China’s Dirty Wind
News in the WSJ on Sept 28th reported that China’s wind farms, which as I have noted before* , have some connectivity problems in joining the electrical grid. That information is nothing new, but the rest of the article’s discussion piqued my interest.
Apparently, the Chinese government is planning to ensure ample supplies of wind (even when it is not blowing) by balancing the load not with fast-starting natural gas plants, as some US wind farms utilize to manage the load, but with slow-starting and arguably heavy-polluting coal plants.
What is not common knowledge is that producing power is not as easy as connecting a wind farm into a preexisting grid. Wind power fluctuates and varies and sometimes needs to be shut down/curtailed if wind speeds exceed say 35 mph, or blow at less than around 5 mph. Too much or too little wind on the grid can cause power shortages. (A very basic explanation of load management and peaking is HERE). A news article on the problem of variable loads being matched with hydroelectric power is HERE.
According to NERC, which (under FERC’s supervision) can assess fines and create rules to ensure electricity reliability in the US, “Wind machines “ramp up” and trail off so fast that the grid is likely to need new generators fired by natural gas that can start up or shut down faster than the ones in service now.” (NYT).**
When I read the WSJ article, I could not initially believe what it was saying. For a country run by engineers and geologists, one would think that China would be well aware of the difficulties in cycling up and down different types of power. Natural gas is a good match for wind power because it is easy to cycle up quickly. Coal, however, takes longer to cycle up. For coal to be an efficient match to mitigate the variability of wind power, coal plants will need to be on constantly.
Considering that coal is a relatively cheap source of energy, wouldn’t it be cheaper for Chinese power plants only to invest in coal and run the plants at 100% capacity rather than constructing wind plants while running coal power plants at 50% and then scaling up their use when needed? By matching coal with wind, most potential environmental gains are negated since coal’s emissions constantly flutter into the atmosphere. Still, it could be said that some reduction in carbon output is better than none at all. But the matching of coal to wind certainly drives wind power’s costs up– for China’s economic detriment and only marginal environmental gains. (It could be that China is hoping the build-out of wind power helps them when the Copenhagen environmental carbon market targets are achieved; or that natural gas can be matched to the wind farms after certain pipelines are completed.)***
Why is China using coal instead of natural gas? China simply does not have very much natural gas. (EIA) Natural gas only accounted for 3% of China’s total energy mix in 2006, compared to nearly 70% provided by coal. (EIA). And of that, only 29% was used for electric power or residential and commercial uses as of 2005. (page 4, Yang Dengwei; 32% was used for industrial fuel) This should change, however, due to pipelines that China is constructing from bordering countries that have natural gas surpluses. And of course, Liquid Natural Gas technology also raises the amount of imports that China can receive. By 2011, China hopes to “raise the ratio of natural gas in its total primary energy consumption by 1 to 2 percentage points.” (China Daily). China’s natural gas consumption rose from 50 billion cubic meters in 2005 to 76 billion cubic meters in 2008, to an estimated 86 billion cubic meters in 2009. (China Daily).
I suspect that China may eventually decide to go down the route of battery storage of excess wind power in order to better manage the loads. But battery storage technology is still a bit expensive, “costing roughly $3 million per megawatt plus millions for start-up and testing.” (Scientific American).
When China’s excess natural gas pipeline capacity comes online, the country may also begin greater utilization of natural gas to manage wind’s load, but natural gas supplies will still be dwarfed by China’s coal– and natural gas prices may rise again like they did in Summer 2008. If a majority of China’s natural gas supplies are imported (as appears likely), in order to preserve energy security, Beijing may want to discourage generators from using natural gas to provide safety from wind’s variability. Hydroelectric power could also be paired to wind power. However, hydroelectric power is mostly concentrated in China’s south, whereas much of China’s wind resources are located in the North (Inner Mongolia, Xinjiang, etc.). Perhaps nuclear could balance the wind grid like coal currently does, but most new nuclear plants are to be built on the coast and near China’s south.
It will be interesting to examine how successfully China marries coal to wind generation and what sort of effect this will have on China’s future electricity pricing.
Endnotes
*In my older post I perhaps noted China’s wind connectivity problems a bit too harshly given that the US also has some grid connection problems regarding wind since even more so than in China, a great deal of US wind capacity is far from its citizens and will require long transmission lines to provide wind. This transmission problem helped lead to the demise of part of the Pickens Plan for a massive wind farm in Texas.
**At the very least, “[b]atteries or flywheels, both of which can store energy, may be needed to smooth out the production of wind farms, which stop producing power when the wind stops, or when the wind goes faster than the turbines can handle.” (NYT) [which leads to patents like THIS.]
*** Interesting fact. Due to the need for wind to be matched to more reliable sources of power, wind farms are not 0 carbon emission investments. One study reported that; “Increasing the capacity of wind energy on the Austin Energy grid causes increased usage of these less efficient peaking units. In other words, as more wind energy is generated, there is a drop in the overall efficiency of fossil fuel based energy on the grid, resulting in greater carbon emissions per unit of energy from the nonrenewable sources. . . For purchased wind energy from Austin Energy, with a 20 percent capacity of wind energy, each megawatthour of electricity would increase the emission from the fossil fuel sources by 60 lb of CO2 . While this CO2 emissions rate is lower than the current UT plant emissions of 694 lb/MWh, it is also not zero. Instead of the purchased wind energy being 100 percent carbonfree, the reserve offsets result in 91 percent carbonfree energy” (Is Wind Energy Hot Air?, UT)
China’s Food Safety Law and Tort Reform
With its new Food Safety Law that went into effect on June 1st, 2009, China has edged closer toward an “Americanization” of its tort law system (at least in the Product Liability area). China has given a little more power to people who file lawsuits. The incremental changes in this particular law which allows greater monetary recovery; however, probably does not signal a near-term shift in China’s general attitude toward permitting recovery of higher sums in other sorts of tort law litigation.
China’s Tort Laws have been in semi-serious revision since around 2002, and have been through numerous drafts. (See 2002 draft translation; and a 2007 discussion.) One of the proposed drafts “doubles the [currently used] 1986 Code tort liability provisions from thirty-four articles to sixty-eight articles, which * * * state basic principles of tort liability.” (Conk, 937 ; 2007)
Whether or not “tort reform” in China (I.E. making it easier to sue and to recover more in damages) is necessarily a positive development or not is debatable, but it does seem that the trend in China has been to grant more power and recovery for individuals in certain circumstances.
China’s new Food Safety Law appears to demonstrate an intention to get tough on public health violations. The Food Safety Law allows harmed consumers to claim higher punitive damages. “In addition to a compensation covering the damage they have suffered, [customers may claim] damages up to ten (10) times the purchase price of the product in question from the relevant manufacturer or seller.” (DLA Piper; additionally the law imposes more severe penalties against manufacturers and sellers, permitting criminal liability, confiscation of unlawful gains and property, and fines ranging from 2,000 RMB to 5-10 times the value of the defective product.)
Class action lawsuit reform which would make it easier for class action lawsuits to form, appears to be on hold. Although a class action suit was filed in January, the suit has not yet been accepted. The first individual lawsuit against a melamine-injecter was only accepted in Hebei in March. To date, no class actions have been accepted against any actor involved in the melamine scandal. And class action lawsuits related to the Sichuan earthquake have also been rejected. (A more indepth study of class action lawsuit reform may be warranted at a later date).
Punitive Damages and Government-Based Compensation
Generally, the Chinese government is adverse to mass tort claims and it tends to rely on government-directed fines or state compensation to achieve the same ends that are achieved in American class action suits (Green, 152). Fines and government-directed compensation levied against Sanlu helped cause the firm to go into bankruptcy. (Also see: China milk firms ‘to pay victims,’ BBC, Dec. 27, 2008 ; demonstrating the government-fine system). In the wake of the Sichuan earthquake, Chinese local governments preferred to settle claims and give compensation rather than go to court. And indeed, few if any earthquake-related cases, have gone through trial.
[Also see an article on Xinhua that concerns possible updating of the state compensation system].
Conclusion
It is interesting to see the Chinese government taking a step back from government directed and centralized compensation policies and permitting lower courts to hear individual cases (at least one), and permitting higher recoveries on punitive damages.
Over the next few months as the case(s) wind their way through courts and the courts respond to societal pressures we will be able to see if there is any pending tectonic shift in the way that China practically handles tort law product liability cases. Although the law has “liberalized” somewhat, what really matters is what goes into practice- and a verdict on that will have to wait.
Appendix:
The Food Safety Law. (Promulgated February 28, 2009; In Effect June 1, 2009)
DLA Piper’s Report on China Product Liability.
George W. Conk, A New Tort Code Emerges in China:An Introduction to the Discussion and a Translation of Chapter 8 – Tort Law of the Official Discussion Draft of the Proposed Revised Civil Code,” 30 Fordham Int’l. Law Journal 935 (2007).
Andrew Green, Tort Reform With Chinese Characteristics: Towards a “Harmonious Society” in the People’s Republic of China, 10 San Diego Int’l Law Journal 121 (2008).
NY Times articles on the Sichuan Earthquake and the Chinese Government’s response.
PS: June 2nd, 2009 marked the one year anniversary of this website. :) 加油！(Over 65 articles, averaging 1.1 per week)
Beijing Commodity Demand Boom– A Bust?
China’s commodity demand has risen sharply in the past few months. Its stock market is up and China seems to have dragged commodity prices out of the cellar. However, China seems to be gambling with its stimulus growth. Its demand boom seems to be artificially backed more by government lending rather than sound economics.
Professor Michael Pettis’ article at the RGE EconoMonitor inspired this examination of China’s commodity demand, its existing liquidity, its borrowing spree, and a possible aftermath in the wake of these radical changes.
