China Comment

Energy, Environment, and Economy

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.)

2009409.6 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.

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6 January, 2009 Posted by | China Energy, China Future | , , | 1 Comment

Xinjiang’s Energy Resources

Resources buried under Xinjiang account for over 20% of China’s future petroleum reserves, over 40% of its coal reserves, and Xinjiang has potential for large uranium deposits. Recent terrorist attacks and instability in Xinjiang makes it worthwhile to examine just what the Chinese have of interest in the region. Below, I explore the importance of Xinjiang’s security to Beijing’s energy policy. (Examination of a political point-of-view calculation will have to wait until later.)

An Overview of Xinjiang’s Energy Resources

“Xinjiang’s annual oil and gas equivalent output… ranks the first in the country… The third national resources evaluation shows that: Xinjiang’s total oil and natural gas resource reserves exceeded 30 billion tons… Recently, Xinjiang has been producing 75,000 tons of crude oil daily, occupying 14.4 percent of the country’s daily crude oil output. In 2007, Xinjiang’s oil and gas equivalent reached 44.94 million tons” which was the highest production value of all Chinese provinces” (People’s Daily).

“Xinjiang produced 26.4 million tons of crude oil and 21.2 billion cubic meters of gas last year, or 43.3 million tons of oil equivalent, representing a rise of 13.6 percent from 2006. [Note, these estimates differ slightly from People’s Daily’s estimates] As a result, Xinjiang, with estimated reserves of 20.8 billion tons of oil and 10.8 trillion cu m of gas, has been designated as a strategic area to replace Heilongjiang [in the Northeast] in China’s oil industry” (Stephen Blank, Jamestown).

“[B]eneath Xinjiang’s dusty soil and mountainous steppes lies buried 40% of China’s coal reserves. Equally abundant and far more precious to the central government are oil and natural gas deposits that total the equivalent of about 30 billion tons of oil and represent one-fourth to one-third of China’s total petroleum reserves” (Peter Navarro).

* A short, four page report on Xinjiang’s energy potential by the WSI (World Security Institute).

Xinjiang’s Coal

“It is predicted that during the 11th Five-Year Program period (2006-10), in the Zhundong area of eastern Xinjiang, the total installed capacity to be constructed – based on coal resources there – will reach 8.8 million kilowatts, and that of coal-to-methanol, coal-to-olefin, and coal-to-oil projects will total 7.6 million, 1.96 million and 3 million tons respectively. The aforesaid projects are expected to generate sales revenue of some 55 billion yuan (US$7 billion) after going into production… In 2006, raw-coal output in Xinjiang increased by some 3.6 million tons over 2005” (Asia Times).

“In accordance with the region’s 11th Five-Year Program, by 2010 Xinjiang’s raw-coal output is expected to exceed 100 million tons, and its installed capacity to top 10 million kilowatts” (Asia Times). 

Xinjiang’s Natural Gas

“The Tarin Basin alone has proven reserves of over one billion tons of crude and 59 billion cubic meters of natural gas” (Martin Andrew, Jamestown Foundation).

Xinjiang’s Wind

Xinjiang is also home to the Dabancheng wind farm, one of the largest in China, and has potential for much more wind power expansion. And “The Ala Mountain Pass region… will have an installed base of wind farms totaling 1 GW” by 2015 (Renewable Energy World).

“(Although significant power-grid transmission to the East would be a logistical problem to overcome.) “Currently, the total wind power capacity installed in Xinjiang accounts for 20% of nationwide capacity installed… The total capacity is estimated to reach 43.8 million kW, which can generate 1 00 billion kWh of electric power and is nine times of the current electric power generated in Xinjiang” (World Security Institute).

Energy Security and Transportation

* “The 2008 People’s Republic of China (PRC) White Paper on Diplomacy placed energy security as a major centerpiece of the country’s foreign policy…The White Paper specifically emphasized that China is currently the world’s second largest producer and consumer of energy, and therefore an indispensable part of the global energy market, and is increasingly playing a prominent role in ensuring global energy security” (Russell Hsiao, Jamestown).

