China's coal industry faces challenges from multiple fronts. Photo: Bloomberg

China is considering aggressive new curbs on coal consumption as it accelerates efforts to transform its economy and tackle climate change, moves that would hurt Australia's export revenue and place new mines in doubt.

There will be no growth in coal or steel demand in China – in fact significant declines.  

Ross Garnaut, professor of economics at the University of Melbourne

A mandatory nationwide cap on coal use is among the likely initiatives to be unveiled in the Communist Party's 13th five-year plan, a key economic planning blueprint slated for release next year, sources familiar with the discussions said.

China's property boom is flagging, with new starts down 17 per cent this year. Photo: Tomohiro Ohsumi

"The issue is how to define the cap, and how to allocate the cap among the different sectors and provinces," said Teng Fei, a senior climate change academic at Beijing's Tsinghua University, and a member of China's negotiating team travelling to Paris for the climate summit next month.

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The current five-year plan only provides "aspirational targets" for coal consumption in selected cities and provinces. A mandatory cap – targeting both carbon emissions and the notorious smog blanketing many of China's major cities – would also likely see the nation's coal imports, down 31 per cent this year, plummet further.

A smooth shift to a more service and consumption-based economy would aid the pollution fight at home but also help limit global warming by capping China's carbon emissions well before the 2030 goal pledged by Beijing.

For Australia, though, the potential loss of one of its largest markets for thermal coal would send coal and other commodity prices lower, cut revenue for state and federal budgets, and raise further doubts about the viability of major new coal mines such as Watermark on the Liverpool Plains and Queensland's Galilee Basin.

Evidence that the shift is already underway include a 17 per cent dive in housing construction starts so far in 2015 as the government seeks a controlled deflation of a bubble in the domestic property market. Apartment prices in large Chinese cities often exceed those in Australia by some margin.

The sector accounts for almost one-sixth of the economy, fanned by property prices that can rival or exceed those in Australian cities even though average incomes remain a fraction of those of Australians.

The building binge included  adding about 20 per cent more than the entire floor space in Britain  in China last year alone, said Jiang Kejun, a research professor with the Energy Research Institute, a think tank under the powerful National Development and Reform Commission.

Even with power demand basically flat this year, China continues to add almost 1 gigawatt of new coal-fired generating capacity – equivalent to a large power station in Australia – to the grid each week.

Professor Jiang, who is also a government climate change adviser, told Fairfax Media planners are considering to slapping a ban on new coal-fired capacity: "Now we are just talking about this in the new five-year plan – whether we go to zero new coal-fired power plants." 

Even without an order from the top, construction must slow. "They will automatically stop," he said. "There is no market, they are dying."

Tim Buckley, a former Citi analyst now with the Institute for Energy Economics and Financial Analysis, said China's coal-fired power plants were operating at less than 50 per cent capacity with average hours of operation down more than 9 per cent in the first seven months of 2015.

"It'd be crazy of them not to [ban net new plants]", Mr Buckley said. "I'm amazed they haven't done it already."

China's economy is likely to grow 6.8 per cent in 2015, its slowest since 1990, and ease further to 6.3 per cent next year, the International Monetary Fund said this week. That's down from the double-digit growth rates earlier this decade that helped trigger an investment boom in Australia's mining sector.

China buys just over one third of Australia's exports, with iron ore accounting for about $50.6 billion in sales last year and coal $8.3 billion, according to Department of Foreign Affairs and Trade data.

Ross Garnaut, professor of economics at the University of Melbourne, flagged the possibility of a sharper-than-expected slowdown with absolute falls in investment in a recent report on the Chinese economy. (See his chart below on China's rising coal demand.)

"The new model of economic growth involves major adjustment for the Australian resources industries if things go smoothly in China," Professor Garnaut said. "These are immense changes in China, and it would not be surprising if there are some large bumps in the road."

"There will be no growth in coal or steel demand in China – in fact significant declines – for the foreseeable future, while increased supply capacity is being added in exporting countries," he said.

"In the long term, growth in demand outside China will help the adjustment in China for iron ore, but not for thermal coal." 

Global commodity prices have tumbled along with China's waning growth, dropping below the lowest point during the global financial crisis in 2007-08, a chart from the Reserve Bank of Australia showed this week: