Lifting of coal price cap marks start of public-private partnerships

The recent decision to rescind the cap on thermal coal prices has surprised many and led to intense speculation over the likelihood of an imminent and substantial price hike. However, the decision was made because prices are stable, if not declining.

The move to cancel limits on thermal coal prices will not lead to sharp price hikes as industrial demand is sluggish, especially in energy-intensive industries, amid the global economic slowdown and the continued slowdown across China.

Let's not forget that the cap was only introduced at the very beginning of 2012 when demand was far more buoyant and prices were soaring.

Far more important though, let's not overlook the fact that China relies heavily on coal and will continue to do so for many years to come. The coal industry, therefore, falls comfortably into the category of a "strategic industry".

And it is this strategic status that requires China's central government to play a very active role in managing industry competition and the balance of supply and demand.

Simply relaxing the pricing restrictions should be seen as a woeful neglect of government responsibility. In addition, allowing supplies of coal to increase while demand remains stubbornly sluggish is also a dereliction of duty on the part of the government.

Not only should the central government place major restrictions on coal production, especially from the nation's major coal producing regions such as Shanxi province and Inner Mongolia autonomous region, but there should also be tighter restrictions on coal imports.

Australia and the United States in particular continue to eye China as a lucrative coal exporting market, given the bleak outlook for European markets.

Government management of the coal industry structure is also essential, especially when such an imbalance between supply and demand exists.

Oversupply and weak demand in most industries often leads to significant industry consolidation where mergers and acquisitions as well as closures often result.

Such an industry restructuring could ultimately result in an extremely uncompetitive Chinese coal industry in which an unhealthy and exploitative oligopoly or even duopoly of producers set prices well beyond any realistic market level.

Price caps never represent a long-term solution. It is only a genuinely competitive industry that ensures market-based pricing levels and only government can ensure necessary industry competition.

Most importantly, the central government should resist the temptation to instigate major, wholesale privatization of the coal industry.

Health and safety and the private sector always prove to be extremely uncomfortable partners, and China's coal industry continues to be plagued by poor and often unsafe working conditions. Nor should the government choose a totally government-owned coal industry.

Instead, a happy halfway house will prove most effective where government plays a crucial supervisory role, maintaining a competitive industry and enforcing strictly a safe operating environment.

At the same time, some commercial freedom should be afforded to these newly formed quasi-private coal producers. Commercial freedom will improve efficiency but not safety without assertive government control.

This model of public-private partnership should also be replicated across all of China's strategic industries such as the power industry and the water industry.

The author is visiting professor at the University of International Business and Economics in Beijing and a researcher at Nottingham University's School of Contemporary Chinese Studies.