Beijing China sea port“Where there are policies from above, there are ways to get around them from below,” goes a Chinese saying, which sums up the challenge Beijing faces in eliminating overcapacity in the coal and aluminium industries.

Local governments’ reluctance to shut uncompetitive excess capacity, and sometimes even support their operation in hard times, belies the central government’s goal to reform state enterprises and make their operations more market-oriented.

Henan, the mainland’s fifth largest coal-producing region, this month initiated a meeting with eight banks, including some of the nation’s largest commercial banks, to ask them to keep lending to the province’s top three coal miners suffering from an industry downturn and offer them preferential lending rates, Bloomberg quoted government officials as saying.

Zhengzhou Coal Industry and Electric Power – a Shanghai-listed flagship of one of the three miners, Zhengzhou Coal Industry (Group) – warned investors it expects to post a first-half net loss of 52 million yuan (HK$65.5 million), citing weak coal demand and overcapacity. In the same period last year, net profit slumped 93 per cent year on year.

Pingdingshan Tianan Coal Mining, a Shanghai-listed unit of another of the three miners, China Pingmei Shenma Group, saw a 75 per cent fall in net profit to 48 million yuan year on year in the first quarter.

First-half profit for the sector dropped 44 per cent to 51.3 billion yuan, according to the China National Coal Association. Of the 36 large miners tracked by the association, 20 are in the red, nine are close to breaking even and more than half have cut or delayed paying salaries.