By:  Steve Dickinson

This is Part Two of a three part  series on China’s energy challenge.  This series arises from the White Paper on China Energy Policy 2012 that the PRC State Council put out last month, right before the 18th Party Congress. The White Paper sets out China’s current situation and then maps out China’s energy plans for the ten-year term of the new leadership to be installed at the party congress.

In Part One, I set out China’s energy scenario.  In this Part Two, I will analyze the White Paper itself.  In Part Three, I will discuss how China’s energy challenge is likely to impact foreign companies doing business with China or in China.

The White Paper starts by providing data that shows that China’s energy consumption has increased dramatically over the past five years:

  • Primary energy consumption has increased by 31%
  • Natural gas consumption has increased by 110%
  • Electricity consumption has increased by 60%.

Not only has China’s energy consumption increased, but the government predicts that the rate of increase will accelerate over the next decade as China develops rural areas and the Central and Western regions. An additional issue is that the rate of increase will be especially great for petroleum and natural gas, fossil fuels that will start to displace coal in the national energy mix.

China is the world’s largest producer of both coal and hydroelectric power. For that reason, even in 2011, China was able to maintain a domestic self-sufficiency in energy of about 90%. However, production of coal and hydropower have natural limits and China’s shift to petroleum and natural gas in expected to substantially increase. This will make maintaining self-sufficiency in energy progressively more difficult for China over the next decade.

With this factual scenario as the background, the White Paper identifies the following five specific challenges for China’s energy future:

  1. Consumption growth. China’s per capita energy consumption is low by world standards. Continued rapid growth in energy consumption is to be expected.
  2. Low energy efficiency. China’s energy consumption per unit of GDP is higher than developed country standards and is even higher than some recently industrialized economies comparable to China.
  3. Increasing environmental pressure. China’s wasteful use of energy results in substantial pollution of air and water. This is more than an economic problem. It negatively impacts the lives of all Chinese people.
  4. Energy security. As China shifts away from coal as the primary fossil fuel, dependency on foreign sources of energy is increasing. For example, in the past five years foreign supply of petroleum has increased from 32% to 57%.
  5. Systems and mechanisms. China’s existing systems and mechanisms for energy production and pricing are weak. This is particularly true the pricing for energy products. These pricing issues then make it difficult to develop a rational domestic energy production program, especially in those areas where domestic and non-domestic prices are substantially different.

The White Paper then goes on to describe in very general terms the areas within China’s energy sector where the government will focus to address these five challenges:

  1. Conservation. Over the past five years, China focused  on energy conservation with the goal to reduce China’s ratio of energy use to GDP growth to .5 to 1. Though the White Paper does not explicitly discuss this, this policy has failed. As I noted in Part One of this series, China’s current ratio of energy use to GDP growth remains at about 1 to 1 ratio and there is no indication that ratio will improve in the next decade.
  2. New and renewable energy sources. Like every other country in the world, China is focusing heavily on renewable energy. Like every other country in the world, even if China succeeds in its most ambitious renewable energy plans, the results are likely to be negligible.
  3. Clean fossil fuels. This is a major challenge in China due to its extensive use of coal in electrical and industrial production.
  4. Provision of universal energy service. If this program is successful, energy consumption will increase by a substantial amount.
  5. Improved energy technology. The White Paper repeats the usual platitudes about increasing domestic innovation in energy technology, but fails to discuss in any real detail how this will be funded or the expected timeline for results.
  6. Industrial reform. A major factor in China’s high use of energy is that its economy is still substantially skewed towards heavy industry. A shift towards more “high tech” and service sector businesses will result in an economy with decreased raw energy consumption. The White Paper does not explain how this economic shift will occur, nor does it discuss the probability of any impact occurring within the next decade.
  7. Increased participation in international energy markets. For many years, China was able to rely on its domestic energy consumption for its economic development. This era is now over. China will now need to actively participate in international energy markets, both in terms of purchasing product and in terms of securing supply. This involves a whole set of commercial, technical and political challenges for which the state owned Chinese oil companies are ill-prepared.