(Conversion note: ~6.7 RMB/Yuan to a dollar)
1. China’s Commodity Boom
* Oil is up above $65 dollars, driven by hopes of expanding demand in emerging markets.
* “In May, China produced 46.5 million tonnes of crude steel, the highest rate of production since June 2008.” (Hindu Business Line).
* “Chinese customs statistics show record copper imports. For the first five months of 2009, Chinese total copper imports hit 1.76 mt compared with 1.15 mt for the same period in 2008. However, imports are likely to slow after June as demand enters a seasonally weak period. So, until there is clear evidence of a slowdown in copper demand, prices could stay firm.” (Hindu Business Line).
China is demanding a lot of commodities, and is apparently producing a lot of manufactured goods. But it does not appear to be selling a lot of goods abroad, or at home– which implies that China is creating a pseudo-bubble market– and that should be a reason for concern.
(For more sources and citations; See my comments and sources on China’s declining exports and shrinking tax base in section 2b below)
2. Worries About Artificial Growth
Artificial growth, fueling a pseudo-economy and backed by shady investments in real estate and over-extension of debt, contributed to the economy’s crash in America. It is possible that China’s 4 trillion yuan (~520 billion USD) stimulus package may, likewise, create weak institutions and tendencies across its country even as China’s rising commodity orders help drag the rest of the world back into GDP growth.
Including local government debt, according to the Wall Street Journal, China’s stimulus debt is not at the officially claimed sub-20% of GDP level. Instead, China’s debt is nearly 40% of GDP. (Still, this compares favorably with the US’ over 60% of government-held debt as a percentage of GDP– but there is one difference between the two places; China is a developing country, whereas the US is a developed country-Economists will argue whether that means China’s debt is better or worse than America’s). (Wall Street Journal).
2a. Government Borrowing
Some echoes of the United States’ spendthrift ways can be seen Chinese Cities’ spending on bond issuances and construction projects. Caijing has many good articles on this topic (See Appendix below).
As much as two-thirds of Beijing’s 4 trillion yuan stimulus program will be spent by local governments, primarily financed by state-owned banks.
The extent of borrowing in China is massive, even just by cities and provincial governments. “About 2.8 billion yuan in local government bonds were issued across the province last year. But so far this year, municipal bond issues have totaled 8.5 billion yuan. And 7.9 billion yuan in borrowing is pending NDRC approval… Maturity periods range from seven to 10 years. ” (Yu Ning, Zhang Man and Fang Huilei; Caijing)
The borrowing may lead to difficulties since China’s province and township-backed companies are competing with each other for State-backed money and for customers.
The borrowing in China also seems a bit reminiscent of the real-estate market troubles in the United States:
“According to Huang Huidong, the general manager of Liuan City Investment Co., the city’s government has a 1.5 billion yuan budget gap. The company borrowed 1.24 billion yuan from banks and issued 1.5 billion yuan in bonds. Income from land leasing seems to be the only way to make ends meet.
“We can make about 3.6 billion yuan by leasing land to balance the 2.7 billion yuan in debt,” Huang said.
However, Huang admitted leasing will be difficult if the real estate market sours. “If land is not leased, and there are no government subsidies, city investment companies will go bankrupt.”
Liuan collateralized its bonds with 28 properties valued at an estimated 4 billion yuan. But Caijing learned from the local land bureau that the Liuan government earned only 800 million yuan from land leases last year, and the city has had no major real estate sales so far this year. Flats in six buildings near Liuan’s best school are currently for sale at 3,200 yuan per square meter – cheap by Beijing standards, but the most expensive housing in Liuan.” (Yu Ning, Zhang Man and Fang Huilei; Caijing)
Chinese local governments increasingly lack land to collateralize against for loans, an assistant director at CASS (China Academy of Social Sciences), warned. “Some local governments will virtually go bankrupt,” Professor He told BusinessDay. “Previously, local governments got all their money from selling land. This is not sustainable. Some areas have already sold quotas from the next 30 years.”
If China’s stimulus money was mostly being corralled toward infrastructure and long-term investments that can unequivocally help the local governments that are spending the disbursements, the long-term aftermath of China’s bond issuances might be more positive.
However, it appears that the majority of China’s stimulus money is going toward manufacturing- which leads to jockeying amongst the provinces and townships to prove the best rate and the best deals for eventual export or domestic manufacturing plants.(And the manufacturing is generally the dirty low-end kind rather than the high-end kind: See: Tom Miller, Financial Times on Dongguan)
This competition between local governments, financed through state-owned banks, could have grave consequences as at least some provinces will bet poorly and their SOE, TVE, or local government-loan backed factories will go out of business. Then, the provinces may be at a loss to pay their debts. (To say nothing of the possible crowding out of wholly private non-Town and Village Enterprise-owned factories… such as they exist).[Admittedly, the current situation of SOE/TVE/Local Government participation rates is worth a book-- and the paragraph above is only a broad overview. Wu Jinglian wrote some comprehensive books on China's state-business interaction.]
Due to declining demand (and perhaps rising competition??) “China’s consumer price index fell 1.4% in May from a year earlier, the fourth straight month of drops,” (Terence Poon ; WSJ) Increased competition could cause prices in China to continue to decline; still, economists almost paradoxically fear eventual inflation (due to extensive government borrowing) – which should offset the deflation.
Ultimately, the real story and worry here is neither inflation nor deflation, but of Chinese local governments’ backed-enterprises potentially competing each other out of business.
As a Caijing article reported: “Where is the money going? Unlike an economic development blueprint sketched out by the central government that favors infrastructure projects and low-emissions, high-tech industry, the province’s local governments have shown that they still prefer the old standbys — manufacturing.”
2b. Industry Borrowing
“A National Statistics Bureau survey of 22 regions found industrial profits totaled only 323 billion yuan during the first quarter, down 32 percent from a year earlier. That means annual profits for all industries will amount to only about 1.6 trillion yuan this year.
Outstanding loans currently stand at 35 trillion yuan. Assuming companies have kept a moderate debt ratio averaging less than 50 percent, their capital investments now exceed 35 trillion yuan. And profits of 1.6 trillion yuan versus 35 trillion in capital investment means an annual return rate of only 4.57 percent, below the weighted loan interest rate of 4.76 percent we saw in March.” (Lu Lei, Caijing)
“China’s relatively new corporate-bond market, where many local governments also are raising funds, provides a bit more clarity. By the end of May, issues of local corporate bonds — virtually all of which are indirectly backed by local governments — totaled 102.53 billion yuan, already more than the 68.39 billion yuan sold in all of 2008.” (Wall Street Journal).
Although a lot of money is being borrowed, it seems to be borrowed more to prop-up flailing businesses rather than to reflect businesses catering to increased Chinese or foreign demand for services. Overall exports were down 22% year-on-year for April, ” “Electricity generation is down y/y, even though industrial value added it up” (Setser) and this year China’s tax base is smaller. “Looking at tax revenues, local governments nationwide were unable to collect as much in the first quarter as in the same period 2008. In fact, tax receipts fell 1.4 percent, in sharp contrast to the 34.7 percent increase posted a year earlier.”
3. How Long Can the Borrowing Be Sustained?
Economists will debate the complicated question of how long Chinese local governments’ borrowing can be sustained and how long the worldwide economic downturn will continue. Regrettably, those questions are a bit too rich to effectively treat here at this time.
4. What Is Left In The Aftermath of China’s Spending Spree?
It seems that without worldwide economic recovery and a rebound in the demand for Chinese manufactured goods; China’s cycle of bubble-borrowing may lead to inflation and instability, or defaults that may bring its financial system into danger.
However, China’s financial system has the strong backing of the government. (And China’s Investment fund and foreign reserves continue to grow.)
“At the end of March, the State Administration of Foreign Exchange (SAFE)—part of the People’s Bank of China (PBoC)—managed close to $2.1 trillion: $1.95 trillion in formal reserves and $184 billion in “other foreign assets.” China’s state banks and the China Investment Corporation (CIC), China’s sovereign wealth fund, together manage another $200 billion or so. This puts China’s total holdings of foreign assets at $2.3 trillion. That is over 50 percent of China’s gross domestic product (GDP), or roughly $2,000 per Chinese inhabitant.” (Brad Setser; CFR)
Here, although I very much believe in China’s long term economic success, I argue for some sobriety in assessing the extent of the current “Chinese miracle” of recovery.
It is nice to see China take some lead in stimulating a worldwide economic recovery. But it makes one wonder, is China’s debt-fueled growth rising demand for commodities like oil causing an artificial climb in prices that will ironically hurt demand for Chinese exports?
Could the Chinese be doing a disservice to themselves by embarking on a massive borrowing spree? China has benefited over the past 20 years from a high savings rate (30-40% per person), that the country may only now be cashing in so that the country may maintain stability and over 6 percent yearly growth needed to employ the majority of their college graduates. So China may be able to afford its spending spree- it is certainly better positioned to afford a spree than is debt-heavy Japan, for example.
Interestingly, one Financial Times commentator argues that at least in Guangdong, the employment situation seems to be holding steady:
“the local government estimates that of the 10m migrant workers who went home for the lunar New Year, 9.5m have returned to the province. Of these, about 5 per cent (or 460,000 people) had not found jobs… in the context of a province with a total population of 110m, half a million migrants is a sizeable [sic] but manageable army of unemployed.”
However there is a real fear by the Chinese government that a sizable amount of unemployed could lead to real troubles of unrest. And of course, the numbers could be exaggeratedly small– especially given China’s real decline in Q1 tax receipts and in electricity demand (Setser) .
Although China is out borrowing and stimulating the world economy, just as some in the West have called for China to do, there may be a worrisome double-effect of the infusion of so much government-backed “play cash” into the market.