* “Central Asia can serve as a transshipment area for Middle East oil should war ever break out over Taiwan or China’s various claims for oil reserves in the South China Seas” (Peter Navarro). Pipelines through Xinjiang connect China with Turkmenistan, Kazakhstan (2010), and also run through Uzbekistan. It is vital to China’s energy security that these energy pipelines are secured.

* Crude Oil reserve bases are also located in Xinjiang, which will be useful if coastal oil reserves in Zhejiang or Fujian come under fire due to a Taiwan conflict.

* Xinjiang’s vast resources can help China wean itself off of foreign countries’ energy. If developed properly, and if China restrains its energy consumption, the country can continue to possess a modicum of energy independence.

Conclusion

Security of Xinjiang’s resources is central to Beijing’s strategy of becoming a developed nation. Without Xinjiang’s resources, the Chinese would depend even more on the vagaries of the Malacca Strait for transshipment of energy. Russia’s new pipeline into China will help alleviate some of China’s dependence on pipelines through Xinjiang, should said pipelines become plagued by sabotaguge (which is unlikely). Additionally, more energy diversification is planned with expansions of China into Myanmar energy.

Still, China’s domestic energy hub for the future is Xinjiang. Its supply of energy to the rest of the country is disproportionate to its population and its wealth. Because Xinjiang is key, China will continue to be harsh in its crackdowns against splittists, terrorists, and overly zealous religion adherents.

27 August, 2008 Posted by | China Energy, China Future | , , , , , , , , , , | 1 Comment

Trouble in the Spratlys

The Spratlys, co-claimed by Vietnam, China, Brunei, Malaysia, the Philippines, and Taiwan appeared again in the news this week as China warned Vietnam and Exxon Mobil to not go ahead with planned exploration. Previously, in 2007 China discouraged BP from co-developing a natural gas field with Vietnam.

Chinese assertion of sovereignty in this case, when compared to its June 2008 deal with Japan to co-develop Chunxiao oil field in the East China Sea, is interesting. With the Chunxiao deal, China asserted supremacy, still claiming sovereignty, but it still agreed to co-develop the field, splitting investment and revenues 50-50% (“Sun Bin” has a description of that deal).

With Vietnam’s claim to the Spratly oil, China will reach no such consensus. PetroVietnam seems intent on not splitting investments with China, and Vietnam definitely has a legal case for not splitting. The Spratlys are beyond China’s Exclusive Economic Zone of 200 miles from its shores (in which it can exploit resources), however China still lays claim to them since the Spratlys are on China’s Continental Shelf.

And China has been enforcing its claims. In June 2007, “China arrested 41 Vietnamese fishermen near the Spratlys for straying into contested waters.  They were released after paying fines.  Vietnamese fishermen in another incident on July 9th were not as lucky.  One fisherman was killed and several others were injured when Chinese navy vessels opened fire on their fishing boats near the islands.” In November 2007, “large military exercises by China in the South China Sea close to the Paracels sparked protest from Vietnam.” And “on December 4… Vietnamese state media criticized China for ratifying in the People’s Congress a plan to create the Sansha administrative zone to manage the Paracels, Spratlys and the Macclesfield Banks.  The zone has been given the status of a “county-level city” within Hainan Province with its administrative headquarters on Woody Island in the Paracels… Chinese Foreign Ministry spokesman Qin Gang claimed China has “indisputable sovereignty” over the islands.”

As described by Bernard Cole in The Great Wall at Sea (2001), China signed the 1996 UN Convention on the Law of the Sea, but only after including several reservations. It claimed a sovereign right over an Exclusive Economic Zone (which would allow full naval intervention within more than 200 miles), and over its Continental Shelf (350 miles).

China also wanted boundary disputes to be settled bilaterally rather than internationally and would not allow foreign warships to transit through waters without approval. China’s naval claims extend from its coast nearly to the coasts of Indonesia, Vietnam, and the Philippines, and if accepted, would basically make the South China sea an exclusively Chinese lake, denying Vietnam easy naval access to the Pacific Ocean.

China’s historic claims to the Spratlys/Paracels are based on exploration by the Han from 200BC-220AD, and administration by the Tang Dynasty from 618-906, but Cole argues this does not really establish current-sovereignty according to modern usage.

China currently occupies around seven islands militarily, and vietnam has military garrisons on 20 Spratlys. Vietnam traces its legitimacy to 1933 French claims on the area.

