China Comment

Energy, Environment, and Economy

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.

27 October, 2008 Posted by | China Economy, China Environment/Health, China Law | , , , , , , | Leave a comment

Saturday Poll: Pipeline Deals

If you were inspired by China Comment’s article, “Pipelines to Partnerships,” I am interested in hearing your opinions of the feasibility of future international Chinese oil and natural gas pipelines. To help facilitate the discussion and feedback, I have a little poll here:

I am looking forward to reading the reasoning behind your choices.

Feel free to write in the comments section. Registration is not required, however, it may take a few hours for your first comment to appear, I must manually approve all first-time posters.

Thank you for taking the time to read, participate, and comment on China Comment!

Note: Update on the Russia-China pipeline. There are hopes it will be completed by 4Q 2009, but that early a date for completion seems increasingly unlikely.

24 October, 2008 Posted by | China Energy, China Future | , , , , | Leave a comment

Pipelines to Partnerships

China will build a further 150,000 km (93,000 miles) of oil and gas pipelines in the next 12 years, the official Xinhua news agency said on October 19th” (Reuters). These pipelines traveling within the country, and others which travel without carry oil, and geopolitical implications.

Below, I examine where China’s internationally-destined pipelines are going, examine the feasibility, and postulate what the pipeline developments mean for China’s future development.

Chinese Pipelines, Comparatively

China has a relatively developed system of oil and natural gas pipelines, but there is a great deal of room for improved coverage and efficiency. According to the CIA World Factbook, in 2007 China had 26,344 km of gas, and 17,240 km of oil pipelines. Comparatively, Russia in 2007 had 158,699 km of gas, and 72,347 km of oil, and the United States in 2006 had 244,620 km that carried petroleum products, and 548,665 km carrying natural gas. The United Kingdom, a much smaller country than China, had 18,980 km of gas and 4,930 km of oil pipelines.

If China’s goals are reached, in 12 years, the total length of its pipelines will reach around 193,000 km, still much less than the lines in the United States or Russia.

A great deal of China’s planned internal pipeline length will be achieved due to the construction of a West-East pipeline, pumping natural gas from Xinjiang to Guangzhou. The project will cost around $20 billion, and cover over 9,102 km.

There are great opportunities for natural gas expertise and development in China. According to Xinhua, “the country planned to raise the ratio of natural gas in its energy consumption by 2.5 percentage points to 5.3 percent by 2010.”

Overview of Expanding Chinese International Energy Pipelines
(This is by no means an exhaustive list; but it is extensive.)

—-

Kazakhstan-China Oil Pipeline (Atasu-Alashankou pipeline)
November 2005; Expansion completed by 2009-2011.

Length: 962.2 km (600 mile) from Atasu in Kazakhstan to the Alataw Pass of Xinjiang. (Planned additional 700 km expansion to link to the Caspian Sea.)
Cost: $700-800 million shared between China and Kazakhstan.
Capacity: 5-20 million tons of oil a year.
What It Carries: “In 2005, China imported 1.3 million tons of crude oil from Kazakhstan via Alataw Pass.” (People’s Daily). By 2007, that number rose to 6 million tons (Upstream Online).
Future Developments: In August 2007, China and Kazakhstan agreed to extend the pipeline by 700 km (435 miles) westward to link it to the Caspian Sea.
(From: People’s Daily, May 25, 2006, China Daily, July 21, 2006, and Reuters, August 18, 2007.)

——–

Turkmenistan-China Gas Pipeline (Central Asia Gas Pipeline)
(Gas shipments start in early 2010. Phase II should be complete by 2011-2012.)

Length: 10,000 km. It originates in Turkmenistan, runs through Uzbekistan, southern Kazakhstan, and then enters China (People’s Daily, September 20, 2008). Stage I of the Uzbek part will be finished by Jan. 2010. Stage II finished by Jan. 2012 (RIA Novostoi, April 2008.) The Kazakhstan section began construction in July 2008, and phase I should completed by June 2010. “The first segment of the [Kazakh section of the] pipeline will go from the Uzbek-Kazakh border to the Kazakh-China border through Shymkent, the administrative center of the South Kazakhstan region and reach China’s Horgos” (From: New Europe, July 21, 2008).