If one believes in the power of the market to correct, then there may be a correction. Without demand for its exports, Chinese demand for commodities will slacken and commodity prices will decline. But at what price for China?
As Professor Michael Pettis stated, perhaps best, this appears to be an opportunity for China to shift its economy’s composition; and the gamble it is taking with its stimulus requires either a rebound in foreign export demand or for an increase in domestic demand.
Although “China will be the first one out of the crisis because it is least likely to be affected by it,… China [still]may be the last one to say goodbye to the recession, because it has to make “difficult adjustments” to transform its economy from exports-driven to domestic consumption-oriented.” (Caijing)
Appendix:
Cities Rush into Debt … Caijing
No End in Sight for Loose Monetary Policy… Caijing
China’s Stock Market Could See a Huge Drop… MarketWatch
The Chinese puzzle: why is China growing when other export powerhouses aren’t?… Brad Setser
(Interesting Argument: “The answer, I suspect, is that China – unlike many other countries that relied heavily on exports for growth – actually did have an underlying dynamic of domestic demand growth… It is now clear that the majority of China’s stimulus has been off-budget: the huge increase in lending by state owned banks mattered far more than the change in the budget of the central government.”)
China’s International Leadership
From February 26th through the 27th I attended a symposium at the University of Texas in Austin, TX on China’s Emergence: Effects on Trade, Investment, and Regulatory Law.
Here are some thoughts on the more notable issues raised at the symposium:
Raj Bhala, a professor of law at the University of Kansas and a graduate of Harvard Law, Oxford, and the London School of Economics, spoke about China and the Doha trade round. He suggested that China’s actions at the WTO’s Doha round discussions demonstrate that China’s claims to be a global player in the highest echelon of nations are premature.
Bhala argued that China’s failure to take leadership to promote the common good with a compromise solution for the Doha round is a worrisome indicator for the future of the agreement. Without the leadership and investment of time and effort by one of the world’s most populous and economically involved countries, it may be impossible for Doha to become satisfactorily resolved.
Some tangential issues raised by Prof. Bhala’s talk were:
(Note: Professor Bhala merely raised the topics; the below research and musings are solely the work of China Comment’s point of view that has been shaped by a synthesis of Bhala’s lecture and other sources.)
—
1) China’s Leadership in International Forums, or lack thereof
China has sent peacekeepers to the Caribbean and to Sudan (and accounts for 2,200 of the over 115,000 UN peacekeepers); and recently it has wielded its UN Security Council veto more forcefully, but China still appears to ascribe to the policy of waiting and seeing how circumstances develop before taking a firm stand on an issue.
For long, China would not wield a UN veto, instead abstaining when it disagreed with a policy. (China has only used its veto around six times in the past thirty years.) But recently, China vetoed resolutions attempting to levy sanctions on Zimbabwe in 2008 and Myanmar in 2007.
Although China’s comments about abandoning the dollar as the world’s standard trading currency surprisingly seemed to indicate a more assertive country, any comments that the Yuan will in the near term present a significant threat to the Dollar as a reserve currency are likely idle speculations, not the least because the RMB still trades in a managed band and is not fully convertible. There does not seem to be enough being done by the Chinese, other than a few meetings with Brazilian dignitaries to suggest that the proposal has merit and is being advanced for any reason other than to distract from US policies pushing for Chinese currency revaluation- although China Comment will follow the situation. (A measured and detailed discussion of the merits of Zhou Xiaochuan’s plan is presented by Pieter Bottellier which reveals that the suggestion is FAR more nuanced than a mere call for the RMB to supplant the dollar. Jeffrey Sachs sees some merit in Zhou’s plans, as do others. Brad Setser at CFR has a good round-up of all the important people’s views on the subject.)
China also failed to take leadership on agricultural trade issues during the Doha round. It could be argued that China used India’s objections to the Doha trade rounds in 2008 as diplomatic cover to likewise reject the deal in order to avoid being criticized too harshly for their demurral. (See some collected views from major newspapers on who caused Doha to fail, HERE and HERE). [Note: The topic of China's actions in Doha is far too expansive to discuss here. Likewise, the topic of China's leadership in agricultural trade is beyond the scope of this digression.]
Gao Guangsheng, Director General of the National Coordination Committee on Climate Change, did posit an interesting argument about how the world could help decrease China’s pollution. He suggested that the developed countries pay China 1% of their GDP, about $350 billion in 2008 (Because, in past eras, developed countries were allowed to pollute as much as they wanted). It is a little difficult to take Gao’s environmental-hostage-taking demands seriously.
China Comment suggests that as China becomes more confident in its economy vis-a-vis America, it will increasingly throw its heft behind solutions and ideas. But before it can do this, it will have to become an international financier and investor. China has already begun to travel down that road, with an April 2009 annoucement that it would create a $10 billion investment cooperation fund, and offer $15 billion in credit to its Southeast Asian neighbors to promote infrastructure development (also “the trade value between the ASEAN and China increased from 59.6 billion US dollars in 2003 to 171.1 billion US dollars in 2007, growing at an annual rate of 30 percent”). Additionally, China made a May 2009 agreement to lend $10 billion to Petrobras, and has entered into assorted lending contributions to African countries, from Zambia to Mozambique (for a Hydroelectric dam).
Still, China has some way to go to compare its giving to the billions that the United States and Japan and the EU donate to the UN (US donated 22% of the UN’s budget. China paid 2.03%.), the IMF (China contributes 3.72%, the United States contributes 17.09%), and other organizations and countries. With China’s billions in reserves, however, the country is flush with enough cash ($1.95 trillion in forex reserves; and over 1,000 tons of gold) that strategically spent, can make a huge difference.
2) China’s International Diplomatic Style (Its “Grand Strategy”)
China’s putative international diplomatic style is to exert a large amount of “soft power,” to not “ruffle feathers,” and to pursue a policy of peaceful development. (China Daily, December 2005) China also expresses a support for multilateralism, which is a bit strange given that China also demands to resolve natural resource disputes bilaterally rather than multilaterally, specifically in regards to the Spratly dispute (Valencia, Mark J., Jon M. Van Dyke, Noel A. Ludwig, Sharing the Resources of the South China Sea, 1997. 118.)
China’s policy of peaceful development, however, is sometimes looked on negatively by other countries as the Chinese can be seen as global free riders, who do not assume their international obligations, who contribute too few soldiers to UN peacekeeping missions, who contribute too little money to international lending institutions, who pollute the environment, and who have for long done too little to rein in their troublesome neighbors- like North Korea.
China has attempted to involve itself in multilateral institutions for discussion in both the economic realm (ASEAN) and the security realm (the SCO) in order to gain influence in a non-threatening fashion while working with regional allies.
- This topic certainly merits more in-depth study and research in a future article.
3) China’s Ultimate View of the International Trading System
- What are China’s long term goals? Its suggestion that the dollar be replaced as a global reserve currency may indicate a desire for China to assume economic leadership, but when will that be feasible? And what sort of leadership will China take? Will they be promoters of free trade- China has signed many bilateral free trade agreements (See China Comment’s Article), or will they be less ideological, and more realist in their plans- not pushing any philosophical strategy save that of friendship with China?
Conclusion
China does not seem to have yet taken leadership in inventing a workable global trade structure, one that is harmonious for all, or even one that is China-centric. When will the confidence to create and propose such a system come? Reflecting on China’s financial philosophy, and comparing that to the invention of Western financial philosophy- it seems that ideas for world financial structure are implemented only in times of great crisis or upheaval; Post Cold War-WTO, Post WWII-Bretton Woods (which had concepts germinated during the Great Depression and WWII), Great Depression Keynesianism (which had concepts germinated after World War I and in the early years of the Great Depression), and that the ideas which eventually shape the system originate from the “great power” at the time.
It could be a chicken and the egg problem of whether economic leadership causes a country to become a great power or if only great powers can take economic leadership, but even if China has decided to avoid its chance to grab world economic leadership during the current crisis as Prof. Bhala indicates, I believe that China and its academics are consolidating ideas and preparing themselves for the next worldwide military crisis, or are awaiting the next cyclical economic crisis (c. ~2012-2015) to grab its next opportunity. And when that opportunity arises, much of the thoughts germinated by Chinese academics during this current crisis may very well become world policy.
Note: It would be useful to conduct a literature review of Chinese academic writings on world financial markets. Since time for that project currently eludes me, I will point a link here to Michael Pettis’ wonderful site on China’s Financial Markets. The Jamestown Foundation may also occasionally have some information on what China’s academics are currently thinking.
Slight Delay In Updates
Hello. Thank you for reading China Comment these past ten months. China Comment looks forward to another very successful ten months in the future!
Regrettably, however, there will probably be no updates for the remaining month of April and until the end of May. But China Comment expects to return to its normal schedule after May.
Currently, China Comment is working on two articles that hopefully will be published in an academic journal. Both articles deal with aspects of China. One is about half done, the other (which deals with China’s Energy) has just passed the literature review stage and pen has been put to paper. Those articles have absorbed much of my free time.
However, China Comment intends to return to regular updates as soon as possible.
Thank You again for your patronage!
~ Francis.
The US Government and China’s Currency
From February 26th through the 27th I attended a symposium at the University of Texas in Austin, TX on China’s Emergence: Effects on Trade, Investment, and Regulatory Law.
Here are some thoughts on the more notable issues raised at the symposium:
Timothy Reif, the incoming General Counsel of the Office of the US Trade Representative, spoke as a private citizen to open the event as its keynote speaker. He expressed a desire for China to “stop manipulating” its currency and to move on currency reevaluation. Currently, China’s currency trades in a limited range of .5 percent daily against the dollar (up from .3 percent daily pre-2007).