The Philippines base their claim on an alleged discovery by a businessman in 1947. In 1974, he deeded the islands to government. The Brunei claim is based on proximity. 

China is upset about Vietnam exploiting the natural resources because strategic costs and energy supplies are hanging in the balance. Although most estimates place reserves under the Spratlys at 7-20 billion barrels of oil; China believes there may be as many as 200 billion barrels beneath the waves. Strategically, if Vietnam starts developing the fields, then its claim to the islands would strengthen since the country would be utilizing the area.

Could this situation escalate? If the June 2007 collapse of the PetroVietnam/BP deal is any guide– then no, the status quo of undeveloped Spratlys could prevail. However, Vietnam and ExxonMobil may attempt to take advantage of the Olympics in order to push hard to shame Beijing into refraining from harsh rhetoric and threats. This would allow PetroVietnam and ExxonMobil to push ahead with developing the oil field and might lead to diplomatic consequences after the Olympics are finished.

ExxonMobil must have known the political consequences after seeing BP’s failure to join Vietnam in investing. Later, I hope to uncover some research on ExxonMobil’s oil interests and investments in China. To what degree would acquiring new sources with PetroVietnam hurt ExxonMobil’s bottom line? Now, ExxonMobil might still pull out of the deal if China exerts enough pressure, but I find it difficult to believe that ExxonMobil didn’t expect China to push back– they must have a  good reason for pursuing talks with PetroVietnam.

What’s certain, though, is that Vietnam seems ready to go ahead with the deal and exploration despite Beijing objections.

24 July, 2008 Posted by | China Diplomacy, China Energy | , , , , , , , | 3 Comments

Consequences of China’s Oil Price Hike

China has finally raised the prices on its oil. It came a bit sooner than I expected, but as I stated in “China’s Oil Price Freeze,” the raise was a lot lower than needs to be done (China’s prices are still 1/4 cheaper than gas in the US and 1/3 cheaper per liter than oil in the UK). The United States’ prices on oil have risen over 50% since December 2007 (based on calculations of average gas prices of 2.71 in 2007, according to the EIA);

China only raised their oil prices 16 to 18%. (In November, they raised prices 11% to confront $80/barrel oil;  China’s oil companies appear to still have a shortfall of $21 dollars per barrel from current prices of nearly $130 a barrel.)

Rising oil prices will affect Chinese stability, inflation, and government openness.

STABILITY

According to Xinhua, the Chinese State news agency: “more subsidies would be offered to farmers, public transport, low-income families and taxi drivers to cushion the crunch of price rises.” According to FT, “the finance ministry said the targeted subsidies would amount to Rmb19.8bn ($2.9bn, €1.8bn, £1.5bn).”

Given  China’s huge trade surplus, the burden of cost can be arguably borne by the government (And the amount of subsidies direct to the people currently is far less than the amount of subsidies ($50 billion plus) the Chinese government would have needed to give to state oil corporations forced to do business at under-market prices. Apparently,  Sinopec was losing money on imports when “the international price exceeded $78 a barrel.”)

The problem with the Chinese government pumping a lot of money into the hands of its poor peasants, however, is that it can lead to inflation. In a similar situation in Indonesia “the [Indonesian] government forecasts inflation will rise to 12% in June — up from 8.96% in April — as the fuel-price increase feeds into the broader economy.”

INFLATION

Remember, in 1989, part of the impetus for the massive protests was runaway inflation, rising unemployment and lowering standards of living. And as Pieter Botellier of the Jamestown Foundation also argued; “the Communists’ defeat of the Nationalists in the Chinese civil war of 1945-1949 was greatly assisted by the run-away inflation of those years, which sharply reduced the popularity of Chiang Kai-shek’s Republic of China (ROC) government. ”

This is not to say China’s government is in any danger of losing its grip on power– but rising inflation might cause its leaders to look to past lessons of history and react skittishly to the consequences of unrestrained inflation. According to Prof. Victor Shih of Northwestern, this is the highest inflation we’ve seen in China since the mid 1990s. Also according to Shih, there is a current factional dispute in China’s leadership about whether to continue to tighten the monentary supply, or to reevaluate the RMB upward to correct the domestic inflation problem. It’s a complicated situation, and I recommend reading his article for more details.