Cost: $7.31 billion. (New Europe, January 5, 2008).
Capacity: Upon its completion and full utilization in 2013, the pipeline will have an annual transmission capacity of 30-40 billion cubic meters of natural gas (People’s Daily, September 20, 2008). These supplies should last for 30 years. Initially, 4.5 billion cubic meters will be pumped annually. Completion of Kazakhstan’s “second segment (Beineu – Bozoi – Kzyl-Orda – Shymkent) will have an annual capacity of 10 billion cubic metres and a length of 1,480 kilometres” (New Europe, July 21, 2008).

Of Note: Turkmenistan sells nearly half of its natural gas to Russia, around 40 billion cubic meters a year of the 70 billion cubic meters of gas a year it produces. By constructing this pipeline toward China, Turkmenistan gains access to a source that is willing to pay more for its gas, and loosens Russia’s hold on its economy, while bringing Turkmenistan closer toward China’s sphere of influence.
Also see: Silk Road Intelligencer, July 9, 2008 and Asia Times Online, July 17, 2008 and China’s Pipeline Diplomacy.

——–

Russia-China Gas Pipeline (Altai Gas Pipeline Project)
(2011 previous plan; 2013 is now a more likely date due to diplomatic and economic hangups between China and Russia over the price of natural gas from the pipeline and its route. If however, a 2015 goal of piping gas to South Korea is achieved, an earlier constructed Chinese spur would seem rational. (Also see the WSJ))

This on-again, off again pipeline finally seemed ready to be deployed when resource and energy prices reached stratospheric levels during Spring 2008. However energy price drops, expansion of China’s energy supplies vis-a-vis domestic and Turkmenistani projects, and a worldwide economic slowdown have resulted in Russia rethinking the deal. According to an Oct. 8, 2008 Forbes article, “Russia will delay the construction of proposed gas pipeline to China due to competition from other gas sources in the Chinese market,” such as the new Central Asia Gas Pipeline.

Cost: $14 billion.
Capacity: 30 billion cubic meters/year. (10 billion cubic meters/year in the alternative South Korea-only plan.)
(Reuters’ optimistic September 10, 2008 article on the subject.)

Note (Update 10/29/2008) Despite delays in the natural gas pipeline; the ESPO oil pipeline spur, which will cost around $800 million and deliver 300,000 b/d should be completed sometime in mid-late 2009; although as often seems to happen with Russia-related projects, disputes and delay have arisen as of mid Nov/2008. When oil prices start rising again though, the parties will likely give/take more in negotiations. That would place pipeline completion around mid-late 2010.)

——–

Pakistan-China Gas Pipeline

This pipeline would provide China with an alternative transportation route to the easily blockaded Strait of Malacca. However, a solely Pakistani-Chinese pipeline is more of a distant future hope than any short-term reality. Given Pakistan’s unrest and general difficulties, it will be difficult to safely tap the country’s resources or make any extensive long term investments.
Information on the pipeline’s proposal is from: (Xinhua, April 30, 2007).

——–

Iran-Pakistan-China Gas Pipeline
(Construction begins May 2009? Completion June 2014?)

This pipeline is significantly more likely to be built than a solely Pakistan-China pipeline since Iran has better developed energy infrastructure than Pakistan and can supply the needed resources. However, there is danger that the pipeline in Pakistan may suffer damage due to terrorism or internal unrest much as pipelines in Iraq have been plagued by terrorism. Originally, the pipeline was planned to go to India, but has been held up for various reasons.

Cost: $7.4+ billion.
(More information at Stratfor; February 11, 2008. AND the Tehran Times, October 20, 2008; A March 30, 2008 Heritage Foundation backgrounder on the history of the original planned 1993 Iran-Pakistan-India Pipeline.)