What the White Paper shows is this: The Chinese government is very clear that energy production and consumption will impose major challenges for China GDP growth over the next decade. However, in reading the White Paper, it is clear that the Chinese government has little idea on how to address those challenges. In that sense, the Chinese government is not that much different from any other government in the world. The problem for China is that in the developed world the challenges are not being addressed solely or even primarily by governments; for the most part, the challenges are being addressed by private businesses. Without private business to provide the risk taking and innovation, it is difficult to see how China or any other command economy will deal with these issues over the next decade.

In Part Three, I will address how China’s energy issues are likely to impact foreign companies doing business in China.


By: Steve Dickinson

In October of this year, the Information Office of the PRC State Council published its White Paper on China Energy Policy 2012. The White Paper outlines the current state of energy production and consumption in China and China’s future energy plans. Since energy is critical to economic growth in any country, it is worth taking some time to consider China’s energy challenge. The White Paper is particularly significant because it was released immediately before the 18th Party Congress. The White Paper sets out China’s current energy situation and then maps out its energy plans for the ten-year term of the new leadership to be installed at the party congress.

In this Part One, I set out China’s energy scenario.  In Part Two, I will analyze the White Paper itself.  In Part Three, I will discuss how China’s energy challenge is likely to impact foreign companies doing business with China or in China.

Before turning to the White Paper, let’s consider China’s basic energy situation using data from the BP Statistical Review of World Energy June 2012 and the CIA’s World Fact Book. The most important fact is that in 2011 China became the largest consumer of energy in the world. In 2011, China consumed 21.3% of world primary energy. In that same year, the United States was the second largest consumer, taking 18.5% of world primary energy.

Note however that in 2011, the Chinese GDP was less than half of that of the United States. According to the CIA, U.S. GDP was about $US 15.0 trillion. In nominal terms, the Chinese GDP was $US7.2 trillion. That is, the U.S. economy was slightly more than twice as large as the Chinese economy. On the other hand, U.S. energy usage was only 86% as large as that of China. Stated simply, China used substantially more energy than the U.S. to produce less than half the economic output.

Consider this issue from the standpoint of economic growth. During the year 2011, China’s GDP grew at a rate of 9.2%. During that same year, China’s consumption of primary energy grew at a rate of 8.8%. Using rough numbers, we can say that for every 1% of economic growth, China’s economy required a 1% increase in energy consumption in 2011. This ratio of energy to GDP growth has been fairly consistent for the past decade in China. We can therefore say that under China’s current pattern of production and growth, this ratio will probably remain the same for the next decade of growth.

Now consider the issue facing Chinese economic planners. It has been a commonplace to claim that China’s GDP will reach the level of the U.S. GDP sometime in the next decade. If we use the CIA numbers, this prediction means China’s GDP will grow to about 2.5 times its current size within the next decade. Applying the one to one ratio of 2011, that means China’s consumption of energy will also need to grow to about 2.5 times its current size to fuel that increase in GDP.

Consider now what that increase in energy consumption would mean. In 2011, China consumed 2,623 million tonnes oil equivalent (MTOE). The world consumed 12,274 MTOE. If China’s economy grows 2.5 times larger, its energy consumption would increase to 6,533 MTOE. That is, China alone would consume over 50% of the current total energy consumption of the entire world. In order for this to happen, one of two things would have to occur. Either all the other countries in the world would be required to substantially decrease their energy consumption, or the entire world production of primary energy would need to increase by over 50% in a ten-year period. If other developing countries grow at a rate even close to that projected for China, even this 50% number would need to increase by a substantial rate.

This then leads to the energy dilemma. No one believes that the countries of the world will reduce their own consumption of energy simply to make room for increased Chinese consumption. And no one believes that it is possible to increase world primary energy production by over 50% in a ten-year period. This then means that under current conditions, the projected growth of the Chinese economy is simply impossible. There is not enough energy available to fuel that growth.

This is China’s energy challenge and the White Paper was written with this stark challenge as a background. For many reasons, China must continue to grow its GDP. However, if China does not make major changes to its current system, energy constraint will make that growth impossible. These are not constraints that will have an impact in the distant future; they are constraints that will have an immediate impact. Thus, the new leadership of China must address these issues immediately.

