Local Governments in Coal-Rich Chinese Province Can’t Meet Payroll

December 29, 2015 Updated: January 4, 2016

The collapse in coal prices has hit home in northern China’s Shanxi Province, as coal companies and local governments have found themselves unable to meet payrolls.

Coal is king in Shanxi, which possesses about one-third of China’s total coal deposits. Even though demand for coal has fallen with the slowdown in China’s economy, coal has remained in oversupply, and prices have plummeted.

The current hard times occur in the context of recent prosperity. In 2002, coal prices increased sharply from 200 yuan (about US$31) per ton in 2002 to 1,070 yuan (about $165) per ton in July 2008. Though the ensuing global financial crisis saw a dip in the price, the coal prices climbed back up to 853 yuan (about $131) in August 2009, according to the state-run China Times.

Coal prices in Shanxi took a hit beginning in 2014. By July 2015, the coal industry had been losing money for 12 straight months. By Nov. 23, the price had fallen to $51 a ton.

For the first three quarters of this year, the coal industry in Shanxi suffered a loss of 7.037 billion yuan (about $1.08 billion). Coal companies failed to pay workers’ salaries totaling 3.5 billion yuan (about $539 million), and failed to pay 10.9 billion (about $1.68 billion) for social security insurance.

A woman stands on a pile of coal near a coal mine at Datong in Shanxi Province on Nov. 20, 2015. 103 county governments in Shanxi couldn't pay the salary of their civil servants as coal price took a dive. (Greg Baker/AFP/Getty Images)
A coal mine at Datong in Shanxi Province on Nov. 20, 2015. 103 county governments in Shanxi couldn’t pay the salary of their civil servants as coal price took a dive. (Greg Baker/AFP/Getty Images)

County governments, dependent on the coal companies for revenue, have also suffered. In the province, 103 of 119 counties have not been able to pay their civil servants, according to China Times.

“Serious overcapacity in the coal industry is currently the most important issue,” said Zhu Qiyuan, the secretary-general of the Economic Reform and Development Society in Shanxi, in an interview with China Times. Zhu added that, after traveling to multiple provinces, many local authorities told him they would rather see a drop in price than the halt of coal production in their regions.

Qing Yonglong, a coal mine owner in Shanxi, told China Times that halting production was difficult, given the increased difficulty in obtaining a loan after production slowed, and the problems of losing market share and jeopardizing social stability. The euphemism “social stability” refers to the Chinese regime’s concern that adverse circumstances, such as unemployment, may cause people to turn against the ruling Communist Party.

Wang Sixiang, an economist, questioned why the local authorities were not able to pay the civil servants’ salaries, given that the money to do so would have originated from the coffers of the central government, which collected the money from the Chinese taxpayers, in an opinion article published on the Hong Kong-based website Oriental Net on Dec. 28.

Wang explained that the problem lies with the fact the the central government only pays the salaries of civil servants within the staffing quota, while many county governments usually exceed their quotas. In China, local governments are given a certain number of positions they may fill—the staffing quota.

The situation was made worse by the fact that some county governments also misappropriated the funds earmarked for paying salaries.

Paying out salary to civil servants should have never been a problem, wrote Wang, given that China is able to generate revenue from a tax that is one of the highest in the world: selling land. In China, the state is the sole landowner, and local governments have turned to selling the land of homeowners and farmers to raise revenue.  

In addition, Wang said, fines leveled for fire, transportation, and tax violations account for nearly 20 percent of the state’s total taxation revenue. These fines were also available for paying the county officials’ salaries.

The truth is that the financial burden on the Chinese taxpayers is simply too heavy, wrote Wang, as the state needs to support too great a number of civil servants in China.

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