In the 1980s and 1990s, China’s energy consumption elasticity averaged 0.4. That is, for every one percent of GDP growth, the energy consumption increased by 0.4 percent. Based on this number, the government made the assumption, in its long-term development strategy, that China’s energy consumption elasticity would reach 0.5 by the year 2020. However, China’s energy consumption growth in the past few years has far exceeded the economic growth rate. In fact, the energy consumption elasticity in 2003 and 2004 surged to 1.32 and 1.6, respectively. This demonstrates that China has entered the era of Heavy Manufacturing.
China’s Energy Consumption Structure Is Showing a Trend of Reversal
In the early 1990s, light industry and heavy industry products were virtually equal in terms of total industrial output. By the end of last year, the percentage of heavy industry products rose to 67.5 percent. That figure climbed to 69 percent in the first seven months of this year. Because the energy consumption in heavy industries is generally four times that of light industries, China’s transition into the stage of heavy manufacturing will inevitably lead to higher energy consumption, a common characteristic shared by industrialized nations when entering the same stage.
When industrialized nations enter the heavy-manufacturing stage, energy consumption is more dependent on oil and natural gas than on coal. Oil and natural gas, called clean energy resources, generate more heating value while producing less harmful gas. Thus, despite accelerated energy consumption, nations using clean energy resources cause significantly less environmental damage despite accelerated energy consumption.
However, the same shift in its energy consumption has not occurred during China’s industrialization. As a matter of fact, the percentage of oil consumption in relation to overall energy consumption decreased from 24.6 percent in 1999 to 22.7 percent in 2004. Despite the 15.7 percent of annual growth in crude oil imports since 2000, with a record 120 million metric tons imported last year, oil usage in relation to overall energy consumption dropped because of a slowing in the growth of domestic oil production. Is this reversal of the pattern of energy consumption temporary or is it an indication of a long-term trend? My answer is the latter, because two major factors limit China’s long-term shift to oil-based energy consumption.
The first factor is the unavailability of world energy resources. China is short of oil resources. It has been predicted that China’s maximum annual oil production is 200 million metric tons. Compared to China, the oil consumption per capita in many industrialized nations is far greater. In the United States, per capita oil consumption is 28 barrels. That number is 17 in Japan or Korea. In contrast, China’s per capita oil consumption is 1.7 barrels, one sixteenth of the United States, and one tenth of Japan or Korea.
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While the United States is the largest consumer of total energy, Japan and Korea boast that they have the most efficient energy users of all industrialized nations. By the standard of Japan and Korea, in 2030 when China accomplishes its industrialization, its annual oil consumption will amount to 3.6 billion metric tons, out of which 3.2 billion tons will have to be imported. World oil resources, however, are just not that abundant. Currently total annual oil production stands at 4.5 billion tons, out of which only 2.2 to 2.3 billion tons are tradable. Even taking the future growth of world oil production and trade into consideration, the world’s oil supply falls far short of the demand from China.
Japan and Korea, both lacking in oil resources, are forced to rely on world resources to accomplish their transition from a coal-based energy structure to an oil-based one. These two countries, with small populations, have fairly low levels of total oil demand despite high per capita oil imports. China, with its huge population, has such a high demand that it will be impossible to accomplish the energy structure shift by relying on world resources. In 2003, China’s imports of crude oil and oil products totaled 120 million tons, while that number surged to 150 million in 2004, 40 percent of the newly added trade volume for that year. Many people have even attributed the surge in oil prices to the increasing demand from China. Despite the rise in imports, the percentage of oil in relation to total energy consumption in China continues to drop. This phenomenon reflects how hard it is for China to rely on world resources to accomplish the transition of its energy consumption structure.
The second major factor lies in the ever more severe international conflicts caused by China’s enormous oil imports. This will be an increasingly serious constraint on China’s oil imports. As a matter of fact, developed nations own over two-thirds of the tradable oil in the world. In 2004, U.S. oil imports reached 640 million tons, while that number was 620 million tons for the European Union, and more than 200 million for Japan. When the growth in China’s oil imports exceeds the growth in the amount of international tradable oil that is already owned by the developed nations, it will certainly create pressure on those developed nations. China’s conflict with them will be inevitable. That is, when China’s demand for oil imports reaches a certain threshold, not only will economic feasibility be an issue, but political and military security issues will come into play as well.
Oil is a key factor in every country’s economy. Therefore it is a focal point of the economic, political, and military fights among large nations. Since 2001, the United States has launched military assaults in Afghanistan and Iraq. Recently it has been actively conducting "color revolution" [2] in some Central Asian nations. In addition, in the name of anti-piracy, it has established its military presence in the Malacca Strait. America’s military actions in the past few years center around the oil resources in the Middle East and Central Asia. If China’s oil demand relies too heavily on the imports from these regions, not only will its economic security be unpredictable, but its political independence will be challenged also. Thus, even if it were economically feasible to rely on overseas resources to accomplish China’s conversion of its energy consumption structure, it is politically unsafe.