The purpose of the White Paper is to address these issues. Like most government based energy policy statements from around the world, the White Paper avoids providing any clear statistics outlining the real issues. It instead portrays the issues and the proposed solutions in purely qualitative terms. This suggests either that 1) the issues are not fully understood or 2) the problems are so intractable that a factual discussion would lead nowhere. This is typical of world governments and should come as no surprise.

Stay tuned….

Co-blogger Steve Dickinson yesterday spoke at the Chengdu AmCham on China’s 12th Five Year Plan and he will be speaking on that again on April 14 at the Swedish Chamber in Beijing. Though Steve has already written a few posts on here regarding the plan, this one is an important update because it discusses how the plan has evolved such that it now differs markedly from even its most recent drafts.

As I have mentioned previously, China tends to very much follow its five year plans and so they can make an excellent blueprint for businesses located in or doing business with China.

This post will be in two parts, with Part II to come out tomorrow. Today’s post focuses on the guidance given for the Plan. Tomorrow’s post will focus on the plan as actually adopted. 

By:  Steve Dickinson

Guidance for China’s Twelfth Five Year Plan was adopted by the CPC [Communist Party of China] last October in two critical documents:

The Opinion of the CPC Central Committee on Establishing the 12th Five Year Plan (中共中央关于制定国民经济和社会发展第十二个五年规划的建议) (the Opinion) adopted on October 18, 2010

Explanation of the Opinion (央关于制定国民经济和社会发展第十二个五年规划的建议的说明) authored by Wen Jiabao and presented to the CPC Central Committee on October 15, 2010.

This preliminary review is based on those documents and on government and research institutes that have been published in China in response to those documents.

I. China’s Ten Major Challenges

The goal of the Chinese regulators is for China to become a moderately prosperous country by the year 2020. The current five year period will be critical in meeting that goal. China has recently reached a level where its per capita GDP equals $US4,000. The goal is to achieve a $US10,000 per capita GDP by the year 2020. This is a critical transition. It is generally believed to be relatively easy for a country to achieve the $4,000 number. It is common, however, for countries to stall out in GDP growth and never achieve the $10,000 goal.

The goal of the 12th Five Year plan is to prevent China’s growth from stalling. In the Opinion, the CPC identifies 10 factors that threaten the continued development of the Chinese economy

  1. Resource constraints: energy and raw materials.
  2. Mismatch in investment and imbalance in consumption.
  3. Income disparity.
  4. Weakness in capacity for domestic innovation.
  5. Production structure is not rational: too much heavy industry, not enough service.
  6. Agriculture foundation is thin and weak.
  7. Urban/rural development is not coordinated.
  8. Employment system is imbalanced.
  9. Social contradictions are progressively more apparent.
  10. Obstacles to scientific development continue to exist and are difficult to remove.

II. The Theoretical Solution

Before discussing the concrete outline of the plan, the party sets out the theoretical approach that will serve as the guide:

A. The Main Theme: Scientific Development

1. “During the period of the 12th Five Year Plan, economic development remains the key to resolution of all problems.” (Wen Jiabao, quoting from the Opinion)

2. Development must be “scientific”:Practical (unconstrained by ideology),  human centered, and sustainable.

B. The Main Line:  “China must rapidly engage in a complete transformation of its form of economic development.”

It cannot be stressed sufficiently how radical is the proposed remedy. The idea is not to refine the current system, but to completely transform the current system in only five years. This is a bold goal.

The focus of transformation is as follows:

1. From export led consumption to domestic led consumption.

2. From excessive reliance on exports to balance between export, import and domestic consumption.

3. From reliance on foreign technology to reliance on domestic innovation.

4. From reliance on “old” energy, and materials and industries to creation of a low-carbon /new-materials based economy.

III. Ten Point Outline of the 12th Five Year Plan

A. To address the ten challenges, and in accordance with the theoretical approach, the CPC proposes that the 12th Five Year Plan focus on ten major areas, as follows:

1. Expand domestic consumption while maintaining stable economic development.

a. Unleash domestic consumption. This will be done through the measures at item seven below.

b. Coordinate consumption, investment and export to create a balanced economy.

