capacity in most coal-producing provinces weakened between 2016 and 2018. At the same
time, the advanced production capacity was gradually released, indicating that the focus of China’s
coal industry’s de-capacity work has gradually shifted from the backward capacity cut to structural
capacity adjustments.

Energies 2019,12, 2331 8 of 16
Energies 2019, 12, x FOR PEER REVIEW 7 of 16
From Table 2, according to incomplete statistics, China eliminated 620 million tons of backward
coal production capacity during the period from 2016 to 2018. Capacity eliminated means the
mining facilities and equipment being physically demolished and, in general, the closed coal mine
will not restart. The target of eliminating 500 million tons in three to five years from the Opinions
had been achieved by the end of 2017. Specifically, in 2016, China planned to cut 250 million tons
and finished at 290 million tons; in 2017, it planned to reduce 150 million tons and cut 250 million
tons; in 2018, it planned to eliminate 150 million tons, and from January to July, a production
capacity of 80 million tons was eliminated. More than half of the 2018 annual plan was completed,
and the work of coal capacity reduction progressed smoothly [46].
Table 2. Completion of China’s coal de-capacity target (hundred million tons).
Year 2016 2017 2018 Total
Plan target 2.5 1.5 1.5 5.5
Actual completion 2.9 2.5 0.8 * 6.2
Note: The data with* denotes the January-July 2018 data. Data source: [47].
3.2.2. Spatial Distribution of De-Capacity
As can be seen from Figures 3 and 4, the province with the largest coal de-capacity in China
during 2016–2018 was Shanxi with a total reduction of 69.2 million tons over three years. Overall,
the overcapacity withdrawn is concentrated in the central and southwest regions. The intensity of
de-capacity in most coal-producing provinces weakened between 2016 and 2018. At the same time,
the advanced production capacity was gradually released, indicating that the focus of China’s coal
industry’s de-capacity work has gradually shifted from the backward capacity cut to structural
capacity adjustments.
Figure 3. Spatial distribution of coal capacity cut in China.
Figure 3. Spatial distribution of coal capacity cut in China.
Figure 4. Provincial annual coal capacity cut in China.
3.2.3. Classification of Closed Mines
As shown in Table 3, state-owned coal mines accounted for 81% of capacity elimination in 2016,
and the rest were private or collective mines. Among the state-owned mines, capacity reduction of the
large and medium mines accounted for 36%, and the small-scale mines below 300,000 tons accounted
for 45%. Most of China’s state-owned coal mines, especially the large and medium resource-exhausted
mines, have a long mining history, redundancies in their workforces and many social functions,
resulting in insolvency and heavy burdens.
Table 3. China’s closed coal mines in 2016.
Mine Property Mine Scale Quantity Proportion (%) Capacity Proportion (%)
State-owned Large and medium 13 36
Small-scale (<300 kt)
60 45
others — 27 19
Data source: [48].

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4. Policy Effect
4.1. Effect on Coal Market
According to the relationship between the coal de-capacity policy and the coal market, the policy
effect on the coal market can be divided into three stages: the policy effect-taking stage, the market
rebound stage, and the market adjustment stage [
49
]. The Bohai-Rim Steam-Coal Price Index (BSPI)
is the core indicator of China’s coal price system and the vane of the coal price, which reflects the
total supply and demand level of coal in the country extremely. Therefore, we analyzed the impact of
de-capacity policy on China’s coal price using BSPI. The corresponding coal price changes are shown
in Figure 5.
Energies 2019, 12, x FOR PEER REVIEW 9 of 16
demand was basically in normal fluctuations. Affected by the de-capacity policy, coal supply
continued to decline, and coal prices rose across the board. Later, with the release of high-quality
production capacity, coal prices fell and levelled out.