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In conclusion, in the long run, China’s industrialization can hardly be achieved by completing an energy structural change similar to that of other developed nations. Because of its abundant coal resources compared to its oil resources, however, China will surely rely more heavily on coal in its future development. As a result, the continued increase in coal usage in China’s overall energy consumption and the drop in oil consumption will become a long-term trend in China.
China’s Environment in the Next 10 Years Will Continue to Deteriorate
If China’s energy structure becomes based on coal when it enters the heavy-industry era, it will surely face ever-mounting environmental problems. As of today, no country has ever accomplished its industrialization based on a coal-based energy structure. Presently, the discharge of harmful gases in China due to coal burning accounts for 65 to 90 percent of the total, exceeding 80 million metric tons annually.
Based on the growth rate of China’s energy consumption and the drop in its oil consumption since 2000, China’s total energy consumption is expected to reach nine billion metric tons of standard coal by 2020, with the weight of coal consumption surging to 75 percent, or the equivalent of 9.5 billion tons of raw coal. The harmful gases that this amount of coal will emit when burned, based on current environmental standards, will reach 400 million metric tons, a fivefold increase from its current level. Such a tremendous amount of harmful gases will be catastrophic.
Some people may ask: If entering the Heavy Manufacturing era is the root cause for the surging energy consumption and its resulting environmental disaster, can China bypass this stage? Because of the potential issues of resources and investments in Heavy Manufacturing, many people are debating whether China should take this route.
The reason is that at the current per-capita income level, many people have a demand for durable goods- including housing and automobiles-which has to be supported by heavy industry. Therefore whether China should develop its heavy industries is related to the question of whether the Chinese people should increase their demand for high-grade consumer goods. Evidently this is not a question for debate, but a question of Chinese people’s pursuit for a better life. Without this pursuit, what is the meaning of China’s modernization and development of social productive forces?
Some people use the example of Hong Kong and Singapore to demonstrate that domestic demand for heavy-industry products can be fulfilled through international exchanges. Unlike the issue of oil, for the economies of millions or even tens of millions of people, domestic demand for heavy-industrial products can indeed be satisfied by international allocation and exchange, so that the domestic economies can bypass the stage of Heavy Manufacturing. Nevertheless this is impossible for as large an economy as China’s, with such a huge population. It is equally impossible for China to bypass the stage for oil, steel, chemical, or mechanical industries. China’s modernization, therefore, must take the path of Heavy Manufacturing. The result is that its consumption of energy cannot be cut back.
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Still others argue that because China intends to construct an "energy efficient society," China can reduce the demand for energy by taking the path of a "cyclic economy." For example, using scrap steel will reduce energy consumption and the emission of harmful gases by over 90 percent. I have to remind the readers that a "cyclic economy" takes the approach of recycling and reusing the processed resources. To develop a large-scale cyclic economy, one must have a society in which a large amount of products have reached the end of their life cycle. This is the reason why there can be a cyclic economy in developed nations, while in developing countries this possibility is limited.
In modern China, over half of the steel is consumed in real estate, with 20 percent in mechanical industries, and only five percent in the auto industry. As of 2004, 60 percent of the total housing square footage in urban areas was built in the past five years, and 60 percent of the automobiles and machinery has been in use also for only five years. Assuming the average use cycle for housing is 50 years, and that of automobiles and machinery is 15 years, then in the next ten years, China will not have large quantities of used steel to recycle. The story will be the same for other colored metals and plastic. Thus, one cannot expect China to accomplish large-scale energy saving by developing its cyclic economy.
As China’s coal usage continues to accelerate, the country will easily reach the limit of its environmental tolerance in just a few years. If China cannot bypass the path of heavy and chemical industries and the world resources cannot support China to accomplish its shift from coal-based to oil-based energy structures, China’s industrialization must take a whole new path.
We often talk about how China should take "brand-new industrialization approaches." By this we mean that it needs to grow from extensive to intensive production. From the relationship between energy and environment, the word "new" should reflect how China should take a brand-new technological approach that has never been taken before by any country, namely, to accomplish its industrialization on the basis of new energy resources and new raw materials. China’s new industrialization should be not only new as compared to its past, but new to the whole world.
