At the end of 2016, the Chairman chaired the 31st Meeting of the Central Leading Group for Comprehensively Deepening Reform, during which the "Reform Plan for the Transfer System of Mining Rights" and the "Reform Plan for the Mineral Resource Equity Fee System" were reviewed and approved.

In the "Reform Plan for the Mineral Resource Rights and Royalty System," not only have the fees for prospecting rights and mining rights been abolished and replaced with royalties on the transfer of mineral rights, but also the fees for the use of prospecting rights and mining rights have been adjusted to become fees for the occupation of mineral rights.

Why does the central government issue such a document as the year-end approaches?

Before we continue reading the article, let me share a little bit of background information with you all.

What is a mining right?

Currently, the state has not yet provided a precise definition; it merely stipulates that the right consists of prospecting rights and mining rights—simply put, the right to explore for minerals and the right to extract them.

What are “frying ore” and “dumping ore”?

Someone once defined it as follows: the practice of acquiring prospecting or mining rights through certain means, then neither conducting exploration nor commencing mining, but instead driving up prices and reselling these rights for profit.

To thoroughly analyze this matter, we must also start by examining the “past and present” of mining rights.

I. The “Initial Liberation” of Mining Rights

The transfer of mining rights in our country can be divided into three stages, each corresponding to a specific historical period, policy stance, and market transaction behavior.

The first phase, from the post-reform and opening-up period to the end of the 20th century, was characterized by a shift in policy—from prohibiting the transfer of mining rights to gradually relaxing restrictions. The primary purpose of market transactions during this period was to acquire the mineral resources associated with mining rights.

On the surface, before the 1996 amendment to the Mineral Resources Law, the state prohibited the buying and selling of mining rights; however, in reality, mining rights had already been “abused” even before the 1986 Mineral Resources Law was enacted.

The origins date back to 1981. At that time, the then-General Secretary of the CPC visited Datong and Shuozhou in Shanxi Province for an inspection. The coal seams in this region were shallow—minerals could be mined with just a single hoe—and the area was truly a treasure trove. Yet, despite possessing this “golden rice bowl,” the local residents were strikingly poor and often went hungry.

To address the issue of poverty among the people, the General Secretary said: “If there’s water, let it flow quickly. Large mines should be exploited by the state; slightly larger ones can be developed by collectives. As for small and marginal mines—those that aren’t worth investing in for either the state or collectives—we should let the local people themselves take charge of mining them.”

After that, township and village coal mines—of a collectively-owned nature—began to spring up rapidly and vigorously. The official introduction of the central policy “Let the water flow quickly” marked a loosening of the state’s control over mining rights. First, the “water” of coal resources flowed from the territories of state-owned coal mines into the farmlands of collective economies; and since these “collectives” were composed of “members,” it was only natural that the “water” eventually ended up in the “individual pockets.”

Later, in 1992, the revitalizing winds of reform and opening-up “swept” across the entire country, and rapid economic development sparked a huge demand for mineral resources. In Shanxi, the “flow” of coal—once a steady stream—now accelerated even further and became much more “chaotic”: underground trading of mining rights became increasingly frequent; township coal mines, labor reform farms, and local military units all scrambled to seize resources, while local governments turned a blind eye or pretended not to notice.

In 1998, the State Council issued three consecutive administrative measures, hoping that the introduction of these three supporting regulations would bring the mineral rights market onto a standardized track.

However, the chaos of this period had already “fattened” a group of people. The most typical and widely known example is Xing Libin, the “coal boss” who was exposed by the media in 2012 for marrying off 70 million daughters.

It is understood that his first major financial breakthrough came from the Jinjiazhuang Township-run coal mine in Liulin County, which he leased and operated—a venture that began precisely in 1990. Subsequently, Xing Libin acquired all the equity of Liulin County Xingwu Coal Mine, the region’s largest state-owned enterprise with reserves totaling 1.5 billion tons, for a mere 80 million yuan—what was described as a “pea-price” deal. As a result, Xing Libin instantly became the richest man in Liulin, Shanxi, with assets exceeding 10 billion yuan.