Responding to a question, Reif acknowledged that China’s economy and the world’s economy would need time to adjust to a freely-floating regime. He suggested that China might not be prepared to freely float the RMB until perhaps 5-10 years in the future. Still, Reif speculated that if the Obama administration did not push China to take some actions toward reevaluating its currency, then the United States Congress may take aggressive action against China.
Reif’s speculation may be based on fears grounded on prior Senate actions directed against China’s currency valuation. (The following paragraph’s information is supplemental. The issues were alluded to, but not discussed in depth. The summary is provided for readers’ reference.)
In 2005, Senator Schumer introduced a bill in the Senate, S.295, that would impose an additional duty of 27.5 percent on “Chinese goods imported into the United States unless the President submits a certification to Congress that the People’s Republic of China (PRC) is no longer manipulating the rate of exchange and is complying with accepted market-based trading policies.” (Thomas.Loc.Gov) That bill was not put to a vote and, even if passed, would have been non-compliant with WTO standards. However, in 2006 and 2007, Schumer and others in the Senate tried again with a bill believed to be WTO-compliant. That bill was the Currency Exchange Rate Oversight Reform Act of 2007, which was placed on the Senate legislative calendar after passing the Senate Finance committee with a 20-1 vote; but the bill ultimately did not come to a floor vote.
Ultimately, Reif did not indicate support for China to take any particular policy. He expressed no opinion on support for a wider managed band in which the currency could trade, nor for increased disclosure on which currencies are included in China’s market basket. His believes it is imperative that China’s currency appreciate, but at the time and in this venue he could not comment on exactly how the appreciation should be managed.
The most interesting question raised by Reif’s talk was to what degree will US President Obama and the Congress push against China to appreciate its currency during this economic downturn that is negatively affecting both countries. His comments seem to reflect that if America’s economy fails to improve, then domestic pressure will encourage Obama and/or Congress to take significant action to counter “imbalances” caused by China’s currency policy.
(Part III will include commentary on presentations from Raj Bhala (Law Professor at the University of Kansas), and John Greenwald (International Trade Lawyer).
Subsidies and Trade Liberalization
From February 26th through the 27th I attended a symposium at the University of Texas in Austin, TX on China’s Emergence: Effects on Trade, Investment, and Regulatory Law.
Here are some thoughts on the more notable issues raised at the symposium:
Trade Imbalances, Subsidies, and the Market Distortion of Prices
Scott McBride of the US Dept. of Commerce, speaking as a private citizen, discussed countervaling duties, world poverty, and market distortions (my terms, not his) that contribute to inflate the real prices of goods. This particular point was only a small portion of his talk on the “US Government’s Recent Responses to China’s Enforcement Problems and Countervailable Programs.”
McBride claimed that one reason for American subsidization of farmers in the cotton industry is in order to combat cheap Chinese cotton. However, although US subsidies are aimed at protecting American farmers from subsidized Chinese cotton imports, the subsidies also hurt the four major C-4 African cotton manufacturing countries (Mali, Benin, Chad, Burkina Faso). These African countries lack the resources to subsidize their crops, or to increase their crops’ efficiency. Although African cotton would be relatively competitive in a trade-barrier-less world, it cannot hope to contend with cotton-subsidizing American policies, and a China that supports its cotton industry and has a relatively weak currency. He went on to state that the US’s position is generally that it will not drop its subsidies until China drops its support for its domestic cotton industry.
Extra research by China Comment revealed that the United States is also bargaining for enhanced market access to developing countries’ markets before it will significantly drop its cotton subsidies (AllAfrica, October 2008).
According to a source cited in a CRS report (Congressional Research Services), “cotton producers in developing countries (not just Africa) face annual losses of about $9.5 billion as a result of subsidies… the United States provides the largest amount of subsidies to its cotton producers, which it estimated at $2.3 billion in 2001/2002. Other countries’ subsidies in 2001/02 included China ($1.2 billion), European Union (EU) countries Greece and Spain ($716 million), Turkey ($59 million), Brazil ($50 million), and Egypt ($29 million).” (CRS). “Washington has paid out $2 billion (1 billion pounds) to $4 billion a year in subsidies in recent years to the 25,000 U.S. cotton farmers who export 80 percent of their output and account for 40 percent of cotton traded internationally around the world.” (Reuters; July 24, 2008 / See Also The Guardian; July 2003)
The Point:
(1) American subsidy policies that are aimed to combat unfair trade advantages gained by one country often have a double-effect that causes repercussions in (arguably innocent) third-party countries. (This is something to keep in mind when well-meaning NGOs suggest sending aid to Africa. Sometimes, the better policy may be to drop trade barriers first. Still, the African countries often wish to keep their own restrictive trade barriers.)
(2) The more America or China subsidizes their agricultural industries, the more other countries begin to subsidize their agricultural industries. These subsidy policies lead to a market-distorting situation similar to that suffered by the debt-fueled American mortgage-industry boom. Ultimately, the policy benefits no one except subsidy-receiving farmers. Meanwhile, national debts rise to unsustainable proportions.
In the interests of increased efficiency, China Comment supports trade liberalization and progress such as that imagined by the WTO’s heretofore disappointing Doha round. (A full discussion of exactly what details of trade liberalization would be fairest is far beyond the scope of this article. Even full-time economists and government negotiators have difficulty getting their minds around all the nuances of the Doha round in order to craft a compromise. Perhaps that is why Doha has been so much of a disappointment.)
(Part II will include commentary on presentations from Raj Bhala (Law Professor at the University of Kansas), and John Greenwald (International Trade Lawyer).
Lucky 8
Instead of having a year end review in January when China Comment would compete against others’ reminiscences for your valuable consideration, China Comment waited for a more auspicious time.
So now, on the 2nd of February 2009, China Comment celebrates its first eight months of existence with an overview of the site’s most popular articles.
8 Most Popular Articles on China Comment
An examination of China’s nuclear power industry. (June 26, 2008)
- The China Law Blog and What About Clients? linked to this post, bringing in a significant amount of traffic.
2) What is Happening With China’s Economy?
An analysis of economic numbers and articles dealing with China’s economic situation. (September 22, 2008)
- The China Law Blog, and others linked to this post.
Repercussions of Russia’s invasion and China’s historical relationship with the Caucasus country. (September 4, 2008)
- The Wall Street Journal’s China Journal, and others linked to this post.
The positives and negatives of China’s economy, environment, and demographics. (July 30, 2008)
- The China Law Blog, and others linked to this post.
5) China and the American Election
A consideration of the American candidates and their possible future relationships with China. (September 1, 2008)
- The China Economic Review, and others linked to this post.
An artful musing on and examination of Beijing’s pollution. (July 10, 2008)
The BRICs are getting Closer. (July 16, 2008)
- The Wall Street Journal’s China Journal, and others linked to this post.
China’s planned free-trade agreements. (September 8, 2008)
- The Wall Street Journal’s China Journal, and others linked to this post.
4 Most Popular Links Out of China Comment
allroadsleadtochina.com, What China Thinks of Obama, Elite Chinese Politics and Political Economy, The Candidates on US Policy Toward China.
Other Notable Articles
Refining a Relationship: Venezuela and China
China and Venezuelan oil and gas exports. (October 2, 2008)
China’s Natural Gas industry and its future. (July 14, 2008)
A look at China’s wild, wild west. (August 27, 2008)
Olympic Pollution- Comparisons
A comparison of Beijing’s particulate matter, sulfur dioxide, and nitrogen dioxide levels pre-Olympics and during the Olympics. Additionally, pollution numbers for four other “Games” cities were compared. (August 25, 2008)
- The Wall Street Journal’s China Journal, and others linked to this post.
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Best Wishes for a Lucky “Niu” Year,
~ Francis.
Fighting Corruption
Chinese national banks’ regional and provincial branches are audited by the state, and many state employees consider anti-corruption missions quite seriously. But to some degree, Chinese companies suffer from significant systemic corruption.
A Chinese friend served an internship over the Summer with the financial auditing arm of a provincial government. She worked on a team investigating a Shaanxi branch of a national Chinese bank’s accounting books. The team found several irregularities in the numbers, and they reported to their supervisor, who confronted the bank’s director.
The director offered to take the team to dinner and discuss the matter. He offered to pick up the check. My friend’s superior accepted and they ate, drank and discussed. The director argued that the misplaced amounts were inconsequential, somewhere around 7000 USD. He tried to convince the team to overlook the transgression in return for “help” and “benefits.”
The superior declined and the bank was fined. The director kept his job since the amount misplaced was only a “mistake” and the bank director was a “good man” who had long served. China’s system of friendship among bank officials almost guaranteed that unless the crime was disproportionately large, little negative attention would be fostered on the wayward director.
When asked what she felt about this situation, my friend seemed nonchalant. She stated it was common for bank owners to embezzle but she still admired her superior for being so “driven” in achieving his objective. She said most supervisors would probably have taken a bribe. Afterward, her team discussed the tragic situation whereby bribery and corruption are considered the status quo. They recalled their supervisor’s lament that although he always tried to quash corruption, his plans were often flummoxed. He annoyed too many in his bureau due to a “righteous” mentality, and was overlooked for promotions. He feared he could never move to a provincial-wide managerial position. Instead, for his efforts, he was stuck at a mid-level job, where he could be overruled if political considerations superseded a need for economic honesty.
China disciplined 115,000 Party members for corruption in 2005, and has dealt with an “average of 130,000-190,000 Party members each year for various types of misdeeds and crimes since the early 1980s,” according to Minxin Pei of the Carnegie Endowment for International Peace. For various reasons, “24,000 of the Party’s 68 million members” were expelled from the Party in 2005, according to Edward Cody of the Washington Post.