OPENNESS

In light of increased tensions as a result of upwardly spiraling inflation and energy costs; President Hu Jintao might be encouraged to crack down more on free press and coverage of unrest that will likely emerge as people are able to afford less and less.

The Chinese belief has long been that silencing opposition makes it go away. We’ll see what happens over the coming months.

RESULTS

Due to transportation costs, Chinese food prices will increase even more than the 22% percent they have already appreciated since last year. (In all, according to the BBC, China’s inflation as of April was up 8.5% on the year.) Rising inflation could lead to big problems and the end of 4 kuai (.50 cent) meals that sustain many low-paid migrant workers who labor in the cities and send remittances to their farming families.

Already, there has been a slight decrease in the amount of migrant workers in China’s coastal cities (regrettably, I can’t currently find the Journal article I saw the numbers for this cited in- I will post it as soon as I find it), driving up prices for construction and leading to more inflation. The eventual return of these workers to their villages and second-tier cities might be good for the economy in the long-term as some population stress is removed; but in the short term, their return with big city views, and big city demands for quality of life, these returnees could have big cosmopolitan demands for their local governments- demands that might not be met and could cause social unrest.

IN SUMMARY:

ONE Beijing still needs to subsidize a gap of around $20 in international purchases of oil. Its importing companies are still losing cash, but ultimately China can weather slightly cheaper oil prices than the rest of the world since “average Chinese [domestic] production costs were about $US20 ($21)”. It’s the internationally-bought oil gap that China has to pay for.

TWO China also has to manage the social unrest that will originate due to the rising oil prices. Subsidies to the right populations should take a lot of the bite out of that unrest. Prof. Victor Shih of Northwestern speculates a little on what needs to be done to prop up the Chinese middle and lower classes after gas prices rise. 

THREE There may be citizen-government clashes over the increased oil prices, much as there were in March 2007 during the Yongzhou Mass Incident,  sparked over rising public transportation costs. This could be why public transport costs are being kept steady. (According to the FT, “CSFB, the investment bank, estimates that an 8 per cent increase in fares would add 2.3 percentage points to inflation. “)

FOUR If there are clashes, the government will likely clamp down, and try to keep the media from reporting on negative developments since China does not want to look bad in the year of its Olympics (as noted in my earlier article.) How successful they are remains to be determined.

FIVE And certainly, other reprecussions will be demonstrated, from migrant worker movements, to wage price increases, to possible capital flight from China. Remember, it’s China… Anything can happen.

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Also of note: An article on hidden cost of fuel subsidies explains why China needed to reevaluate its oil prices.

And Forbes discusses in more detail the weird situation where one of China’s national oil companies, Sinopec suffered under the system and required billions in state subsidies to prop up its foreign oil acquisitions.

http://www.eeo.com.cn/ens//Industry/2008/06/25/104320.html Also had an interesting article on the possible reprecussions of the price rise on China’s national oil companies.

20 June, 2008 Posted by | China Economy, China Energy, China Future | , , , , , , , , , | Leave a comment

China’s Oil Price Freeze

Considering recent shortages in fuel in some places in China, as reported by today’s WSJ and an article by the Jamestown Foundation, many may wonder why China is leaving its oil prices at the same level since the last raise in November 2007?

What follows is an analysis focusing on bank loans and stability concerns. More work needs to be done looking into the elite political decisions, namely the discussions between ministers in charge of different portfolios since that can also affect these decisions, but that will have to wait for later.

China wants to present a good image to the world while it prepares to host the Olympic games. The Olympics are a coming-out ceremony for them, an opportunity for much 爱国 (aiguo) or love of country/patriotism. Red, the color of China, appears everywhere. Even PEPSI changed its traditional blue to red in the run up to the Olympics. As one Chinese said in the article: “I thought it was a good idea when I saw those promotional cans. They’re supporting Team China.”

So, what stereotypes does China have to promote to present a good image of their country?

1.) China is not backward

Thus they have retranslated many formerly amusing signs that made little sense in English, such as “Deformed Man” signs outside toilets for the handicapped.

2.) China is ruled by law and order and every Chinese loves China.