Market adjustment stage (Stage III): The coal de-capacity work has made remarkable
achievements and China’s coal market is in a healthy and stable state. The focus of coal de-capacity
has been transformed into systematic and structural optimisation from simply capacity reducing
since 2018. In Stage III, there was a tight supply in the coal market, while high-quality production
capacity continued to be released in an orderly manner, railway transportation was strengthened
and coordinated, and the relationship of coal supply and demand developed in a fundamentally
balanced direction. In general, the coal production capacity adjustment promotes a stable coal price
within a range of normal fluctuations.
Figure 5. Bohai-Rim Steam-Coal Price Index (BSPI).
Data source: [50].
4.2. Effect on Spatial Distribution of Coal Production
According to the similarity of geological conditions, the consistency of basic characteristics of
coal mine disasters and the principle of administrative division, China’s main coal production areas
are subdivided into five regions, namely: Jin-Shan-Meng-Ning-Gan, East China, South China,
Northeast China and Xin-Qing [51]. The specific division is shown in Figure 6.
Figure 6. China’ five main coal production areas.
Over half of China’s sustainable coal production capacity is distributed in
Jin-Shan-Meng-Ning-Gan and Xin-Qing, which will be the main battlefields for coal exploitation in
Figure 5. Bohai-Rim Steam-Coal Price Index (BSPI). Data source: [50].
Policy effect-taking stage (Stage I): In the first half of 2016, various ministries and commissions
under the Central Government successively launched de-capacity and related policies. Subsequently,
local governments responded positively and reduced the coal backward production capacity. In Stage
I, the coal production of enterprises above a designated size fell sharply, coal supply was at a low level
and the coal supply and demand relationship gradually became balanced. With the implementation of
the de-capacity policy, coal supply continued to decline, coal prices rose as expected and the coal price
index lagged the implementation of the policy, which rose steadily.
Market rebound stage (Stage II): Starting from the second half of 2016, with the continuous
implementation of coal de-capacity work, China’s coal production capacity was effectively reduced,
and the coal market gradually recovered and rebounded. In Stage II, the coal production of enterprises
above the designated size oscillated slightly, and the coal market was basically balanced. Advanced
production capacity was released to a certain extent, the balance index of coal supply and demand was
basically in normal fluctuations. Affected by the de-capacity policy, coal supply continued to decline,
and coal prices rose across the board. Later, with the release of high-quality production capacity,
coal prices fell and levelled out.
Market adjustment stage (Stage III): The coal de-capacity work has made remarkable achievements
and China’s coal market is in a healthy and stable state. The focus of coal de-capacity has been
transformed into systematic and structural optimisation from simply capacity reducing since 2018.
In Stage III, there was a tight supply in the coal market, while high-quality production capacity continued
to be released in an orderly manner, railway transportation was strengthened and coordinated,
and the relationship of coal supply and demand developed in a fundamentally balanced direction.
In general, the coal production capacity adjustment promotes a stable coal price within a range of
normal fluctuations.

Energies 2019,12, 2331 10 of 16
4.2. Effect on Spatial Distribution of Coal Production
According to the similarity of geological conditions, the consistency of basic characteristics of coal
mine disasters and the principle of administrative division, China’s main coal production areas are
subdivided into five regions, namely: Jin-Shan-Meng-Ning-Gan, East China, South China, Northeast
China and Xin-Qing [51]. The specific division is shown in Figure 6.
Energies 2019, 12, x FOR PEER REVIEW 9 of 16
demand was basically in normal fluctuations. Affected by the de-capacity policy, coal supply
continued to decline, and coal prices rose across the board. Later, with the release of high-quality
production capacity, coal prices fell and levelled out.
Market adjustment stage (Stage III): The coal de-capacity work has made remarkable
achievements and China’s coal market is in a healthy and stable state. The focus of coal de-capacity
has been transformed into systematic and structural optimisation from simply capacity reducing
since 2018. In Stage III, there was a tight supply in the coal market, while high-quality production
capacity continued to be released in an orderly manner, railway transportation was strengthened
and coordinated, and the relationship of coal supply and demand developed in a fundamentally
balanced direction. In general, the coal production capacity adjustment promotes a stable coal price
within a range of normal fluctuations.