——
Myanmar-Yunnan Gas Pipeline (Kyaukphyu-Kunming)
(Under negotiation and feasibility study. Plausibility of near-term development… low due to stability concerns, especially post-cyclone. Plausibility of development 2010-2012 medium to high depending on international natural gas prices and stability of the region.)

Length: 1,450 km (900 miles).

(The Guardian… as always, often alarmist, gave an early analysis of the situation in January 2008; Reuters, with an update. March 6. 2008).

——-
UAE Oil Pipeline (Habshan-Fujairah Main Oil Pipeline)
(March 2008 Construction begun; March 2010 completion.)

Length: 360 km.
Cost: $1+ billion.
Capacity: 1.5m bpd/oil.
Notes: “In early 2007 the China Petroleum Engineering and Construction Corporation (CPECC) signed an agreement with Abu Dhabi’s International Petroleum Investment Company to build a pipeline that would bypass the Strait of Hormuz… Still, when completed, it will be a drop in a bucket compared to the 17 million bpd of crude oil that pass the Hormuz Strait today.” This pipeline is important because it helps alleviate threats that Chinese oil will be blockaded should the international diplomatic situation degrade.
(Pipeline Information from Here. and Yitzhak Shichor writing for Jamestown in September, 2008.)

Compact Analysis

Importation of foreign Natural Gas is not essential to the growth of China’s energy industry since it accounts for less than 5% of China’s energy mix, but the addition of pipelines carrying up to 40 billion cubic meters of natural gas apiece would nearly double current Chinese capacity.

In 2006, China received 69.6% of its energy from Coal, 21.1% from Oil (350M tons; 183.7M produced domestically, around 47% imported), 5.8% from Hydroelectric, 2.7% (~3% in 2007) Natural Gas (55.6B cubic meters- in 2007 this rose to 69.8B cubic meters),  0.8% (1.3 % in 2007) from Nuclear Energy (9.6 GW), and 0.4% (0.7% in 2007) from Wind (5.6 GW), and [data from: Rosen (17), and China Daily (2006) with some updating.]

China‘s natural gas output in 2005 was around 48 billion cubic meters, in 2006 it was 58.6 billion cubic meters (China Daily, October 2007), and it was 69.8B cubic meters in 2007. “The government plans to increase the figure to 80 bcm by 2010 and 120 bcm by 2020… the expected demand [is] 120 bcm per year by 2010 and [150-]200 bcm by 2020.” (China Daily, Dec 2005)

Beijing will receive a relatively large chunk of Turkmenistan, Kazakhstan and Uzbekistan’s natural gas and oil, which will strengthen Beijing’s influence in the SCO (Shanghai Cooperative Organization) economic and defense grouping of Central Asian states. Beijing’s rising importance in these countries’ GDPs will lead to declines in Russian and American power, and present multiple diplomatic options for these countries.

Through its energy diplomacy and economic influence, Beijing appears to be creating a multi-polar near-term future for the Central Asia-East Asia world. A few years after the pipelines are completed at at capacity and the gas and money are flowing along the routes (perhaps as early as 2012), Beijing will become integral to these relatively small economies which may become increasingly less amenable to hosting Russian or American military bases or exercises without extremely viable compensation.

Beijing already surpasses the US in trade partner significance to several Central Asian States, trading $12 billion in 2006 (CRS, 71) with the region, compared to 2006 US trade of slightly over $2.3 billion with the region.  (Data from HERE, HERE, HERE, HERE, and HERE for exports; HERE for imports)

The Central Asian states need Beijing more than Beijing needs them so it will be interesting to see what diplomatic initiatives China may enact and what diplomatic repercussions these energy shifts will have if Beijing attempts to exercise its soft power, especially as energy resources are diverted from Russia, economies become tied to China rather than Russia or US-Allies, and Iran finds a new source for its gas pipelines.

