Coal reforms have to cut both ways

As coal prices have been falling in recent days thanks to the slowing domestic economy, annual negotiations to set contract coal prices went smoothly this year, and many industry experts say now may be a perfect time to liberalize thermal coal prices. The National Development and Reform Commission (NDRC), China's top economic planner, is also reportedly mulling reforms to scrap the annual contract coal pricing mechanism.

Yet, canceling the mechanism, which secures a certain amount of thermal coal for power plants at prices well below market levels, would only exacerbate financial problems for power companies if there are no corresponding reforms in electricity pricing.

Since the NDRC still caps electricity prices, if coal prices rebound again, power companies which cannot shift their increased costs downstream would suffer heavy losses. And if the losses became severe, this could lead to the reintroduction of annual contracts. Therefore, it is necessary to link thermal coal prices to electricity pricing before leaders can realistically consider axing annual price contracts.

The author is Zhao Nan, an economic commentator.

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