Figure 5. Bohai-Rim Steam-Coal Price Index (BSPI).
Data source: [50].
4.2. Effect on Spatial Distribution of Coal Production
According to the similarity of geological conditions, the consistency of basic characteristics of
coal mine disasters and the principle of administrative division, China’s main coal production areas
are subdivided into five regions, namely: Jin-Shan-Meng-Ning-Gan, East China, South China,
Northeast China and Xin-Qing [51]. The specific division is shown in Figure 6.
Figure 6. China’ five main coal production areas.
Over half of China’s sustainable coal production capacity is distributed in
Jin-Shan-Meng-Ning-Gan and Xin-Qing, which will be the main battlefields for coal exploitation in
Figure 6. China’ five main coal production areas.
Over half of China’s sustainable coal production capacity is distributed in Jin-Shan-Meng-Ning-Gan
and Xin-Qing, which will be the main battlefields for coal exploitation in China. As can be seen
from Figure 4, this round of coal capacity reduction is mainly distributed in southern China where
mining conditions are poor and the eastern part of the country, which has a long history of mining.
Comparatively, the reductions in Xin-Qing and Jin-Shan-Meng-Ning-Gan were relatively small.
From January 2016 to March 2018, China approved 45 coal mines (including renovation and enlargement)
with a total capacity of 246.7 million tons, mainly distributed in Shanxi, Shaanxi, Gansu, Ningxia and
Xinjiang [
52
]. There is ‘less production capacity reduction and more increase’ in western China and
‘more capacity reduction and less increase’ in central and eastern China, which objectively accelerates
the implementation of China’s coal overall layout ‘controlling the east, stabilising the centre and
developing the west’. The centre of China’s coal production has shifted from the central and eastern
regions to the west, especially Jin-Shan-Meng-Ning-Gan and Xin-Qing in the country’s northwest.
4.3. Effect on Coal Enterprises
(1) Significant enhancement in coal enterprises’ profitability
China’s coal prices rebounded rapidly in July 2016. After September, as some advanced production
capacity was released to increase the coal supply, coal prices fell sharply after November before
returning to a reasonable level. In this context, China’s coal industry, which once suffered overall loss,
later ushered in a big turnaround. In 2016, China’s coal mining and washing industry achieved a total
profit of 109.09 billion yuan, a year-on-year increase of 223.6% [
53
]. In 2017, with coal prices at a high
level, the main business income of coal enterprises above a designated size was 2.54 trillion yuan,
a year-on-year increase of 25.9%, and profits totalled 295.93 billion yuan, a year-on-year increase of
290.5% [
54
]. In the first three quarters of 2018, with coal prices at a still higher level, the coal mining
and washing industry achieved a total revenue of 1.79 trillion yuan, a year-on-year increase of 5.8%,
and total profits reached 232.75 billion yuan, a year-on-year increase of 14.5% [55].
(2) Rapid increase in industry concentration

Energies 2019,12, 2331 11 of 16
With the mergers and acquisitions of coal enterprises, the number of coal mines in China decreased
from 9,700 at the end of 2015 to around 7,000 in 2017 and then to about 6,500 in 2018. The concentration
of China’s coal industry has further increased over the years. CR
8
of China’s coal market is calculated
by summing the coal output of the top8 firms, dividing that sum by the total coal output of China.
In 2016, CR
8
of China’s coal market was 36.41% and rose to 38.50% in 2017. In 2018, it exceeded
40% for the first time, reaching 41.90% (see Table 4for details). At the same time, the international
competitiveness of China’s coal enterprises had obviously been enhanced. Among the top 30 global
coal enterprises, Chinese companies accounted for 21 seats in 2017 [56].
Table 4. Output (TOP8) and CR8in China’s coal industry (unit: 10,000 tons).