Extra!
* China’s Pipeline Diplomacy. Deals with the reprecussions of China’s energy investments in the Central Asian States and what it means for their economies and ties to Russia.
* IAGS Global Energy Security.
* Iran’s Major Oil Customers.
* Kazakhstan’s Plentitude of Oil. Estimates of production of 3.5 million barrels per day (174 million tonnes) by 2020.
* Oil and Gas Industry Terrorism Monitor.
* Pipeline and Gas Journal’s October 2007 International Pipeline Report, and international trend analysis.

Also please see; Natural Gas Development, chinacomment’s prior treatment of the natural gas industry.

22 October, 2008 Posted by | China Diplomacy, China Energy, China Future | , , , , , , , | 1 Comment

China’s Aging

The Dallas Morning News, the AP, and other news outlets often warn China’s aging will put significant breaks on its future economic development. I disagree.

Although China has some challenges to address regarding its aging population, aging alone will not be a significant drag on China’s GDP growth rate. Here, I examine some common fears about China’s aging populace, then I rebut the dire predictions.

Elder Population Explosion

Warnings about China’s aging population often start with the China National Committee on Aging’s claim that “[b]y 2020, China will have 400 million people age 60 and older, and 100 million older than 80. By 2050, a third of the 1.4 billion Chinese will be at least 60.”

This is a lot of elderly, and some commentators believe China may grow old before it grows rich. But a population of 400 million elderly still leaves nearly 900 million younger folk ready to work and contribute to increased productivity.

When the support ratio of young to the elderly dwindles from 5-1 to 3-1 or 2-1 that could feasibly cripple sustained economic growth in most economies. However, China is not a typical developed country that has fully exploited the human capital of its workers– China’s workforce is still developing.

Productivity and Economic Potential

Beijing is pushing energy efficiency, development of rural regions, and policies that will help move millions of Chinese out of the rural sector and into the urban. Amazingly, some “98 million to 128 million Chinese agricultural workers are surplus.” In “A Weak China?” I discussed how 30-45% of China’s population is still rural, whereas South Korea and the United States have less than 7%!

Economic growth comes when productivity, education, infrastructure, and efficiency are present. Even though China has been underdeveloped in all those sectors, it has posted remarkable 10%+ GDP growth for years. Ultimately, China still has a long way to grow.

Caring for the Elderly

China’s economic growth could slow if society is required to care for the elderly through imposition of social programs. However, unlike in the West, Beijing simply has not made the same massive social welfare program commitments. Although Beijing recently made some commitments, the Party’s pocketbook does not grant the same level of government-sponsored elder-care expected by Westerners. Instead, “66 percent of interviewed rural residents said they would rely on their children when they were old” (People’s Daily).

The lack of government obligations allows China to invest in infrastructure, energy development, and other productive, GDP-growing enterprises.

Because Chinese people know they must depend on themselves and not the government for elder care, they have traditionally saved a great deal of cash that could otherwise have been used to promote even faster Chinese GDP growth.

The Dallas Morning News, citing Cai Fang, “director of the Institute of Population and Labor Economics with the Chinese Academy of Social Sciences,” attempts to indicate that 1/4th of China’s economic growth came “from the productivity of a workforce with few dependents younger than 15 or older than 65… [and that] In “five years, that advantage will start disappearing, and a rising number of the elderly will slow down China’s economic growth,” according to Dr. Cai.

Although there may have been “few dependents” during China’s growth period, China’s savings rate has been one of the world’s highest, “totaling nearly 40% of the gross domestic product” as of 2004 (as noted by the McKinsey Quarterly). This could be because the Chinese traditionally plan ahead to their own elderly futures, expecting to use their own money instead of government subsidies.

The Chinese already have a good deal of cash saved, therefore it is odd to assume that those expecting to become elderly will divert significant additional money from the economy to retirement savings accounts. Individual Chinese are, in general, already prepared for financial disaster.

Demands of elder-care seem unlikely to directly affect Chinese consumer spending any more than their current 40% savings rate already has allegedly “depressed” consumer spending.

