Workers clear snow in Beijing, China. (Photographer: Nelson Ching/Bloomberg)

Why China's Freezing

(Bloomberg View) -- China is suffering from a frigid winter, but it can't blame Mother Nature alone. Late last week, following a widespread uproar, officials reversed a policy banning some provinces from using coal for heat -- which had the inadvertent but predictable effect of leaving large swathes of the country freezing cold.

China's government has been keen to reduce air-pollution levels, which are quite literally off the charts. State media rejoiced last month when data showed that China was only the second-most polluted developing country, behind India. With health concerns rising, and middle-class anger swelling, the coal ban was a well-meaning attempt to address the problem.

Unfortunately, it made no sense. China generates almost 70 percent of its electricity from coal. Households buy it from vendors pushing carts, while metal refiners use it on a huge scale to power their plants. Any attempt to reduce this consumption would require serious investment in alternatives and a gradual phase-in. Instead, officials simply mandated the cuts, with little in the way of preparation.

This led to a scramble for natural gas, one obvious alternative. But a lack of inventory, distribution and ready output caused a supply crunch. Production has risen by only 9.7 percent this year, with total consumption up 14.6 percent -- not nearly enough to make up for the cuts in coal. Officials are expecting a shortage of up to 20 percent this winter. Prices in some areas have doubled. In Tianjin, near Beijing, they're up 74 percent.

Making matters worse, the ban has brought major industries to a near-standstill. Mills in the key steel regions of Tangshan and Hebei were operating at 80 percent of capacity in September; now rates are as low as 43 percent. Aluminum and other heavy industries are facing severe production limits through March 15, a mandated slowdown that could weigh heavily on gross domestic product.

The public backlash has been swift. With millions of homes left with insufficient energy for cooking and heating, anger on social media grew so fierce that the government soon reversed course. Last week, the Ministry of Environmental Protection told local officials in 28 cities to ease coal restrictions and take measures to stabilize prices and supplies.

All this was a perfectly foreseeable outcome to imposing steep cuts on the country's primary source of heating and electricity without any alternative in place. So what happened?

On one level, it's another example of how China's bureaucracy can sometimes subordinate common sense to centrally mandated goals. In an analogous episode a few years back, a hurriedly constructed school track meant to impress a government official came out as a rectangle, leading to instant social-media infamy.

But the coal debacle also reflects a deeper problem. A country of 1.4 billion simply can't change its energy mix overnight. China has made great strides in encouraging alternative fuels, but continued progress will require good planning, not just investment. Natural gas, which the government hopes will meet its residential energy needs, is widely available globally, yet China's pipelines aren't ready to transport it. Many of the country's solar farms are sitting idle for similar reasons.

Solving such problems is easier said than done. But rather than making heavy-handed decrees, China should be thinking about market-based reforms such as carbon taxes, while working to improve infrastructure for alternative energies. A more transparent policy-making process would also help. There's a reason that major public investments and policy changes usually require things like comment periods or impact reports. Such formalities lead to better regulation and reduce the risk of technocrats making well-meaning mistakes.

A common refrain from China bulls is that democracy is too slow in solving problems. As anyone who has visited an American airport or subway system in recent years can attest, there's some merit to this argument. But while central planning may seem more efficient at times, far more often it leads to predictable foul-ups -- with all-too-costly results.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of "Sovereign Wealth Funds: The New Intersection of Money and Power."

To contact the author of this story: Christopher Balding at cbalding@phbs.pku.edu.cn.

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