Time to carve up excess coal capacity

China's fixed-assets investment in the coal mining and processing sector has amounted to 3.1 trillion yuan ($505.3 billion) since 2006, media reports say. Thanks to this massive dose of capital, the country's coal production capacity now stands at 5.5 billion tons, with actual production hitting 3.7 billion tons last year.

However, given a precipitous decline in coal demand, the industry is suffering serious financial losses. According to figures from a recent China Business News report, 20 large-scale coal producers reported net losses of 10.56 billion yuan during the first three quarters of this year. Moreover, efforts in China to prevent environmental degradation, combined with slumping oil prices and the emergence of shale gas in the world market, coal consumption has nowhere to go but down.

The problem now is dealing with overcapacity in the coal industry. To date, authorities have relied on administrative interventions to eliminate outdated capacity. This is not enough. The government needs to let the market play a bigger role in eliminating overcapacity so that previous investments are not completely squandered.