Thus, they will increase security and recently presented new regulations aimed at discouraging protestors, both from outside and inside the country. Additionally, the recent clampdown on foreigners overstaying and sometimes working on tourist visas is somewhat based on this. China wants to catalogue all the people inside the country. Laxity in law enforcement is dissipating as the government becomes concerned that foreign elements might seek to upset the festivities.

This also explains the move to ban liquids on Beijing subways starting on May 9th, which appears to be based on International Flight legislation banning liquids on airplanes, and the ban on liquids in other major cities’ subways around the world.

Additionally, the ban of reporters from travelling freely in T*b*t is another example of China trying to present a good “face” to the world– if no one is seen protesting, then it doesn’t happen.

And of course China’s press has cracked down against “negative stories”, and the Hong Kong-based South China Morning Post and other media outlets routinely provide evidence of the country’s greater crackdowns on the free speech of the press. (“Free media for Games = media free of bad news, one city says.” South China Morning Post. March 20, 2007.); also see an April 30, 2007 report on: “The Olympics countdown – repression of activists overshadows death penalty and media reforms”

3.) China wants its economy to keep growing.

China has not reevaluated its currency extremely fast in order to control inflation since it fears (since 2007 in fact, when it had only appreciated 5% against the dollar since the July 2005 depegging, compared to the over 20% it has appreciated by April 2008) that exporters will not be able to survive if there is a rapid reevaluation. Chinese exports to the world have risen exponentially since the early 2000s as the multifiber agreement and trade protectionist agreements expired.

If exporters start suffering, then bad loans could accumulate back to levels not seen since 2005/6 when worries about China’s 10-45% nonperforming loans in state banks led some people to predict an imminent banking collapse– that did not happen, however (China claimed state banks NPLs were only 9.5%) . China seems to have cleaned up it banking act (surprisingly quickly), making its banks at least as solvent as those in America and Europe wracked by subprime.

Some argue that China’s state banks’ cleaned up their balance sheets. However, it appears that some exposure might be hidden. According to the 2006 NYT article: “China Construction had turned in the best numbers at that point, reducing its share to 3.92 percent of loan assets late in 2004, down from 17 percent in 2002… But the risk adviser began cautioning that bad loans were being hidden at the bank’s branches, erroneously labeled as good loans, even though company records showed that they were impaired. He told bank officials that in Beijing and Tianjin alone, he had uncovered $750 million in bad loans that had been deemed good.”

According to an article in Britain’s Telegraph from December 2006; “Less understood is that a sharp rise in the yuan could be the last straw for China’s banks, sitting on a network of loss-making factories living off marginal exports. Standard & Poor’s said a 25pc rise in the yuan combined with a 2pc rise in interest rates would slash corporate profits by a third.”

All these reasons may explain why China raised the reserve requirement to 17.5%. China’s leaders don’t want to risk a hit to their economy’s growth and want to insulate themselves from runs on banks that might happen if loans start to go bad.

As one professor said in regards to a 2006 report on China’s banks, quoted in the NYT: “If there is a slowdown, there will be a day of reckoning. It might be in a long, long time or it might be the day after the Olympics.”

BUT WHY WOULD RAISING GAS PRICES HURT THIS?

Considering all the unrest and trouble that China has recently suffered in T*b*t, and with increasingly loud voices calling for accountability in the construction of school buildings, China wants to avoid more unrest.

With inflation at around 8 percent on the year already, and likely to climb higher, increasing prices for gasoline and ending subsidies can send that rocketing even faster. China’s low per person GDP means that non-subsidized gas will negatively effect farmers, and small businesspeople disproportionately. This could cut into entrepreneurialship and send some to protest, like people have already done in India and Malaysia where “the pump price of gasoline rose Thursday by a whopping 41 percent to 87 cents a liter, or $3.30 a gallon.”

The question is, will gas shortages, caused by undersupply (due to price controls) result in more unrest than raising prices. It appears that as far as the Chinese leadership is concerned, they believe it is better to keep prices low, considering all the other hits to the world economy.

Therefore, I predict that if gas prices in China rise before the Olympics, they will rise much less than they have elsewhere in the world. More likely, the prices will be raised after the Olympic ceremonies are complete.

12 June, 2008 Posted by | China Economy, China Energy, China Future | , , , , , , , , , , | Leave a comment