Health

Alarmist stories about China’s aging problems often cite how China’s elderly are compelled to work longer to ensure they will have enough money available for when they retire. This, however, seems to be an argument for continued Chinese growth rather than economic contraction. Assuming the elderly remain relatively healthy, they will have a longer time to contribute to China’s GDP.

The elderly’s health may be in question, given China’s environmental record, but there has been progress in China’s health care system and its confrontation of environmental problems.

Where There Will Be Problems

Admittedly, Chinese aging will create some problems. Those problems are, however, addressable.

* Rural Rust Belts. In Japan, which currently has nearly 21% of its population aged 65+, rural cities have been hollowed out. Aging will press hard against rural areas which may need to attract polluting industries in order to gain money that can be used to subsidize elderly populations. The young have moved to the coasts where economic opportunities exist. However, the young may return. The future of China appears to be in development of its internal market. It seems likely that for various reasons, the center of the country will experience significant investment growth from 2011-onwards. (A future article will examine this theory.)

* Older people will be alone, without anyone to support them, or to give comfort. This could lead to psychological problems, crime problems of people preying on the elderly, public health hazard problems, and stability problems (the banned F-G belief system was remarkably popular among the elderly.)

* Health concerns. It can be quite costly to pay for elder care and if the Chinese society ages poorly and develops chronic conditions that are expensive to treat, even the massive amounts they saved may not be enough to ensure fiscal security.

* Rising expectations for public health care could tie down government investment in productivity-creating enterprises. Although on average “retired Chinese [currently] get government help of little more than $50 a month,” there are demands for more government assistance.

According to the Dallas Morning News article, “[some] polls [they do not cite which polls or who conducted them] show 87 percent of Chinese now expect the government to take care of retirement income and health care… A startling share of Chinese now believe the primary responsibility for caring for the elderly should be with society as a whole – the state… And if the state fails to deliver on that expectation, it could be a real social and political crisis.”

Conclusion

China is aging and with age will come new challenges. However, China is well-situated to confront its challenges. Although the net size of China’s workforce will decline, the net productive urban manufacturing core will remain steady as over 120 million rural agricultural workers transition to other industries. China can improve its infrastructure, logistics supply chains and, energy efficiency. Even improvement to US-levels will result in millions worth of savings that will directly transition toward GDP growth.

In China, wisdom (infrastructure improvement, energy efficiency growth) certainly will accompany age.

Last Notes

* On Energy Efficiency: “In 2005, China’s energy consumption per unit of GDP was… more than three times the level of the United States, more than five times that of Germany and eight times that of Japan” (Xinhua); specifically, “the energy intensity of China in 2005… was 35,766 British thermal units per U.S. dollar. In the U.S., the Btu/dollar ratio was 9,113. In the U.K. and Japan, the figures were even lower, 6,145 and 4,519 respectively” (Forbes).

* In General: I realize there are almost limitless factors to consider regarding the future of China’s aging, so if you would like to discuss China’s aging, feel free to communicate in the Comments section.

13 October, 2008 Posted by | China Environment/Health, China Future | , , , , | Leave a comment

Refining a Relationship: Venezuela and China

Hugo Chavez and Hu Jintao met on September 24, 2008 and signed 12 cooperative deals dealing with “trade, oil, finance, education, justice, telecommunications, infrastructure, sports and cultural relics” (Xinhua). The  economic and oil agreements appear to be the most politically important since Venezuela is aggressively attempting to diversity its options in dispersing its abundant supplies of heavy crude oil.

Below, I explore possible effects of Chavez’s goal to ship 1,000,000 barrels of oil a day to China by 2012.

Amount of Trade / Growing Cooperation.

In 2001, China and Venezuela established a joint trade “committee [that] aims at consolidating and strengthening trade cooperation. “ (Xinhua), which helped China become one of Venezula’s five largest trading partners. The US, Brazil, and Colombia are among the others.  China’s money, however, mostly travels toward the EU, the US, Japan, and the ASEAN nations (People’s Daily).