The country could have grown even faster without the stultifying effects of late-1990s corruption. According to Chinese economist Hu Angang, cited by Will Hutton in The Writing on the Wall, the annual cost of corruption “is between 13.3% and 16.9% of China’s [potential] GDP.” Admittedly, that number is difficult to believe and I would like to see it backed up by another independent evaluation. Still, when confronting the anecdotal evidence and the recent Gome and real estate scandals, it is not too difficult to perceive millions of RMB flowing where it should not.
My friend’s view of corruption is a common one, and she could not say she would refuse a bribe if it had been offered to her. The bank director was a powerful man and held lots of influence. Without protection, she may not dare confront such a man. She admired her heroic supervisor, but wondered whether she could emulate his courage.
Positively, the number of prosecuted corruption cases has risen in recent years. But negatively, many former Party and government members have “jumped into the sea” of business, and used government connections to flout laws, “grease wheels,” and avoid bureaucratic regulations.
Without a reevaluation and a recognition that everyone is equal under the law and none are more “equal than others,” people like my friend will hesitate in acting honorably and working against corruption. Eventually, they might do the right thing and oppose corruption, but without a change in its culture of privilege, China could face a very stormy and increasingly corruption-filled coming decade.
Links and Final Comment
Pei: http://www.carnegieendowment.org/files/pb55_pei_china_corruption_final.pdf
Cody: http://www.washingtonpost.com/wp-dyn/content/article/2006/02/14/AR2006021400672.html
It is far beyond the scope of this article to evaluate various countries’ approaches to fighting corruption. Corruption seems to be present everywhere in the world. Every few years the United States suffers something along the lines of an Enron, a Tyco, or a Bernard Madoff scandal; Germany suffers a Siemens scandal, Korea suffers a Samsung scandal, and so it goes ad. infinitum.
Note: This article was originally written in January 2008, and was recently updated.
China’s Hidden Environmental Lessons
China’s environmental troubles are often decried in the Western press, and generally there is a good basis for the articles’ conclusions (See the NYT ’s “Choking on Growth” series). Still, China and its people also have a lot to teach foreigners about prudent energy conservation and consumption.
Although China may not have the best energy efficiency utilization (see EIA numbers), the country’s prior poverty inspired its populace to adopt some surprisingly environmentally-friendly policies.
Person-Driven Policies
The Chinese consumer, to conserve cash, often makes due without unnecessary perks that are common for Westerners. Chinese consumers, by doing so, save thousands of dollars and millions of watts of electricity.
- Natural Drying Clothes (Live Naturally)
Many Chinese do not use electronic driers 烘干机. Instead, Chinese clothing dries in the wind and sun. This method of drying works great for clothing, not so well for bedding or woolen materials. Still, if one owns a spare bed-cover or wool jacket, then natural drying works perfectly. Most clothing dries within twenty-four hours.
Forgoing driers saves China millions of watts of electricity each year.
- Human-Powered Recycling (Capitalist Environmentalism)
Although the recent US economic recession greatly increased the number of lower-class entrepreneurs wandering city streets collecting recyclable trash, the Chinese long ago perfected the art of scavenging. In China’s cities, from Beijing to Chengdu, poor and retired people seek plastic and aluminum to recycle.
In every city, poor entrepreneurs dart hither and tither, snatching empty plastic bottles from hands and scavenging from trash cans. Although each plastic bottle only results in a few jiao of cash, China’s poor act as guardians of the environment- ensuring that not even a plastic bottle, crushed and covered by garbage, escapes recycling.
Entrepreneurial Recycling in Beijing / China Comment
Also of note, from 2003: http://www.china.org.cn/english/2003/Jul/69702.htm Amusing complaints that people are not sorting their trash. Perhaps the people decided trash-sorting was unnecessary because they knew the city’s unofficial garbage collectors would likely scavenge the trash before the municipality’s collectors arrived.
- Air Conditioning Only When Necessary (Waste Not, Want Not)
Chinese restaurants save millions of yuan each year by only turning on air conditioning units when customers actually utilize portions of the restaurant. Many Chinese restaurants have both a common dining room and a selection of private dining “party rooms.” Each party room often has a space heater or air conditioner that is only turned on when the room is occupied.
- Heating When Necessary (Think Global, Act Local!)
Chinese often huddle slightly cold in some restaurants and most universities, wearing jackets and scarves tucked in tight. Although restaurants and universities have the ability to heat their common rooms, the proprietors and deans choose to keep thermostats turned down. These proprietors understand that by refraining from over-heating buildings they can keep down costs.
In contrast, American universities spend millions on heating and cooling each year. All their spending results in higher carbon output and higher student tuition costs to pay for heating and maintenance overhead. American universities and campus environmentalist activists can learn much from Chinese students’ stoic endurance of slightly uncomfortable weather.
- Hotel Lights (Use Only When You Need)
Chinese hotels slash unnecessary electricity bills by only allowing patrons heating, air conditioning and light in their rooms if the patrons are actually present in the room. Rooms’ lights only turn on if a room key is placed in a wall socket unit. American budget hotels could save thousands of dollars by implementing similar conservation-inducing practices.
- Hot Water, Not Bottled (Reuse!)
Although bottled water sells well in China (at 0.8 RMB it’s a great bargain), Chinese are just as often likely to be seen toting hot water in plastic containers. Although the process of warming water to a boiling point consumes electricity, the use of reusable plastic containers cuts down on disposable water bottle waste.
- Solar Water Heaters (Self-Sustainability)
“China has a cumulative installed capacity of solar water heaters (SWHs) that surpasses 90 million square meters (m2) of collector area—roughly 60 percent of the world’s total. In fact, nearly one in ten Chinese households owns an SWH.” (from http://www.ita.doc.gov/media/Publications/pdf/china-clean-energy2008.pdf pg 11)
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Government Driven Policies
- Plastic Bag Revolution (Pay For What You Consume)
China attempted to reduce plastic bag consumption in summer 2008. In July, a ban was imposed on ultra-thin bags. Thicker bags could be sold, but major cities’ supermarkets and department stores were supposed to charge 0.3 to 0.5 yuan per bag (Xinhua, July 2, 2008).
Bans on free plastic bags are popular in some places in Europe and a few American cities, but have yet to permeate America wholesale.
http://news.xinhuanet.com/english/2008-06/06/content_8320694.htm
http://news.xinhuanet.com/english/2008-06/18/content_8390250.htm
China’ Comment’s July 4, 2008 article on Plastic Bag Entrepreneurs
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Later, China Comment hopes to post other environmentally-friendly measures practiced in China. If you know of any other energy-saving lessons that China can teach America and the “West”, China Comment would be glad to hear them.
Modeling China’s Crude Demand
Models employed by IEA, the Chinese Government, and the United States Department of Energy estimate, quantify, and predict China’s future energy demands. The estimates range from lowball numbers to significant over-estimates. 2008’s wild swings in commodity prices demonstrated the difficulty of predicting international energy markets. Exponential energy growth models significantly overestimated China’s demand, and a 1996 model failed to predict China’s torrid pace of growth. The methodology behind the World Economic Outlook’s (WEO) predictions have closely tracked reality for the past four years. The WEO provides perhaps the most useful framework for understanding China’s future crude oil demand.
China’s year 2008 crude oil production, at 189 million tons, was the country’s highest ever. China’s oil imports also soared to record levels, at over 164.51 million tonnes imported through 2008’s first eleven months (AFP). Still, China’s oil demand appears to have slowed in 2008’s fourth quarter. Oil is currently 21 percent of China’s energy mix. Yearly, China’s oil imports increase by 5-10 percent. Increasingly, oil gains in importance as part of China’s energy security strategy. Correct models of China’s future energy demands may make China’s future economic and political goals more understandable. Below, three energy demand models are examined and are followed by a data-table.
Exponential Energy Growth Model (Ramirez, Alvarez and Rodriguez- 2005)
China’s future energy demand has been difficult to predict. Models, such as Ramirez, Alvarez and Rodriguez’s (below) depend on exponential growth patterned on prior returns. An exponential growth graph fails to capture nuances of human nature and account for plateauing of demand after an optimum supply-level and equilibrium price is reached. At some point, every society becomes “built out” and its growth slows. Accompanying the reduced GDP growth, crude oil demand likewise declines. Ultimately, exponential growth predictions that do not incorporate an eventual plateau will tend to over-estimate growth.
Exponential models of increased oil demand help provide some answer to the mystery of this summer’s rise to $150/barrel oil. Ramirez’s 2005 prediction of Chinese energy demands in 2010 requires an equilibrium crude price of greater than $120 bbl. Under the Ramirez scenario, China’s requirements rise from 7.6 million barrels a day to 11 million barrels of oil a day in 2010. Even with consumption at 7.6 million barrels a day, China still ranks second highest in world demand to US consumption of 20.68 million barrels a day. If China’s middle class, its economy, and its car culture threaten to grow to US, Japanese, or European levels of consumption per capita, then the world’s oil production infrastructure will be put under a mighty strain.
Moderate Growth Model (China Energy Strategy Study- 1996/CSIS 2003)
In 2003 the Center for Strategic and International Studies (CSIS), presented and commented on the 1996 China Energy Strategy Study’s predictions for China’s energy demand growth. The China Energy Strategy Study significantly underestimated future target figures. The Energy Strategy Study’s predicted energy demands were made before China joined the WTO. The predictions appear to have expected 6-8 percent GDP yearly growth. In contrast, the years 2003-2008 posted near-consistent yearly double digit GDP growth.
