China Promises "Blue Skies" as Smog Persists

Local violators resist environmental controls.

Beijing's Tiananmen Square is shown in a file photo.

After setbacks for plans to clean up its coal and steel industries, China's government is trying not to repeat its mistakes in 2017 as it promises "to make our skies blue again."

Premier Li Keqiang made the pledge Sunday at the start of China's annual legislative sessions after the country's top planning agency announced more carefully calibrated plans to cut production overcapacity from highly-polluting coal and steel.

Miscalculations by the National Development and Reform Commission (NDRC) have been blamed for last year's frequent outbreaks of smog, which may been worsened by government intervention and poor enforcement.

In the weeks leading up to the meeting of the National People's Congress, officials have struggled to find a balance between tougher enforcement and less aggressive cutbacks after meddling in the markets drove producers to break environmental rules.

On Feb. 21, leading coal companies met in Beijing to discuss new production controls aimed at avoiding another big swing in prices following a 72-percent jump caused by shortages last year.

The price spike developed after the government pushed mines to accelerate the shutdown of surplus production capacity. The abrupt cuts forced regulators to reverse course and order more output when stockpiles shrank before the winter heating season began.

In the seesaw of changes, the government initially told mines last spring to cut their annual number of operating days due to overcapacity and low prices, only to increase them on an emergency basis when prices soared due to government-backed infrastructure projects and short supplies.

This year, the largest mining companies have urged the government to cut back on planned production days again for the next six months to keep prices from falling back too far, Reuters reported.

The NDRC wants to keep thermal coal prices within a narrow range of 500 to 570 yuan (U.S. $72.51-82.66) per metric ton, said Laban Yu, head of Asia oil and gas equities at Jefferies Group LLC in Hong Kong, as quoted last month by Bloomberg News.

Without output curbs, prices could slump as low as 370 yuan (U.S. $53.66) per ton, China Shenhua Energy Co. warned last year, according to a Citigroup report.

Preserving their gains

The mining companies have been trying to preserve gains from last year's increase in prices. Industry profits have been the subject of seemingly conflicting reports.

Based on figures from the China National Coal Association (CNCA), profits from subsidized coal enterprises surged to over 32 billion yuan (U.S. $4.64 billion) last year compared with losses of more than 4.2 billion yuan (U.S. $609 million) in 2015, the official Xinhua news agency said.

Major coal enterprises reported combined profits of 109 billion yuan (U.S. $15.8 billion) in 2016, more than tripling from a year earlier, Xinhua said in a separate report.

The struggle over prices is taking place in a context of changing conditions and pressing problems, not the least of which is the prevalence of coal-fueled smog.

Despite previous claims of improvement, the Ministry of Environmental Protection (MEP) announced on Feb. 21 that the average density of fine smog-causing particles known as PM 2.5 rose 14.7 percent during January in 338 monitored cities.

In Beijing, PM 2.5 concentrations soared 70.6 percent from a year earlier, Xinhua said.

The declining air quality has been traced to a surge of unauthorized steel production, particularly in neighboring Hebei province, despite government claims that the coal and steel industries met their targets for cutting surplus production capacity last year.

A study released by Greenpeace East Asia last month found that steel production capacity actually rose because official reports of cuts included smelters that were already idled, while some plants reopened to take advantage of rising prices.

The study based on research by Beijing-based consultancy Custeel may cast doubt on National Bureau of Statistics (NBS) claims that coal production fell 9.4 percent to 3.36 billion tons in the sharpest decline since output peaked in 2013.

In its 2016 economic report last week, the NBS said coal consumption dropped 4.7 percent from a year before, but the agency gave no tonnage figure.

Last month, the State Administration of Work Safety (SAWS) announced a nationwide mine inspection following a rash of fatal accidents. SAWS vowed to "shut down coal mines that have produced more coal than the government (has) allowed," the Communist Party paper People's Daily said.

Unauthorized production

It remains unclear whether the NBS data is counting only the authorized coal and steel production. But the attempt to manage coal prices by using production restrictions may represent a partial return to price controls that the government ended a decade ago.