Year on year, China’s trade with Venezuela is steadily increasing. “Bilateral trade in the first seven months reached $6.23 billion, compared with $5.9 billion for all of 2007, Foreign Ministry spokeswoman Jiang Yu said” (Bodzin and Wang, Bloomberg).

Below is a chart examining the rise in trade between China and Venezuela.

Year

Total Exports to China

Total Imports From China

Oil To China

2000 >200 million total from (p202)
2001 >350 million total
from (p202-3)
2002 400-500 million total from (p202)
2003 543 million 199 million
2004 738 million 596 million 12,300 b/ day
2005 1,234 million 908 million 50,000 b/day (est.)
2006 2,622 million 1,698 million ~150,000 b/day
2007 3,014 million 2,835 million 200,000 b/day
2008 6.23 billion total Through July (Bloomberg) 364,000 b/day
2009 (est) > 8 billion total est. 500,000 b/day

(Unless otherwise indicated, data is from China Daily July 5, 2008; figures in USD.)

“Heavy” New Agreements

In the September 25th agreements, “Hu said China would like to deepen “all-phase and integrated” oil cooperation with Venezuela, encourage businesses to invest in Venezuela and establish a trade zone. China will also participate in building Venezuela’s infrastructures, including railway system, telecommunications network, social housing and hydro-power” (Xinhua). Additionally, China and Venezuela plan to construct two refineries, one in each country (Oil and Gas Journal).

Venezuela hopes to make 1,000,000 barrels/day in oil deliveries to China by 2012. The Venezuelans have been working diligently toward that goal; “In the first 7 months of 2008, Venezuela exported 5.18 million tons, or 38 million bbl, of crude to China—an increase of 93.8% over 2007.” (Oil and Gas Journal).

To facilitate cooperation and investment, China and Venezuela set up the “Joint Financing Fund, also known as the “heavy fund”” in early 2008 with capital of $6 billion (China Daily) [$4 billion of which was provided by China]. On September 25th, the countries agreed to double the investment to $12 billion (Shanghai Daily).

A market research report by Business Monitor International expects Venezuela will increase its 2008 production from 2.75 million b/day in 2008 to oil and gas liquids production of 2.93 million b/d by 2012. Internally, “[c]onsumption is forecast to increase by around 3% per annum to 2012, implying [domestic] demand of 675,000 b/d by this point. The export capability would thus be about 2.26mn b/d by 2012” (*A).

Crude Predictions / Feasibility

Logistics of shipping the distance from South America to China will be important to overcome. To in-part facilitate this obstacle, “the two have a shipping joint venture that will build the shared very large crude carrier” (Guardian). Still, according to the Heritage Foundation, the largest supertankers cannot pass through the Panama Canal, which increases costs of oil transport from Venezuela to China. Expansion of the Panama Canal should be completed by 2014. Expansion will expand the current locks from “33 metres (108 feet) wide” “The new locks would be 50 metres (150 feet). A third lane of traffic would be able to handle the wider loads” (BBC; also “Brazil’s Passage To China“).

It is important to retain a sense of perspective about Venezuela’s importance to China. China wants Venezuela’s oil, but Venezuela currently supplies only 4 percent of China’s total oil imports, according to a quotation by a Chinese government official on Bloomberg, but from data elsewhere it appears the number is closer to 10 percent. [Forbes clarifies that Bloomberg misunderstood the quotation- China receives 4% of Venezuela’s crude exports.] China imports about 46% of its oil needs (Xinhua).

In 2007-08, China mainly imported oil from Saudi Arabia (656,000 b/d, 17.92%of its total oil imports) and Iran (433,000 b/d, 11.83%) among others (Shichor, Jamestown).

In 2006, China’s oil imports mainly came from; Angola (~500,000 b/day), Saudi Arabia (~470,000 b/day), Iran (~350,000 b/day), Russia (~350,000 b/day), and Oman (~220,000 b/day). At that time, Venezuela’s supplies of oil did not even rank among China’s top five suppliers. (Data from the EIA).