Rank 2016 2017 2018
Group Output Group Output Group Output
1 Shenhua Group 43,149 Shenhua Group 44,072 China Energy Group 51,200
2 China Coal Group 13,323 China Coal Group 16,368 China Coal Group 19,000
3 Shandong Energy Group 13,050 Shandong Energy Group 14,139 YANKUANG Group 16,100
4Shaanxi Coal Chemical
Industry Group 12,593 Shaanxi Coal Chemical
Industry Group 14,010 Shaanxi Coal Chemical
Industry Group 16,000
5 Datong Coal Mine Group 11,786 YANKUANG Group 13,511 Shandong Energy Group 14,500
6 YANKUANG Group 11,415 Datong Coal Mine Group 12,700 Datong Coal Mine Group 13,700
7 Shanxi Coking Coal Group 9151 Shanxi Coking Coal Group 9609 Shanxi Coking Coal Group 10,000
8 Jizhong Energy Group 8009
Yangquan Coal Industry Group
8200 Shanxi Jinneng Group 8081
China’s coal output 336,398 China’s coal output 344,500 China’s coal output 354,610
CR836.41% 38.50% 41.90%
(3) Safer coal mining
With the continuous advancement of supply-side reforms, many small-scale coal mines with
poor mining conditions have been shut down one after another. Coal mining in China has become
increasingly safe and efficient. In 2016, the number of coal mining accidents and related deaths in China
reached a ‘double decline’, down 29.3% and 10% respectively year-on-year with major accidents and
deaths down by 37.1% and 39.5% respectively. The death rate per million tons was 0.156, down 3.7%
year-on-year [
57
]. In 2017, there were 219 accidents and 375 deaths in coal mines in China, which was
a decrease of 30 and 151 persons, down 12% and 28.7% respectively. The death rate per million tons
was 0.106, a decrease of 32.1% year-on-year [
58
]. In 2018, the safety of China’s coal mines continued to
improve. The death rate per million tons was 0.093, down 12.3% year-on-year, and fell below 0.1 for
the first time [59].
4.4. Regional Differences of Policy Effect
The de-capacity policy directly affected the coal production and the number of employees in China.
Due to the regional heterogeneity, including resource reserves, the contribution of the coal industry
to local GDP and policy compliance, there are obvious differences in various regions. It can be seen
from Table 5that in 2016, among the 25 coal-producing provinces in China, except for Xinjiang’s coal
production growth of 5.59% and Guangxi’s growth of 1.66%, coal production in various regions has
declined by varying degrees. Among them, Shanxi had the largest coal production reduction, with a
reduction of 136.36 million tons. Qinghai had the smallest coal production reduction, with a reduction
of 0.29 million tons. The largest reduction rate occurred in Jilin was 36.08%, and the smallest reduction
rate occurred in Shaanxi was 1.92%. At the same time, except for an increase of 3200 employees in
Guangxi, the coal industry in various regions also experienced different levels of employees reduction.
Shandong had the maximum employees reduction of 89,500 and the Qinghai had the minimum
employees reduction of 1800 persons. In order to avoid the social problems caused by the massive
unemployment of coal employees, local governments and enterprises have to resettle them properly,
which is the basic preconditions for the orderly progress of de-capacity.

Energies 2019,12, 2331 12 of 16
Table 5.
Contribution of the coal industry to local gross domestic product (GDP) and policy effect
differences in 2016.