Since China’s developing industrialization is a brand-new process, the path of exploration will surely be full of difficulties, and the process will naturally take an extended period of time. Before it can successfully switch to the new industrialization approach, China must rely on traditional energies and raw materials for an extended period of time. As the burning of coal continues to weigh heavier in its overall energy consumption, China’s environment will further deteriorate. We must be able to foresee the future, and increase our investment in the protection of our environment. Only this way can we ensure that, in relying on coal, China’s economy can sustain its growth on the path of traditional industrialization.
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The Key to Building an Energy Efficient Economy Lies in Production, not in Consumption
The shortage of resources in China’s economic development raises urgency in China to develop an energy efficient society. To save energy, China must examine two aspects. One is production, and the other is consumption. In production, China must save resources. That is, it must focus on the efficient use of resources. China must also encourage consumers to reduce consumption. Out of these two aspects, which one should be emphasized in an energy efficient economy? Personally I believe the emphasis should be on production, not consumption.
From the perspective of consumption, it means encouraging a thrifty lifestyle, which is contrary to people’s desire for a better life. Japan has the most efficient use of national resources, and is a role model for an energy efficient economy. This does not contradict the fact that for every 1,000 Japanese people, there are 600 cars. Regardless, China must encourage its citizens to have a thrifty lifestyle and thrifty habits.
One might question, why not use economic measures such as taxation to constrain the demand for large housing and cars with powerful engines? As part of the pricing components, higher taxes for resource-intensive consumer products will certainly suppress the demand for such products. However, if the market pricing already reflects the degree of scarcity of the resources, consumers will naturally make rational decisions based on their income level and the price of the product. For example, as the gas price surges, many consumers are expected to give up their plans to purchase cars or to choose to buy less powerful cars. Therefore as long as the market pricing mechanism continues to be effective, the government does not have to interfere in order to suppress consumption.
There is another proposal to use taxation to raise resource prices in order to save the resources. Personally I disagree with such an idea. China’s own resources are not enough to help it achieve modernization. China has been more and more deeply involved in world resources and market ecosystems. As China’s demand for resources increases, the prices for the world’s resources will follow suit and increase. As a result, all nations that import resources from the international resource market will have to share the burden of rising prices, which makes China’s burden much lighter. If China unilaterally raises resource prices domestically, it is equivalent to automatically giving up the advantage of utilizing cheap world resources. By the same token, if demands for world resources from other countries like India increase, China will be forced to share the consequences of rising prices for these resource products. Therefore, as long as the resource prices accurately reflect the scarcity of the resources, China has no need to proactively raise its domestic prices.
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Currently, waste of resources in China’s production is widespread. The main reason for such waste is due to backward equipment and technologies and the small scale of its enterprises. In many manufacturing sectors, including steel, concrete, electricity, mechanical, and construction industries, the consumption of energy and raw materials per unit of product output far exceeds the average in developed nations. Therefore, there is tremendous potential for saving in these industries. Developing an energy efficient economy is not merely an issue of ideology, but more importantly, an issue of material basis. We must take legislative and economic means to force the elimination of some backward production equipment. By using financial subsidies, government-backed discounts for loans, and accelerated depreciation, we can encourage companies to quickly eliminate obsolete equipment and purchase more advanced equipment. In addition, we should strictly regulate the technological and scale levels that China should possess, and widely encourage economies of scale.
The Key to Efficient Production Lies in Incremental Efficiency
Production efficiency can be divided into two categories: incremental efficiency and stock efficiency. In its middle stage of industrialization, China has to consume a lot of new resources every year. Incremental efficiency is to improve efficiency in extracting and processing resources in order to raise the utilization rate of resources. Stock efficiency is to recycle and reuse the processed products, which is also called "cyclic economy."
Developing incremental efficiency and stock efficiency requires large investments from the government and society. With limited financial and social resources, emphasis needs to be selective. From the perspective of China’s industrialization, production efficiency in the next ten years should be focused on incremental efficiency. This is because the development of a cyclic economy requires the accumulation of a certain amount of products. Take steel as an example. Generally there are two criteria used in assessing the development of an industrialized country. One is steel production per capita. The other is the amount of steel stock per capita. Developed countries, after industrialization, own an average of 700 kilograms to one metric ton of steel production capacity per capita, with a per capita steel stock of 10 metric tons.
Once the per capita steel stock reaches 10 metric tons, the steel production capacity gradually retreats, because demand for consumer products is basically satisfied. Renovating products usually takes the form of replacing new for old. The obsolete and abandoned products, such as cars and buildings, often contain a large amount of metal. The recycling rate for abandoned metal products can often reach 80 percent, which provides ample room for the development of a cyclic economy. In the steel industry of developed countries, steel manufacture using electric stoves produces 80 percent of their total steel output because the raw materials in their stoves are comprised mainly of scrap metal. China as a developing country, however, has the per capita steel output of merely 200 kilograms, and steel stock of 1.5 metric tons per capita as of last year, because of its limited economic development. So far, steel manufacture using steel ores still makes up 85 percent of the steel output, while only 15 percent comes from scrap metal. Furthermore 60 percent of the scrap metal is actually imported from abroad.