Zweig, David and Bi Jianhai’s important article; “China’s Global Hunt for Energy.” (Foreign Affairs. Sep./Oct. 2005. 28.)  noted that, as of 2004/5, China had relatively diverse sources of oil imports. China’s largest four oil suppliers accounted for the following percentages of China’s imported oil; Saudi Arabia (14%), Oman (13.3%), Angola (13.2%), and Iran (10.8%)).

Still, China’s oil import demands are rising and were up 14.7% in 2007. Every year, Venezuela supplies greater and greater amounts of oil to China, from a mere 50,000 b/day in 2005 to over 300,000 b/day in 2008.

Consequences. Can Hugo Shift to China?

Hugo Chavez needs other places to sell his oil if he plans to act on his anti-American rhetoric (PINR). Currently, though, the US is very important to Venezuela’s economy. “The U.S. buys about two-thirds of Venezuela’s daily exports of 2 million barrels,” which works out to about 1.3 million-1.5 million b/day (Bodzin and Wang, Bloomberg). As of 2005, over 60% of Venezuela’s oil exports went to the United States and was the United States’ fourth-largest oil supplier (Bajpaee, Jamestown). Interestingly, however, “U.S. imports of Venezuelan oil fell by 11.7 percent to a five-year low in the first four months of the year” (IHT).

The US is Venezuela’s largest trading partner, and Venezuela is the US’s 9th largest trading partner in terms of imports in 2006 and 2007. Venezuela accounted for over 37,000 million in trade in 2006 and 39,000 million in trade in 2007. In 2008, partially due to oil’s price spike, trade was up 58.5% to 32,000 million by July 2008, according to the Industry Trade Association of the US Dept. of Commerce.

China’s purchases of 364,000 b/day from Venezuela is about 1/4th of US purchases. Currently the United States is more attractive for Venezuela to ship to because the US has refineries which can deal with heavy Venezuelan crude, and the United States is much closer and cost-effective for Venezuela to ship toward.

Chavez interestingly claims that “Venezuela won’t suspend crude exports to the U.S. on increased supplies to China” (Bloomberg). If both the Chinese and the Venezuelans make significant investments in developing Venezuela’s oil fields, this will be possible. In fact, “PDVSA hopes that Chinese oil companies [alone] will produce at least 400,000 barrels of crude a day in Venezuela by 2011.”

However, President Chavez’s highly socialist economic policies might cripple indigenous Venezuela PDVSA investment into oil field development and refining. Although Venezuela may intend a “win-win” situation, the reality might turn into a zero-sum game where Venezuela gradually decouples crude shipments away from the United States’ heavy oil refineries (which refine nearly a third of Venezuelan heavy crude), and directs them toward domestic and Chinese refineries.

It is important to note that with expected growth of only 200,000 additional barrels/day expected by 2012, Venezuela may redirect oil and further decouple its economy from the United States in order to meet its self-imposed ship-to-China obligations.

Last Words

As a result of its closer economic relationship with China, Venezuela appears to be purchasing political “cover.” The less its economy is dependent on America’s, Venezuela can more deeply pursue Chavez’s Bolivarian Revolution. It seems this deal mainly benefits Venezuela in its short term goals of independence from American economics.

In the long term, China gains a diplomatic ally, influence in South America, a guaranteed crude supply (because few countries can process Venezuela’s heavy crude), respect as an international economic leader, and gains expertise in heavy crude refining.

Otherwise Notable

* China and Venezuela political relations (until 2003) from China’s Consulate in New Zealand.

* China Daily’s China-Venezuela Special (July 5, 2008).

* Another EIA article on Venezuela, with information on refining capacity (October 2007).

* (Added October 12) Forbes looks at China-Chavez relations (Oct 1, 2008)

(*A) Also of note; “Between 2007 and 2018, we are forecasting an increase in Venezuelan oil production of 23.2%, with liquids volumes rising steadily from 2.72mn b/d to 3.35mn b/d.” Business Monitor International Report.

2 October, 2008 Posted by | China Diplomacy, China Energy, China Future | , , , , , | 1 Comment