Region Contribution to
Local GDP (%)
Production
Reduction
(1000 tons)
Production
Reduction Rate
(%)
Employees
Reduction
(1000 persons)
Employees
Reduction
Rate (%)
Shanxi 32.02 13636.23 14.10 3.00 3.13
Inner Mongolia 18.37 6398.17 7.03 1.39 6.37
Ningxia 14.87 906.48 11.37 0.83 12.83
Guizhou 13.36 354.35 2.06 2.48 9.92
Shaanxi 11.78 1010.10 1.92 2.13 9.94
Gansu 3.47 145.34 3.30 0.53 7.43
Henan 3.14 1649.18 12.13 3.45 7.54
Hebei 2.75 952.73 12.81 0.35 1.85
Anhui 2.69 1168.56 8.72 3.57 13.00
Sichuan 2.53 241.64 3.77 2.52 12.44
Shandong 2.43 1402.53 9.86 8.95 18.98
Yunnan 2.26 597.57 11.53 1.03 11.46
Xinjiang 2.24 -851.62 -5.59 1.03 18.33
Heilongjiang 1.66 660.65 10.08 0.69 3.52
Jilin 1.44 950.38 36.08 0.94 12.11
Chongqing 1.41 1124.82 31.58 3.44 27.09
Hunan 1.22 771.42 21.68 3.42 27.74
Liaoning 0.91 582.65 12.26 0.66 4.43
Qinghai 0.90 29.16 3.57 0.18 23.08
Jiangxi 0.67 713.94 31.44 1.77 25.73
Fujian 0.38 207.04 13.01 0.72 19.00
Guangxi 0.31 -7.05 -1.66 -0.32 -36.78
Jiangsu 0.25 550.99 28.71 1.15 16.04
Hubei 0.19 266.01 30.94 0.89 38.20
Beijing 0.08 132.48 29.43 0.30 28.57
Note: The coal production and employees reduction rate is compared with the 2015. The “-” indicates an increase
compared with 2015.
5. Conclusions and Policy Implications
5.1. Conclusions
This paper first reviews the dilemma of China’s coal industry pre-2016 without the de-capacity
policy, and then analyses the progress of China’s coal de-capacity, including the completion of the
overall target and the spatial distribution of the capacity cut. On this basis, we explore the de-capacity
policy effect and regional differences. This study draws the following conclusions.
(1) The target of the Opinions to eliminate 500 million tons in three to five years had been achieved as
of the end of 2017, with Shanxi as the province with the largest coal de-capacity during the period
of 2016 to 2018. Overall, the capacity withdrawn was concentrated in the central and southwest
regions, most of which belonged to state-owned coal mines and the resettlement of workers was
a prominent problem. The intensity of de-capacity in most coal-producing provinces had been
weakened from 2016 to 2018. At the same time, advanced production capacity was gradually
released, indicating that the focus of China’s coal industry de-capacity work had gradually shifted
from simple capacity cut to systematic and structural capacity optimisation.
(2)
According to the relationship between the coal de-capacity policy and coal market, the policy
effect on the market can be divided into three stages. In the policy effect-taking stage, with
the implementation of the de-capacity policy, coal supply started to decline, and coal price
increased as expected; In the market rebound stage, affected by the de-capacity policy, coal supply
continued to decline and coal price rose across the board. Later, with the release of high-quality
production capacity to a certain extent, coal prices fell then stabilised. In the market adjustment
stage, the de-capacity work was transformed into systematic and structural de-capacity, which
promoted the stability of the coal market and the fluctuation of coal prices within the normal range.

Energies 2019,12, 2331 13 of 16
(3)
There is ‘less production capacity reduction and more increase’ in western China and ‘more
capacity reduction and less increase’ in central and eastern China. The centre of China’s
coal production has shifted from the central and eastern regions to the west, the high-quality
industrial development pattern of ‘structural de-capacity and systemic capacity optimisation’
was initially formed.
(4)
With the development of de-capacity work and the rational return of coal prices, the profitability
of coal enterprises has been enhanced significantly, while the pace of mergers and acquisitions
has improved the industrial concentration. At the same time, the international competitiveness of
China’s coal enterprises has been significantly enhanced, and the level of safety production has
continued to improve.
(5)
Due to regional heterogeneity, including resource reserves, the contribution of the coal industry
to local GDP and policy compliance, there were obvious differences in various regions. Regional
heterogeneity was likely to cause local governments and coal enterprises to respond differently to
the de-capacity policy issued by the Central Government of China, resulting in varied regional
coal production capacity and employee reductions.