The Most Applicable Model for the Near-Term Future (WEO- 2004)
Of the three models for Chinese oil growth, the one with the best track record appears to be the 2004 World Economic Outlook prediction. Although the WEO revises its estimates slightly higher each year, the 2004 and 2006 WEO methodology gives the best model of future Chinese crude oil industry growth.
The WEO’s “reference scenario” approach closely tracks the actual evolution of Chinese crude oil demand. In contrast, Ramirez’s 2005 exponential energy growth model significantly overestimates actual requirements since China’s hyper-expansion slowed. The underestimating 1996 China Energy Strategy Study presumed China would benefit relatively less from international integration and trade than was ultimately achieved.
Chinese crude oil demand also appears to be best tracked by the WEO’s “reference scenario.” WEO projections will likely not underestimate Chinese crude demand since demand is somewhat tied to China’s economic success. Additionally, China’s future economic growth will be tempered by environmental externalities. In 2004, China’s government-created Green GDP measurement demonstrated environmental externalities cost three percent on potential GDP growth. The percentage-cost of environmental degradation is expected to rise as pollution’s harmful effects accumulate and China’s energy demands increase. State policies attempt to mitigate the problems of environmental externalities, but environmentally-friendly policies such as increasing automobile taxes and vehicle fuel-economy standards depress demand growth and discourage consumption.
The WEO’s “reference scenario” also likely does not overestimate China’s crude energy demand. Although the global automobile industry is currently in a retraction period, the annual arrival of hundreds of thousands of Chinese to the middle class presages a continued demand for automobiles and petroleum. Although US car sales plunged an average of 25 percent each month from September through November; Chinese automobile sales in November were only 3.2 percent off from the previous month (China Daily). Still, a sharper drop in Chinese automobile sales could be coming. To prevent that drop, the Chinese government offers valuable incentives for trading in cars (China Daily). Chinese GDP however, is still likely to grow at 6-8 percent in 2009, and as long as oil remains below $120 a barrel, there will be a significant number of citizens who reach the wealth threshold where it makes sense to own and purchase gas for a private car.
- Past experience is no guarantee of future returns, as world stock market investors learned to their chagrin in 2008. The WEO estimates appear to offer good insight into the future, but has the paradigm changed? (Feel free to respond in the comments.)
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Appendix:
Actual crude oil demand and future projections given by various sources, including the above-mentioned models.
* Note on converted numbers: There may be some variations between actual amounts and reported amounts. Some “actual amounts” such as the BP and CBC data differ slightly, but by no more than 15 million barrels in any year. In all cases below, I have converted barrels/day to m. tonnes of crude/year. I identify where I convert numbers.
Total Crude Demand (Estimates and Actual)
2050- 520 m. tonnes of crude (1996 Prediction- Barring aggressive adoption of renewable energy or a decline in Chinese standards of living, this is vastly underestimated.)
2030- 746 m. tonnes of crude (WEO 2006, p. 86)
2030- 683 m. tonnes of crude (IEA WEO 2004 as reported by Dr. Tang (see sources).)
2020- 599.7 m. tonnes of crude (Converted from numbers of the DOE IEO 2005 and 2005 East-West Center report in Lieberthal)
2020- 585 m. tonnes of crude (Converted from numbers of the IEE Japan 2004 report in Lieberthal.)
2020- 565.75 m. tonnes of crude (Converted from the IEA WEO 2004 report in Lieberthal)
2020- 563 m. tonnes of crude (3.3% annual growth rate 2011-2020) (April 2008 Xinhua prediction)
2020- 320 m. tonnes of crude (1996 Prediction- Notably equal to 2004 actual data.)
2015- 487.6 m. tonnes of crude (WEO 2006, p. 86]
2010- 536.55 m. tonnes of crude (converted from “Short-term predictability of crude oil markets: A detrended fluctuation analysis approach” by Ramirez, Alvarez, and Rodriguez doi:10.1016/j.eneco.2008.05.006, Energy Economics 30 (2008) (p 2654). Based on 1984-2005 exponential growth activity)
2010- 448.2 m. tonnes of crude (Converted from numbers of the DOE IEO 2005 report in Lieberthal)
2010- 419.39 m. tonnes of crude (Converted from numbers of the East-West Center 2005 report in Lieberthal)
2010- 409.6 m. tonnes of crude [WEO 2006, p86.]
2010- 407 m. tonnes of crude (4.5% annual growth rate 2007-2010) (April 2008 Xinhua prediction)
2010- 385 m. tonnes of crude (Converted from numbers of the IEA WEO 2004 report in Lieberthal)
2010- 355 m. tonnes of crude (Converted from numbers of the IEE Japan 2004 report in Lieberthal; Notably equivalent to 2008 actual data.)
2010- 260 m. tonnes of crude (1996 Prediction- Notably equivalent to 2002 actual data.)
2009- 409.6 m. tonnes of crude (Converted from EIA numbers).
2008- ~354+ m. tonnes
2007- ~345 m. tonnes
2004- 323.39 m. tonnes. converted. (CBC) & BP 2005.
2003- 270.47 m. tonnes. converted. (CBC).
2002- 251.49 m. tonnes. converted. (CBC).
2001- 239.8 m. tonnes. converted. (CBC) .
2000- 233.97 m. tonnes. converted. (CBC) & BP 2005.
Domestic Supply
2050- 80 m. tonnes of crude. (1996 Prediction, perhaps lowballed.)
2030- 136.5 m. tonnes of crude. (WEO 2006, p. 92)
2020- 180 m. tonnes of crude. (1996 Prediction, notably equivalent to 2006 actual data.)
2010- 165 m. tonnes of crude. (1996 Prediction, notably prior to the Bohai Bay discovery, and equivalent to 2004 actual data)
2010- 185.3 m. tonnes of crude. (WEO 2006, p. 92)
2008- 189 m. tonnes of crude (Up 1.6%) [Xinhua Jan 2008]
2007- 186.7 m. tonnes of crude (Up 1.6%) [China Daily Jan 2008]
2005- 175.5 m. tonnes of crude (WEO 2006, p. 92).
2000- ~155 m. tonnes of crude
Imports
2050- 440 m. tonnes of crude. (1996 Prediction- frightening energy security situation for Beijing if this is underestimated.)
2020- 429.24 m. tonnes of crude. (2005 DOE IEO estimate in Lieberthal. Converted.)
2020- 346 m. tonnes of crude. (2004 IEA WEO estimate in Lieberthal. Converted.)
2020- 140 m. tonnes of crude. (1996 Prediction- Vastly Underestimated)
2010- 224 m. tonnes of crude. (2006 WEO Prediction, after I run the numbers.)
2010- 95 m. tonnes of crude. (1996 Prediction- Vastly Underestimated)
2008- 164.51 million tonnes (In 1st 11 months- 9.5 percent growth; (Reuters Dec. 2008) Note: Q1 and Q2 posted an 11 percent growth at 90.53 m. tonnes)
2007- 159.28 m. tonnes of crude imported [China Daily Jan 2008]
2004- 120 m. tonnes of crude imported. [China Daily Nov 2005]
2000- ~50 m. tonnes (IPR Strategic Business Information Database)
China’s Oil Demand Deficit
| Year | Demand | Deficit (Imports) |
| 2000 | 233.97 m. tonnes. | ~50 m. tonnes |
| 2004 | 323.39 m. tonnes. | 120 m. tonnes |
| 2008 | 354+ m. tonnes. | 164.51 m. tonnes. |
| 2010 (Xinhua & WEO predictions) | 407 m. tonnes. | 210-230 m. tonnes (surpasses 50%) |
| 2020 (Xinhua & WEO prediction) | 563 m. tonnes. | 340-400 m. tonnes (around 75%) |
(*”PetroChina, like many European oil companies, measures its output in tonnes instead of the US standard of barrels.”)
Other Sources:
- Gill, Bates and Matthew Oresman. “China’s New Journey to the West: China’ Emergence in Central Asia and Implications for U.S. Interests: A Report of the CSIS Freeman Chair in China Studies.” Center for Strategic and International Studies. Washington, D.C. August 2003. 25. [Analyzing the 1996 China Energy Strategy Study].
- “China says 2008 crude production up 1.6 pct: state media” AFP. December 2008.
- Lieberthal, Kenneth and Mikkal Herberg. “China’s Search for Energy Security: Implications for U.S. Policy.” NBR Analysis (National Bureau of Asian Research) April, 2006. 12.
- Tang, James. “With the Grain or Against the Grain? Energy Security and Chinese Foreign Policy in the Hu Jinato Era.” October 2006.
China Cleantech: 2008 in Review
2008 was a rocky year for energy markets. Oil soared to $140/barrel, and then crashed to $40. Natural gas spot prices likewise jumped high to $13 MMBtu, then ended low around $6 (EIA). Investors, lulled by impending $200/barrel oil, poured record cash into renewable energy.
Below are some numbers from 2008’s first three quarters of China’s cleantech energy investment and development. The fourth quarter will probably post much smaller investment gains.
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Venture capital investment in Chinese renewable energy quintupled in the first three quarters of 2008, rising from US$29.1 million in the same period in 2007 to US$165 million this year (MarketWatch).
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Solar electricity generation-related venture capital investments raised US$85.2 million in China, up from under $4.6 million in 2007 (MarketWatch). The top energy capture efficiency of China’s photovoltaic cells is around 21% (PV Report, p41), which is competitive in the industry. Solar energy industry growth will likely be much slower in 2009. Businessweek cited concerns that worldwide solar growth may slow to just 15% in 2009, off from the 50% growth the industry has enjoyed every year since 2004.
China accounts for 11% of the market demand for solar power equipment. The US represents 9% and Germany dominates the industry with a 38% demand (Businessweek).
China produces significant solar photovoltaic capacity, but as of 2007 more than 90% of China’s local solar power manufacturing is likely exported (PV Report 2008, p11).