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In summary, the emphasis of production efficiency should be on improving the utilization efficiency of incremental resources. As China’s economic scale is already very large, with its metal stock as high as that of Japan, there is still a lot of room to develop a cyclic economy. It is better to start right away, though.
The Most Critical Resources Are Land and Water
It is the non-tradable resources that are the ultimate bottleneck for China’s economic development.
Efficient production is to save the usage of various production elements. Because of the variations in different countries in the natural condition of various production elements, the usage density of the production elements varies as well. With international trading, the production elements that are scarce in one country can be obtained through trading with other countries. Nevertheless, some production elements, including land and water, cannot be obtained via trade. As a result, in economic development, the non-tradable resources are the ultimate bottleneck that cannot be overcome.
While China boasts vast land and abundant natural resources, because of its large population, its per capita land is less than 1,000 square meters (1,196 square yards). Industrialization must then rely on farmlands. It is even more urgent and important to save the use of land than the use of any other tradable resource. Saving the land is also the most important approach in maximizing wealth output with the least input of production elements. As is demonstrated by many developed nations, two-thirds of the wealth in a nation is in the form of real estate. Food will disappear after it is consumed; clothing is tossed when it is worn out; cars are just durable goods that also depreciate. Real estate is the major form of wealth that can be preserved.
As land is very scarce in China, without improving the efficiency of land usage, China will go astray on the path of an increase-without-development economy. For instance, the plot ratio (or floor area ratio) among China’s recently constructed buildings is very low. China’s gross plot ratio (the ratio of building floor area versus the building area) averages at 0.5. Even in crowded Shanghai, that number is less than 0.8, compared to 2 in Tokyo, 1.6 in Hong Kong, and 1.2 in Taipei. Even in the Zhuhai Triangle and the Yangtze Triangle where land resources are extremely scarce, buildings with five or six floors are common in the downtown areas.
Recently, I visited a city in Zhejiang Province. I learned that all land development plans thereh had reached the limit of the city’s capacity. Nevertheless, most newly constructed homes are buildings with six or so floors. This year the land use in Zhejiang Province approved by the central government is merely 230,000 Mu (37,950 acres), with 40 percent of it reserved for projects by the central government. The allotment of land usage for each city averages 20-30 Mu (3.3-4.95 acres), while the allotment for each county is less than 1,000 Mu (165 acres). This has resulted in a dramatic decrease of investment growth in Zhejiang Province.
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Other provinces, including Fujian, Guangdong, and Shanghai, are facing the same problem. As a result, it is said that China’s economic growth has been experiencing regional changes, showing the "Cold" East and "Hot" West phenomenon.
To find new room for growth in the East, builders have to raise the floor area ratio of already used lands, that is, by demolishing old buildings and building new ones. In the past five years, China has witnessed an increase in demolition. On the average, demolition accounts for 20 percent of all building area. Based on my rough estimate, assuming that the value of the demolished buildings is half of the new ones, the loss of real estate values as a result of demolition in recent years totals 50 to 60 billion yuan (US$6.25-7.5 billion) on an annual basis. So far, the demolished buildings are mostly old and used ones. If the lack of land forces the builders to demolish many relatively new buildings in urban areas, the wealth loss will be even greater, leading to the state of increase without development.
The shortage of water is also a serious issue. Despite the lack of water resources in China’s North, many northern regions have invested a lot in the so-called "pillar industries" which have a high water consumption, including steel, chemical, and building materials industries. When the water resources can no longer sustain the growing demand, production cannot be carried out normally and investments are wasted, even with the new technologies that save energy and mineral resources.
Under China’s special situation, turning China into a nation with the most efficient utilization of land and water resources in the world is the most important task in developing China’s efficient economy.
Footnotes:
1. The article was combined from two articles originally published in the 25th and 27th issues of "Internal Reference for Reform."
2. See Wikepedia at http://en.wikipedia.org/wiki/Color_Revolution: Color revolutions or Flower revolutions are the names given collectively to a series of related movements that developed in post-communist societies in Central and Eastern Europe and are possibly spreading elsewhere including some places in the middle east. Their participants use mostly nonviolent revolutionary change to protest against governments seen as entrenched and authoritarian, and to advocate democracy, liberalism, and national independence. They usually also adopt a specific color or flower as their symbol, and the protests are notable for the important role of NGOs and particularly student activist organizations in organizing creative nonviolent resistance.
Wang Jian is the Vice Secretary-General at the Chinese Macroeconomic Research Society.