5.2. Policy Implications
(1) Avoid improper government intervention in coal production.
Excessive local government intervention is the main reason for overcapacity in China’s coal
industry, and local government behavior is subject to the performance evaluation system and financial
restraint mechanism. Therefore, we can suppress excessive investment of the local governments
and the large enterprises from the following two aspects to alleviate overcapacity. On the one hand,
the performance evaluation system of local officials should be improved from only GDP assessment to
a comprehensive assessment also including ecological environment and people’s livelihoods. On the
other hand, a set of effective restraint and incentive mechanisms should be set up to regulate the
behavior of local governments, state-owned banks and state-owned large enterprises, and to prevent
local governments from giving too many preferential policies to stimulate the economy.
(2) Explore market-based means to cut excess capacity.
The concept “socialist market economy”, introduced by Deng Xiaoping, has survived the test
of time, and China is well on its way to catching up with the world’s largest economy. For some
people, socialism and markets are still mutually antithetical. It was more so at the time when Deng
introduced it to the world, sharply divided as it was between the ideological poles of state-driven
socialist planning systems and market-driven economic frameworks. The remarkable aspect of the
“socialist market economy” is in its effort to reconcile what used to seem irreconcilable [
60
]. De-capacity
policy, as an administrative tool for dealing with overcapacity, has achieved the expected effects in
the past three years. However, the market is the most effective means of allocating resources. In the
long run, marketisation is the fundamental way to eliminate the coal excess capacity. In the process of
further coal production capacity optimisation, it is recommended to apply the quota system to the
overall de-capacity target decomposition, which can give full play to the decisive role of the market in
allocating coal resources and lead to benign development in China’s coal industry.
(3) Continuously optimise the coal capacity and reuse the abandoned mine resources.
The focus of China’s coal capacity optimisation should shift gradually from quantitative targets to
qualitative targets. In accordance with the principles of marketisation and legalisation, China should
continue to actively and steadily promote the resettlement of staffand the disposal of assets and
liabilities. At the same time, it is necessary to provide guidance for the ecological restoration and
treatment of different kinds of closed or abandoned mines, foster the continual and substituted
industries and form some new economic growth points.
Compared with the previous research, this paper is characterised by systematically studying the
implementation effect of China’s coal industry capacity optimisation policy from the three aspects of
coal market, spatial distribution of coal production and coal enterprises, and proposes the avoidance of

Energies 2019,12, 2331 14 of 16
improper government intervention, the use of market-oriented means, and the continuous promotion
of coal capacity optimisation. As China’s coal capacity optimisation is in the transformation stage of
‘total capacity cut to structural and systematic capacity cut’, de-capacity policy is only an administrative
measure taken at a specific stage to regulate industry development. It is the fundamental way to achieve
high-quality development through market means. Further research is needed to assess the impact
of China’s de-capacity policy using quantitative models and exploring the application of the quota
system in China’s coal industry capacity optimisation target. Moreover, the miners’ resettlement and
the development and utilization of abandoned mine resources (such as industrial plants, equipment,
underground space, etc.) should also be a concern.
Author Contributions:
Conceptualization, M.S.; Data curation, X.H.; Formal analysis, X.H.; Funding acquisition,
M.S.; Project administration, M.S.; Software, X.H.; Supervision, M.S.; Writing—original draft, X.H. and W.Z.;
Writing—review and editing, M.S. and Y.F.
Funding:
This study was funded by Key Consulting Projects of China Academy of Engineering (2017-ZD-03),
the National Natural Science Foundation of China (L1624054), and the programme of National Development and
Reform Commission (2016JQ7003).
Acknowledgments:
The authors would like to thank the anonymous referees for their helpful suggestions and
corrections on the earlier draft of this paper. In addition, the authors want to thank Bin Chen and Bo Zhang for
their technical supports.
Conflicts of Interest: The authors declare no conflict of interest.
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