JINCHENG, China (Reuters) - Residents in the rugged, overmined city of Jincheng in northern China’s coal heartland have been breathing a little easier after campaigns to reduce pollution forced dozens of collieries and chemical plants to close.

“Everything was covered in dust, and it’s cleaner now,” said Zhang Haibin, a 44-year-old farmer living in a largely abandoned hamlet on the edge of a defunct coal deposit that once attracted migrant workers from across the country.

But Jincheng has paid a heavy price, Zhang said.

Factories and coal mines have shut down, sending shockwaves through the local economy. The migrants have drifted away, and jobs are hard to find even for locals.

And the air is still not clean enough, falling short of the government’s pollution targets. That means that as another punishing anti-pollution campaign gets underway this winter in smog-choked north China, Jincheng will be under even more pressure.

The city’s experience illustrates the challenges facing the Chinese government as it tries to rein in pollution without further weighing on an economy that is showing signs of a slowdown, exacerbated by the effects of a bruising trade war with the United States.

Across north China, cities are struggling to strike a balance between reversing the environmental damage done by decades of breakneck growth and keeping their heavy industrial economies afloat.

Jincheng has done particularly poorly, according to the central government.

A sprawling, mountainous administrative region in the south of Shanxi province, Jincheng is still dominated by coal. Though many pits have been shut, the craggy landscape bears the scars of decades of excessive mining.

Residents say air quality has improved, but whiffs of sulfur pervade the city’s industrial districts, and smoke can be seen billowing from factory chimneys.

Jincheng was the worst performer among 28 northern cities forced to impose special pollution measures last year, according to data from the Ministry of Ecology and Environment.

It failed to meet its target of cutting concentrations of lung-damaging PM2.5 particles by 10 percent last winter, and recorded 1,819 pollution violations, the most of the 28 cities.

Summoned to Beijing in April to explain his city’s poor performance, mayor Liu Feng said the city’s gross domestic product plunged 9 percent and fixed asset investment 41 percent in the first quarter as a result of production cuts.

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Feng told officials, at a meeting attended by Reuters, that he was “deeply embarrassed” and would seek to “learn painful lessons” about improving compliance this year.

Feng said city inspectors had been too “passive” and had failed to properly forecast smog build-ups or supervise industries. But he also blamed unfavorable weather conditions, as well as the city’s “industrial structure”, dominated by polluting power plants, steel mills and cement factories.

The economy bounced back after the winter curbs were lifted, with GDP growing 4.9 percent from a year earlier in the first three quarters of 2018, according to the city’s statistics bureau, although fixed asset investment was still down 1.9 percent on the year.

But with the winter anti-pollution curbs that took effect on Nov. 1, Jincheng - like many cities in Shanxi - will again struggle to reconcile official pollution targets with their industrial structures.

Shanxi “faces a very complex situation, it has few resources and its supervision capabilities are quite weak - it has a lot of different kinds of challenges,” said Ma Jun, director of the Institute of Public and Environmental Affairs (IPE), a non-government group that monitors pollution.

“Many cities in Shanxi rank the lowest in the country when it comes to environment law enforcement and information disclosure,” Ma said.

Shanxi produces nearly a billion tons of coal a year, around a quarter of the national total, and despite promises to promote cleaner energy, its production of the fossil fuel actually increased in the first three quarters of 2018.

NO LENIENCY

Last year’s winter smog crackdown was criticized for a “one size fits all” approach that failed to take account of local conditions, shuttering hundreds of factories whether they had implemented pollution controls or not.

Beijing has promised a more business-friendly campaign this year, setting lower emissions-cutting targets and promising to exempt environmentally compliant firms.

But after its failures last year, Jincheng is unlikely to be treated leniently in the war on pollution, which is a signature policy of President Xi Jinping.

On Monday, inspectors said 19 firms in Jincheng had failed to follow rules to restrict output during a smog outbreak last week, the latest in a series of problems uncovered this year.

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The city’s coal districts are now in a state of siege as inspectors scour mines, coal processing facilities, chemical plants and storage depots for violations.

This winter, Jincheng aims to cut coal chemical production by 30 percent, and impose output curbs of as much as 50 percent in certain districts. It will also establish a 95-square kilometer “no-coal zone” banning household coal combustion and convert more than 9,000 households to gas.

One manager with Shanxi Lanhua High-Tech 600123.SS, a local conglomerate involved in coal, chemicals and real estate, said the city was under far greater pressure.

The firm will completely shut down some of its subsidiaries in winter, and expects to lose around 450 million yuan ($64.84 million) in earnings over the winter period.

“This year the intensity is going to be stronger,” said the manager, who requested anonymity because he wasn’t authorized to talk to the media.

DIVERSIFICATION

Ma of the IPE said polluting firms in cities like Jincheng had long taken advantage of the system. Their failure to comply with costly rules means they could outcompete compliant rivals, and China needed to create a “level playing field” to make sure lawbreakers were eliminated from the market.

But at a meeting of China’s parliament in March, delegates from Jincheng said the city needed more financial support from Beijing to diversify and regenerate its economy.

Despite years of crackdowns, Jincheng continues to rely heavily on coal, and while surviving mines have benefited from the closure of smaller rivals, related businesses - including local truckers - are struggling with higher compliance costs and intensifying competition.

Gas has now emerged as the major bright spot for the city, with its seams rich in coalbed methane, which has replaced coal as a source of heating for many outlying villages, but development will still take time.

"The GDP growth that Jincheng wishes to accomplish ... will be driven from gas today, while historically it would have been from coal," said Randeep Grewal, chairman of Greka, a unit of G3 Exploration G3EG.L, which has drilled more than 4,500 coalbed methane wells in Jincheng.

“We are in that transition mode, and clearly in transition, you have a bit of growing pains, but the transition is irreversible.”

In the meantime, the legacy of coal is still being felt by residents of Jincheng like Zhang, the farmer.

His sparsely furnished home is riddled with dangerous cracks - the result of subsidence caused by mining - but he said he has not received enough compensation from the state to move out.

“They’ve even closed down livestock farms here because of the environmental policies and lots of farmers are out of work,” he said. “The government knows how to ask you for money but it doesn’t know how to resolve the problems of ordinary people.”