However, at this point—in the truest sense—no one was engaging in large-scale “reselling” or “speculating” on mining rights. Most mine owners entered the market with the goal of accumulating wealth through coal mining.

The reason is simple—it has to do with the market at the time. As for a detailed analysis, that’s reserved for the next section.

Two: “Frenzy in ‘炒矿’!”

The second phase, roughly from 2001 to 2010, was characterized by a gradual tightening of policies governing the transfer of mining rights, with market transactions increasingly aimed at profiting from the price differential in mining-right transfers.

As mining rights gradually open up, a group of people have also “become incredibly wealthy” along with them.

During this period, mining bosses who had amassed large numbers of mining rights after the state permitted the transfer of mining rights in 1996 began both buying and selling these rights. On the one hand, they had capital accumulated from previous mineral sales; on the other hand, leveraging the “networks” they had built up over many years of mining operations with local governments, they started acquiring and applying for mining rights, packaging them up, and then reselling them at a profit.

Meanwhile, local governments, in an effort to boost fiscal revenues, began auctioning off state-owned coal mines under the guise of “paid transfer of mining rights.” At the same time, some collectively and state-owned mining enterprises were converted into private ones, further driving the flow of mining rights into the market. Moreover, lured by the substantial profits from legal transfers, illegal transfers of mining rights also started to gain momentum. Due to the lack of effective oversight and enforcement by local governments, the period around 2000–2010 saw the most chaotic phase in the transfer of mining rights.

There is a widespread phenomenon of falsely reporting reserves and illegally sub-contracting and reselling mining rights at multiple levels. Speculators in mineral resources are everywhere, leaving the mining rights market in complete chaos.

In August 2005, an article titled “Speculating on Minerals Overnight Turns Ordinary People into Millionaires” went viral online, giving people their first clear glimpse of the “big-time moves” made by the “mineral speculation groups.”

At that time, mine owners weren't thinking about how to run the mines—they were focusing on when would be the most profitable time to sell their mining rights.

This drew the high attention of the national government. In April 2005, the Ministry of Land and Resources, together with eight other departments including the National Development and Reform Commission, launched a comprehensive crackdown on illegal mining and transfer activities, strictly reviewed mineral exploration projects, and took vigorous measures to combat corruption and malpractice. In August of the same year, the State Council issued the "Notice of the State Council on Comprehensively Rectifying and Standardizing the Order of Mineral Resource Development." Starting from that year, the number of illegal mining cases nationwide began to decline year by year.

Then the question comes back again: Why are mineral rights speculation cases so frequent during this period? Is it really just because of imperfections in national policies and a lack of comprehensive supporting measures?

No! At the root of it all lies the chain reaction triggered by China’s accession to the WTO in 2001.

As shown in the chart above, from 1990 to 2002, coal consumption remained relatively stable, and at one point even exceeded supply. However, after China joined the World Trade Organization in 2001, its export volume surged dramatically, and foreign investment poured in on a massive scale. As a result, China truly became the “world’s factory,” and demand for coal grew exponentially.

Since then, the coal market has experienced an explosive growth, rising from 1.366 billion tons in 2002 all the way to 3.49 billion tons in 2011—a 2.55-fold increase. Coal has now become a seller’s market, with supply falling short of demand.

With the sharp rise in mineral resource prices, the “value” of mining rights has also soared. Coal bosses are increasingly realizing that rather than clinging to the meager profits from coal mining, it’s far more lucrative to sell or sublet their mining rights!

Thus, driven by the pursuit of maximum economic profit, mining rights trading began to “degenerate,” shifting toward a capital-driven operation characterized by low costs and high returns—namely, reselling mining rights.

Now that we’ve analyzed this crazy phase, what’s the current state of the mining rights market?

III. The market is undergoing a difficult transformation.

The third phase, from 2011 to the present, is characterized by the government maintaining its existing policies, while the transaction forms in the mineral rights transfer market are evolving toward financialization, as represented by securities and trusts.

One year after the establishment of the national tangible market for mining rights, the website of the Ministry of Land and Resources released on July 2, 2012, the relevant data on the market’s first-year performance.