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China’s Wind industry likely added an expected 7 GW of capacity in 2008,* which allowed China to leap-frog India into fourth place among countries with installed wind power. Comparatively, the United States added 7.5 GW (ABS Energy Research). Global wind energy installed capacity was 94 GW at the end of 2007 and may reach 120 GW by the end of 2008 (ABS and p 15 of the Global Wind Energy Outlook). 20 GW of capacity was added worldwide in 2007- 3.3 GW of that in China (Cleantech).
* NOTE: 1/10/2009 Caijing recently reported the actual added capacity was 4.66 GW.
China’s domestic manufacturing capacity of wind turbines and equipment consisted of 40 manufacturers at the end of 2007. Chinese manufacturing accounted for 56 percent of global wind equipment installed that year. As of 2008, “Domestic manufacturing capacity is about 8 GW and is expected to reach 12 GW by 2010.” (Cleantech).
The Chinese wind power market has changed significantly in the past four years. In 2004, 75% of the market demand was filled by foreign suppliers, in 2006 only 55% was, and in 2007 foreign suppliers’ share fell to 42.2%. Only 1.7% of capacity is constructed by joint ventures, the rest of capacity is produced and installed by Chinese companies. (p20). In that same time period, the China market has seen total installed wind capacity rise from under 1GW to 8GW.
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Nuclear Power. China’s nuclear industry remained steady at 9GW of installed capacity as of December 2008. Nuclear energy accounts for about 1.3% of China’s total energy generation mix.
China Growth Is Just About Right (合适)
11/27/2008 Update Notice:
China Comment plans to return to its regular schedule of 1-2 articles a week in mid-December. Currently, in my free time, I am catching up on some China-related academic reading material. If you have suggestions of particularly insightful recently published Journal articles to peruse, I would much appreciate the advice. Thank you for reading.
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I agree China will only see 8-9% growth in 2009, which is less than its previous trend of double-digit economic growth; however, this slowdown will not be disastrous- in fact, it may be beneficial. Only a few months ago analysts complained how China was growing too fast, how inflation was hurting the economy, and how high commodity prices were thrashing China’s consumers, and how the government’s artificially cheap energy market was crippling China’s energy industry.
Now, commodity prices have descended, along with $65 and lower/barrel oil. And that is highly beneficial for China. If prices for steel, coal, and other commodities remained at their Summer levels, China’s prospects for stability and growth would greatly diminish. However, if in June China could be projected to grow nearly 10% y/oy despite $100+/barrel oil, it makes sense that the country- which is rapidly developing its domestic market, can readily afford domestic investments such as those included in China’s $586 billion “stimulus” plan.
China needed this decline in commodity prices, and easing demand to allow its infrastructure to catch up to its growth. On November 14th, State Grid Corp. said “it will invest an extra 2.7 billion yuan ($400 million) to expand power grids,” (IHT), which is a welcome upgrade since over the Summer, China experienced troubling shortfalls in power distribution and production. And when the infrastructure is there to improve transportation efficiency, China’s economy will be humming again with double digit growth.
In 2006, Business Week laid out the case that “An economy growing in the 8 percent to 9 percent range would be ideal,” and China’s 2008 growth target was 8 percent, “following last year’s sizzling 11.9 percent expansion.” (China Daily, June 19, 2008). Growth at that range is more sustainable for China and can prevent the country from building out too much over-capacity. In fact, the world-wide economic downturn may ultimately benefit China. If the country’s weakest-managed companies consolidate, and if the over-capacity is not too enormous (Which it very well may be in the shipping industry.) there is a chance that Chinese companies will emerge from the downturn better managed and better equipped to compete on a global scale, like Haier and Galanz did before and emerged as national champions (also; Made In China, Donald Sull).
Larger Companies… But Many Are Larger “State”-Owned Companies. (Perhaps A Problem)
An alternative view points out that the downturn has led to larger, and perhaps stronger state owned corporations at the expense of privately held ones.
Some larger state mergers, both first announced in June but only recently completed, include:
(1) Sinotrans CSC Group, combining China’s largest logistics (state-owned) and largest river shipping company (state-owned) [so much for the anti-monopoly law.] Apparently, “The merger of the two state-owned groups is a move to consolidate fragmented state-owned groups into fewer, more efficient and focused entities which can deploy their resources for developing identified business areas.” After the merger, Sinotrans CSC will become “the country’s second largest shipping and logistics conglomerate, just trailing COSCO Group.”* (See Below)
(2) Two state aircraft makers also merged.
(3) On October 27, “China Huaneng Group, one of the country’s largest power generating firms, bought a 40 percent stake in Huating Coal Group, the top coal mining company in the northwestern province of Gansu.” Laiwu Steel Corp. and Jinan Iron and Steel Co. agreed to merge to form China’s second largest iron and steel group in February (Reuters and China Daily)
(4) On November 6th Rizhao Iron and Steel, one of China’s largest private-sector steel mills, “signed an agreement to consolidate with a state-owned rival.” (Reuters). Rizhao’s yearly output is 8 million tons of steel (CER); comparatively, the state giant Baosteel, which is being strengthened by the Central Government and is aggressively merging and acquiring assets, produced “28 million tons” in 2007 and hopes to raise its capacity to 80m tons by 2012 (FT, Nov 6, 2008). In consideration of the Laiwu and Baosteel mergers, it will be difficult for private manufacturers to grow fast enough to compete.
Jobs? Production? Trade?
The Canton trade fair was sparsely attended; and some workers’ wages have been cut in half, which will at best constrain spending and prevent China’s domestic economy from picking up the slack in growth from its export sector. At worst, this could lead to stability challenges and tax revolts as workers are laid off, then return to the provinces after find it increasingly difficult to gain and hold jobs.
Conclusion: A Strong China
Although China faces some challenges, the ameliorating effects of lower commodity prices, slowing inflation, economic reform, slash of lending rates from 6.93% to 6.66%, and some pro-export government growth policies such as “increasing tax rebates “on 3,770 export items, or 27.9 percent of all products shipped by China. [by December]” will continue to sustain China’s growing success.
Side Note on Western Manufacturing:
China’s tax rebates on export items, which were recently phased out, but which have now returned, may become a challenging issue in Europe and America, since the rebates will, along with alleged “currency manipulation,” undercut Western manufacturers’ prices. Coupled with cheaper oil and transportation costs, this will lead to a big discount and growth opportunity for Chinese exporters.
In response, Western countries may turn more protectionist, or else (barring a rise in energy or transportation costs from China), there will be another round of Western manufacturing demise.
Additional Information
* “Sinotrans posted operating revenue of RMB 57.7 billion in 2007, and aims to boost the figure to somewhere between RMB 80 billion and RMB 100 billion by 2010. Changjiang National Shipping focuses on river shipping. It has total assets of RMB 41.2 billion and a staff of 70,000, as of end 2007.” (SeaTrade Asia Online).
Bandwagoning About China’s Economy
In the wake of the global economic downturn, China’s economy is growing slower; “only” 9 to 9.9% on the year (Reuters), and perhaps expanding at 8 to 9% in 2009 (China Daily, 11/8/08). Some experts warn that China needs to grow between 6 to 8% to ensure stability and sufficient employment for newly-emerging workers. These worries led to a spate of articles spouting warnings about China’s 2009 economic prospects. Announcement of China’s “financial stimulus” package led to a brief hope-driven turnaround in investor opinion, but China alone cannot lead worldwide economic recovery (other analysts agree). Still, China’s economic composition allows it to weather this recession quite well.
The mass media seems at times to get into “bandwagons” of “fad” commentary that lose sight of the big picture behind issues. For purposes of perspective, I present a cautionary review of some now-ironic predictions and “dire warnings” that were made from November 2007 until today.
(Later, I hope to present a case for what circumstances will allow for continued Chinese economic viability.)
There always seems to be another crisis looming, and yet, China sustains its economic growth. This summer, China was buffeted by increasing energy prices, which contributed to rising prices for food and other commodities. Now, China has seen six consecutive months of declines in its inflation rate and China fears deflation may arrive around February 2009 (The Guardian). China last dealt with deflation in 2002, shortly after China joined the WTO (in late 2001); interestingly, that deflationary experience was similarly precipitated by domestic overcapacity.
Remember back in March 2008 when “Premier Wen Jiabao said tackling inflation was ‘the biggest concern of the people’”, and the BBC commented that “[t]his is a serious concern for the government, which fears higher food prices could trigger social unrest.” (BBC, March 11, 2008).
Deflation may harm China’s growth, but it may also correct a near-overheated inflationary market that was otherwise in danger of bursting. In 2002 the Hong Kong General Chamber of Commerce warned of deflation, but also noted its benefits (I emphasized the most pertinent part); “[a]lthough deflation can give consumers greater spending power, it ultimately gives way to weaker demand as consumer confidence begins to erode [because prices keep falling]… On the flip side, deflation can help increase consumers’ spending power, raise the standard of living of China’s poorer residents, and weed out weaker companies…Mild deflation in China has so far kept the economy from going into recession, and the economy has enjoyed steady growth for the whole of 2002.”
Both inflation and deflation can harm economies, given other surrounding factors, but when making “bets” on China’s future, this current situation should serve as a reminder to draft out a long term plan. In February and March, headline articles appeared not to see this slowdown coming. Instead, they were concerned that inflation driven by rising commodity prices would lead to rising prices for exported Chinese goods, and dire domestic consequences.
A Basically Strong China Supports the World versus A Structurally Weak China Burdens the World.
