The National Administration of Energy has issued two documents within one week.
The first document stressed that the regulator will focus on pressing for the reform of power tariffs and optimizing the fuel trading mechanism this year.
The second document underlined a move toward raising the ratio of coal used in generating power and developing low-emission coal-fired power plants.
The root cause for China’s severe air pollution is that power plants have failed to invest in environmental protection equipment after suffering years of losses, while the government has imposed a tight grip on tariffs for fear of inflation.
As a result, China has wasted enormous resources over the years.
The curbing of tariffs has led to external pollution and put the well-being of all Chinese people at risk.
In order to reduce emissions, power plants have to make profits in the first place.
As a result, the authorities delayed the tariff cuts several months behind the slide in the coal price in 2011.
The power plants benefit from falling raw material costs, and their profitability will be limited at a certain level.
For example, profit at Huaneng Power International Inc. (00902.HK) soared from 1.4 billion yuan (US$230 million) in 2011 to a record 13.5 billion yuan last year, double the peak of 6.5 billion yuan in 2007.
The two documents both focus on tackling air pollution through reducing emissions.
The market reform of the electricity price and overhaul of the profit distribution among power generators and grid operators require power plants to review their social responsibility and commitment to communities.
It’s quite obvious the government intends to see power plants assume a key role in improving air quality.
It has unveiled a set of measures, like holding back the tariff cut, and the loss-making asset spin-off of Datang International Power Generation Co. Ltd. (00991.HK).
As a result, the recovery in the valuation of power plays may already be complete, and their earnings are likely to remain in the lower double-digit percentages, given a greater responsibility to clean up the environment.
Power sector reform is one part of the country’s economic reforms.
Shares of state-owned enterprises have been sluggish in recent years, as the government abandoned the old-time obsession with a high growth rate.
Also, the massive 20 trillion yuan in local government debt gives investors the jitters.
One of the driving forces of the sharp jump in the stock market last month is the 1 trillion yuan debt swap program announced by Finance Minister Lou Jiwei in mid-March.
It’s the first time Beijing has showed its determination to seek a solution for the problem of excessive local government debt.
The market has responded positively as, systemic risk has decreased significantly.
However, Beijing does not want to see more local governments issuing debt to take advantage of the debt swap program.
So, the scheme is limited to already issued government bonds. And this discourages local government officials from pursuing redundant construction.
Does the Chinese government intend to lure in foreign investors to tackle the debt problem faced by Chinese corporations?
The authorities approved the Shanghai-Hong Kong Stock Connect in November last year and will give the nod for the Shenzhen-Hong Kong Stock Link soon.
And the government has repeatedly voiced support for the equities market.
The various economic issues remain solvable, largely depending on the determination of the government.
Whether the market rally can be sustained will come down to the outlook for company earnings.
The rise of internet-plus, energy pricing reform, “one belt, one road” and the merger of CNR China Corp. Ltd. and China CSR Corp. Ltd. should all boost company earnings.
This article appeared in the Hong Kong Economic Journal on May 8.
Translation by Julie Zhu
– Contact us at firstname.lastname@example.org