As clearly shown in the chart below, the market for the transfer of mining rights exhibited a downward trend in 2016, primarily due to the slow recovery of the global economy and the continued sluggishness in global mineral consumption. China’s mining market is also undergoing a period of profound adjustment. In this broader context, mining right holders are choosing to avoid risks and maintain rational investment strategies.

From the perspective of mineral types, mining rights transfers in recent years have primarily focused on gold mines, geothermal resources, copper mines, iron mines, and lead mines. In terms of geographic regions, the transfer of mining rights has been largely concentrated in the central and western regions. In 2015, exploration rights in the western region accounted for 49.1% of the national total, while in 2016, mining rights in the western region made up 50.4% of the national total.

The massive blaze from the “mining collapse” has not been extinguished.

Although the state has begun frequently issuing regulations governing mining operations, illegal activities have been curbed, and the number of cases has declined. With the subsequent refinement of laws and regulations, the number of illegal cases has stabilized at a relatively consistent level.

However, as mineral resource prices continue to rise, the development value of these resources has been rekindled. Coupled with the continued bullish outlook for the future, mining rights have not thereby “devalued.”

The soaring prices of mineral products have driven up the value of mining rights, thereby increasing the costs of mineral production. This, in turn, feeds back into higher prices for mineral products, creating a vicious cycle that repeats itself over and over again.

An article titled “Coal Boss Says Earning Money from Coal Mining Is Less Profitable Than ‘Speculating in Mines’—A Single Resale Can Yield Hundreds of Millions” published in the April 2012 edition of the People’s Daily once again brought mine speculators into the spotlight.

As for these mine owners—many of whom are Jiangsu and Zhejiang businessmen who began contracting Shanxi coal mines as early as the late 1990s—they basically don’t extract coal themselves; instead, they keep the mines running at a bare minimum, paying just enough in annual contract fees to hold onto them. Their ultimate goal is to wait for favorable market conditions, then sell the mines off at a hefty profit—making money without investing much of their own capital.

Not surprisingly, in the two consecutive years of 2014 and 2015, the National Audit Office conducted a comprehensive inspection of mining rights in several provinces and cities across the country. Judging from the results, there are clear signs that illegal activities are making a comeback.

In particular, for the six provinces, municipalities, and autonomous regions reviewed in 2015, as of the end of 2014, the competent authorities for land and resources in these six regions had outstanding mineral resource revenues totaling 2.953 billion yuan (excluding deposits earmarked for the restoration and remediation of mine geological environments). From 2009 to 2015, these six regions failed to use mineral resource-related funds in accordance with prescribed purposes and instead misappropriated or diverted such funds amounting to 628 million yuan. Of this sum, 480 million yuan was used to establish enterprises through investment, 60 million yuan was illegally lent to private enterprises, and 88 million yuan was spent on personnel expenses and other related expenditures.

So, where are these illegal activities mainly concentrated?

IV. Institutional issues are fundamental.

China’s mining rights system got off to a relatively late start, and the relevant laws and regulations are still not fully developed. Many industry insiders have been voicing their frustrations online about mining rights transactions. As the editor, I’d like to offer a few comments—consider it merely “throwing out a brick to attract jade”—and I hope that even more professionals will share their insights and join the discussion.

1. The hidden nature of mineral resources leads to uncertainty in estimating mineral reserves.

Even a single leaf can obscure one’s view—how much more so when most mineral resources lie buried underground, concealed even by just a thin layer of soil, making it exceedingly difficult to grasp their full picture. The occurrence of mineral resources is highly complex, as reflected in the variability of ore body shapes, attitudes, mineral compositions, and grades. Even with an extensive network of boreholes and tunnels that provide detailed control over already discovered deposits and ore bodies, the situation remains highly dynamic after mining begins.

This means that different people, holding different viewpoints, can arrive at vastly differing estimates of the reserves in already mined ore bodies under existing engineering controls. In other words, when estimating reserves, some people deliberately overstate or even falsify mineral reserves—can you spot those falsifications at a glance?