Just four months ago, Albert Keidel’s piece on China’s coming economic rise was touted as a harbinger of a Chinese Century of overpowering strength. Although people who study China know China currently lacks the economic heft to single-handedly support the world economy, TV newscasters, the BBC, and others complained about how China’s demand was either the main or a significant factor for driving up oil prices. Although China’s rising demand certainly contributed to some of the climb to $150/barrel oil, no one country’s sole future expected supply and demand caused oil’s massive price fluctuations from $60 to $150.
Importantly, China’s decreases in demand for certain commodities came after American consumers cut back on their mileage driven and energy utilized (June 2008 saw the biggest decline in US oil utilization in 17 years). In China, however, imported oil demand was up 17.3 percent in the first five months of 2008 [and was up 3 percent in June] despite prices rising 66.9 percent over the previous year (Xinhua, June 2008). China’s imported oil demand decreased 7 percent in July, but then gained 11.5 percent in August, according to Bloomberg.
Additionally, bulls who bet that oil would become scarce and that demand would remain high were confronted with Western public policy pushes toward financing and supporting recovery of additional energy sources.
When considering China’s current affect on the world, it is important to remember that although China is growing, “China accounts for no more than 11% of global GDP, against 21% for the U.S, on a purchasing power parity basis. [5% for China and 28% on non-PPP numbers] Its domestic market is only one-eighth of the size of the U.S.’s at $1.2 trillion (2007 consumption). (Forbes). China can be a guiding factor, one of many in the growth of the world economy, so its domestic policies will likely neither harm, nor hurt the global economy much more than Japanese domestic economic policies (which admittedly is no small effect). But China alone cannot shake the world… yet.
Bonus
* A paper delivered at the Peterson Institute on April 3, 2008 argues that to combat inflation “the world economy really needs what is now forecast for 2008/2009: a significant slowing of economic growth.” It’s good to remember that some people thought this recession could help the economy avoid a larger future financial disaster. Could America’s economic implosion actually have saved China from its own domestic inflationary and energy-price-driven meltdown? It is an interesting point to consider.
To avoid over-capacity, economies need to grow at measured rates. 20 years of growth at 6% is arguably better than 5 years at 10%, 2 years at 5%, then 4 years at 9%, then 3 years at 4% since steady growth rates guarantee a modicum of both stability and job security.
* To allow another view to express itself; perhaps China caused part of the fluctuation in demand for some commodities. J. Christoph Amberger at Seeking Alpha warned in April 2008 that slowing growth in textile and light industry export toward Western countries would contribute to Chinese economic weakness post-Olympics.
The Future of China Quality
“According to the Xinhua news agency, in the first seven months of this year, 3631 small scale enterprises producing toys mainly for the US market have closed down due to a decline in the demand for China-made toys from the US. These enterprises… constituted 52.7 per cent of all toy-making companies in China— Source “South China Morning Post” and AFP.” (South Asia Analysis Group)
China’s 2007 lead toy scandal, its 2007 diethleyne glycol poisoning scandal, and its melamine in milk scandal all highlight problems of accountability in China’s sourcing system, as well as the dangers of unsupervised small (and often-times unbranded and therefore often unaccountable) producers whose goods are purchased by players higher up the value chain.
The fallout from these negative news stories might have some chance of encouraging greater CSR (Corporate Social Responsibility) in the industries affected, but in a decelerating economy, it seems unlikely that Chinese companies will choose increased quality and differentiation practices rather than cost-focused strategies.
However, if the companies do have cash, they might see benefits in investing in something other than labor which has become more protected and expensive due to China’s 2008 Labor Law. Supply-chain management, RFID tagging, and greater computerization and modernization of systems can do much to raise accountability that retailers, such as Wal-Mart are increasingly demanding.
What does China Need to Ensure Quality?
* “No law places clear responsibility on food enterprises for the production of safe products,” according to a UN Report (AP, Oct 08). “[R]esponsibility for food and drug safety [as of 2007] involve[d] as many as 17 government agencies, ranging from the Ministry of Health, which sets hygienic standards, to the Public Security Bureau, which has power to investigate criminal cases” (NYT, July 07).
* Stronger oversight and more accountable expert-overseers. Increased cadre-responsibility.
* Allowing less restricted news reporting on real scandals. Permit people to spread information in an uncensored way about which foods are damaged and which are not.
* China could benefit from better tort laws that allow people to directly sue companies for damages. This will reduce the likelihood that a “big brother” government bureaucrat protects and enables some exploitative factory owners who are good friends of people in the overseeing administrative agencies (See Note 1).
* Consolidation in factories and in agriculture. The new Farm Land-Use Law might encourage and promote this chance for Chinese producers to move along the value curve and achieve greater economies of scale. The average Chinese farm has less than two acres (WSJ), and in total there are about 200 million farms (NYT). “China [also] has around 450,000 registered enterprises engaged in food production and processing but most — about 350,000 — employ just 10 people or fewer.” (AP and NYT).
* Greater business investment in technology and modern agricultural and manufacturing practices. The big players, the Lenovos, Haiers, Galanzes, etc. already recognized the value of modernity. It’s time other less-modern economic sectors caught up.
Mixed Results With A Slowing Economy
China’s economic growth is slowing to around 9-9.5% this year, and its economy may only grow at 8.5% next year; however, if it can achieve that growth, the country will continue to have vibrant industries. The more efficient and better capitalized export manufacturers will survive in a low-priced commodity world (less than $100 oil) since the China Price continues to be relatively low despite imposition of new labor and environmental laws.
Will the better capitalized and managed export manufacturers take this downturn as a chance to invest in capital improvements to increase quality and efficiency? Will they drive down costs not by racing to the bottom and paying workers less, but by hiring fewer workers and improving the manufacturing process?
Sometimes there is great pressure for companies, especially state owned companies to value employment over efficiency. However, the January 2008 labor law, which makes it more difficult to lay off workers, may encourage companies to draft strategic plans based around equipment rather than manpower.
It is difficult to generalize about the overall Chinese manufacturing economy, but previously when market forces encouraged chaff to be weeded due to oversupply, as documented in Donald Sull’s excellent book “Made in China,” more quality-conscious manufacturers emerged.
Sull described how the white goods giants Haier and Galanz emerged from a crowded field of hundreds of low-quality manufacturers back in the 1980s and early 1990s. Both decided their product strategy would be differentiation. They made higher-end, defect-free goods and improved their production processes.
Through investment and consolidation with some well-positioned competitors during supply-glut-driven downturns, both companies gained success and dominated their markets. The lesson learned by them, and taught to other Chinese entrepreneurs through books and lectures is clear; quality sells, and accountability and branding ultimately leads to greater success than anonymity and “selfish-off-the-books, off-the-records and under-the-table economic safety”.
Quality appears to be the route to success for Chinese businesses. China Journal pointed out on Oct. 27th that “in marked contrast to the firm’s survey of American consumers, who ranked price as a top concern, Chinese consumers place greater emphasis on service,” perhaps because they have been “burned” too many times before by faulty merchandise. American consumers can afford to value price over quality because American goods (arguably) are safe if they are sold– in China that is not always the case. With discretionary income comes greater sophistication and value of “quality” over “cheapness.”
While in China (before the melamine issue blew up), I attended a lecture and spoke with Xu Erming, a deputy dean at Renmin in which he discussed Chinese dairy manufacturing, consolidation, and improvement of quality milking procedures. Despite the recent scandals, it is important to realize that milk’s quality and quantity ballooned exponentially since the late 1990s when cows were not even healthy enough to be milked en-masse. Product pipeline oversight today is much better than even five years ago. With time, consolidation, investment in capital expenditures for tracking the product, and increasing sophistication (agricultural and business-wise), China’s industries will increasingly see quality improvements.
Successful Chinese industries will move down the path of accountability simply to survive as labor costs increase. The “easy” and “dumb” money in China has already been made; real Chinese entrepreneurs realize the need for quality and will increasingly work toward increasing it.
Are Western Companies Also At Fault?
Blame for poor quality does not rest on Chinese manufacturers alone, so it is important to examine more globalized trends that can help China’s product quality improve. As foreign purchasers realize they need to spend more money to get quality in order to avoid recalls and negative publicity, they will create a system (as Wal-Mart has) where they do not encourage producers to indiscriminately cut costs.
Or, poor quality toy makers will depart for elsewhere in Southeast Asia where labor regulations may not be as stringent. Still, it is likely many toy manufacturers will remain in China since elsewhere there are more severe difficulties in stability, resources, economies of scale, and infrastructure.
Conclusion
Quality in China’s industries depends on foreign companies’ oversight as well as internal regulatory measures. Scandals hopefully will result in less cost-cutting since few companies want the negative publicity and customer shyness that accompanies scandals.
The ultimate future of China’s quality is murky. A sudden policy turnaround favoring uncensored news reporting seems unlikely, and development of class-action tort damages is even less likely since to allow mass lawsuits would be much too similar to Beijing tacitly approving “mass incidents” which challenge the government’s legitimacy.
However, consolidation of industries, self-regulation by foreign purchasers, and greater funding and improvement of government regulation does seem likely in the next one to two years.
Ultimately, systemic problems affecting Chinese quality will continue to plague certain low-margin parts of China’s industries, but China appears to be taking practical steps to resolving shortfalls in its quality-control systems.
Extra
Note 1: I agree that the “Chinese” solution of the government doling out compensation can rectify some damage. However, if the “Chinese characteristics” of a society are to be respected at the same time Justice is ensured, the government needs to rectify bureaucracies and hold people accountable to encourage others to proactively comply with regulations.
Mere ex-post administrative oversight may catch some culprits, but could just as easily protect other culprits who have better connections, better guanxi, better friends in the regulatory system.
Additionally, bringing government-pursued cases into the sunshine of public oversight will do much to ensure that the Chinese people can see justice is being pursued and that the Party truly cares about their interests.
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