Philip Andrews-Speed, a China energy expert at National University of Singapore, said it is important to distinguish between the government's short and longer-term goals.

"In the short term, it is about price control," Andrews-Speed said by email. "But in the medium and long term, the government still wants to cap coal production and use, and has already announced plans for massive labor redundancies in the coal industry."

Last year, the government projected that planned cuts to overcapacity in the coal and steel industries would lead to the loss of 1.8 million jobs.

Speaking last week before China's annual legislative sessions, Minister of Human Resources Yin Weimin said the overcapacity industries had already lost 726,000 jobs last year and would shed another 500,000 in 2017, Bloomberg reported.

The new NDRC targets for capacity cuts this year are lower than last year's, raising questions about how effective they will be.

The agency has ordered the elimination of 50 million tons of steel capacity and 150 million tons of coal, compared with reported cuts of 65 million tons and 290 million tons respectively, state media said.

Plans for coal and steel may be further complicated by China's announcement on Feb. 19 that it has suspended all coal imports from North Korea for this year in line with U.N. Security Council sanctions against its nuclear weapons program.

China first rejected a cargo of North Korean coal at its Wenzhou port in coastal Zhejiang province on Feb. 13, citing high mercury content, South Korea's Yonhap News Agency reported.

The cutoff in supplies of more costly coking coal for steel production has been seen as further pressure for price hikes.

Managing environmental impacts

But the developments in the coal and steel industries raise questions about how diligent the central government has been in managing production, prices and environmental impacts in the face of widespread violations at the provincial and local levels.

After a month of MEP inspections, Xinhua and the official English-language China Daily "named and shamed" six cities for failing to address air pollution. Twelve more were cited for not dealing with "massive emissions violations by polluting companies."

But when it came to enforcement, the MEP apparently turned the matter over to local authorities.

"All violations by companies have been reported to city and county governments to meet out penalties, the ministry said," as quoted by state media.

Speaking on Sunday, Premier Li vowed to toughen enforcement of air quality rules on officials and industry.

"Officials who do a poor job in enforcing the law, knowingly allow environmental violations, or respond inadequately to worsening air quality will be held accountable," said Li.

"We will make our skies blue again," he said, according to Xinhua.

China Daily highlighted the issue in an earlier editorial titled, "Local officials' chokehold must end for cleaner air."

The paper pointed to examples of cheating, fabrication of environmental data and failure of local officials to restrict industrial operations during smog emergencies.

"Their poor performance, or even inaction, has contributed to the deteriorating pollution situation in the region, and those found responsible must be punished with the full force of the law," the editorial said.

But it failed to address the question of why the government has appeared to cede authority over environmental impact issues to lower administrative levels at a time when President Xi Jinping has centralized political power in Beijing.

Ambivalent policy

Daniel Gardner, a China scholar and history professor at Smith College in Massachusetts, said the environmental conflicts and the Greenpeace-Custeel report highlight ambivalence at both the central and local political levels.

"Beijing itself teeter totters between giving more weight to the country's economic prosperity and more weight to environmental protection," Gardner said in an email message.

"Indeed, the central government itself is not of one mind. There are agencies like the MEP that favor protecting the environment and those like the NDRC that favor developing the economy," he said.

In an earlier study in 2015, Greenpeace cited a related problem in construction of unneeded coal-fired power plants.

The report traced the issue to the transfer of project approval decisions to provincial authorities in 2013.

"The result of this was that a measure originally intended to simplify bureaucracy and increase efficiency has now become a carte blanche for local governments to increase GDP (gross domestic product), especially in provinces heavily relied on coal," the study said.

The balance of power between the center and local authorities may be tested as the result of recent MEP inspections that found widespread disregard for environmental restrictions.

In a statement on Feb. 22, the MEP ordered an expansion of production limits for the winter heating season to cover aluminum and chemical plants in northern regions.

"Twenty-eight major cities in the region will be banned from using coal this year," China Daily reported. But it was unclear how their energy needs could be met without China's main fuel.

A later report by Shanghai Daily said the cities would only be required to show a decrease in the volume of coal they consume this year.