2. Modernize agriculture to create the new socialist rural village. .

a. Modernize agriculture through mechanization and measures that allow larger farms.

b. Invest in agriculture infrastructure, especially in waterworks.

c. Create non-agricultural rural employment.

d. Improve legal and financial development mechanisms.

e. Improve agricultural service business in areas such as wholesaling, warehousing, processing, transportation and marketing.

3. Develop a modern, balanced industrial and trade structure.

a. Develop service trade. Services currently contribute to less than 40% of GDP. The goal is to         raise this number to 70% or higher.

b. Develop modern energy and integrated logistics.

c. Develop marine resources.

4. Advance the integration between regions and encourage stable urbanization.

a. Combat regional disparities.

b. Eliminate the urban/rural distinction. Cities at the second tier and lower must accept rural migrants. The goal is to provide for industrial/service employment for agricultural laborers in areas close to their current residence. This will be done to avoid a mass migration of rural residents into the cities. 

5. Promote energy saving and environmental protection.

Currently, for every 1% increase in GDP, China’s energy use increases by 1% or more. If this rate of use were to continue, China would need to increase its energy consumption by 2.5 times to achieve its 2020 economic goal. To put this into perspective, this would mean increasing the current consumption of coal from the current 3.6 billion tons per year to an astronomical 7.9 billion tons a year. No one in China thinks this can be done. One major way to reduce the amount of energy required for the Chinese economy is to implement energy saving practices throughout the economy. A second way to reduce is to shift from hydrocarbon based energy to alternative energy sources. The new plan advocates an all out program in this area.

6. Create an innovation driven society by encouraging education and training of the workforce.

The plan seeks to shift China from its role as the factory of the world to a new role as a technological innovator for the world. There are two components to this approach:

a. China will seed to become a domestic innovator in all areas of current modern technology, with an emphasis on practical industrial applications.

b. Where China is not capable of domestic innovation, China will continue to import technology from advanced economies. However, China will seek to actively domesticate that technology through a program of “assimilate and re-invent.” The recent program for production in engines for high speed rail is offered as an example of the “assimilate and re-invent” approach.

7. Establish a comprehensive public social welfare system.

In order to meet the goal of unleashing domestic consumption, China has to move to a policy that puts more disposable income in the hands of its citizens. The plan proposed the following approach:

a. Labor and employment.  

China must provide jobs for a growing workforce. There are two key areas:

1. It is estimated that over the next ten years, 200 million persons will be shifted from agricultural labor to urban industrial/service labor. Jobs for these persons consistent with their training must be provided.

2. Currently, China’s colleges produce far more graduates than its economy can absorb. Entry level jobs for college and technical school graduates must be provided. Education must also be adjusted to accord with the realities of the job market.

            b. Wages

Chinese wage are abnormally low. Most planners are pushing for tripling of the average wage for factory workers during this 5 year plan.

            c. Provide comprehensive government benefit programs, especially retirement pensions.

            d. Provide government funded medical services with comprehensive basic coverage by the end of             2011.

            e. Maintain active population control.

It is interesting to note that two major issues are not effectively considered in the plan: the first is the cost of housing and the second is the cost of high school and college education. Though there has been some discussion of constructing low income housing, the measures proposed will do little or nothing to address the problem of affordable housing in China’s major cities.

8. Encourage cultural production in order to increase China’s “soft power”.

China will seek to make its case for the world to avoid misunderstanding of China’s goals and role within the world economy.

9. Increase the pace of reform of the economy.

            a. Financial market reform, especially the RMB.

            b. Energy price reform and price reform of other economic inputs (raw materials).

10. Continue with liberalization and “opening-up” to the outside, but on a new track.

            a. Shift from export only to a balance between export and import.

            b. Shift from inbound investment only to a balance between inbound and outbound investment.               China will continue with its “going out” policy.

            c. Actively participate in international economic governance.