China's Quest for Resources: A Large Black Cloud

A large black cloud

Mar 13th 2008
From The Economist print edition

Rapid growth is exacting a heavy environmental price

CHINA will not continue to grow at the same pace as it has done recently, or suck in as many raw materials, if its leaders get their way. The 11th Five-Year Plan, which lays out their main economic goals for the period from 2006 to 2010, calls for growth to slow to 7.5% a year from its current double-digit pace and for consumption of energy—a good proxy for resources in general—to decelerate even more.

The government has several motives for stepping on the brakes. One is simply to allow its bureaucrats time to plan for and direct growth. Its chief aim is to redress the growing inequality between the prosperous coastal provinces and the poorer interior ones, and between cities and the countryside. But slower, more carefully orchestrated growth might also avoid wasteful and disruptive bottlenecks.

In 2003, for example, electricity consumption surged so unexpectedly that China began suffering from repeated brownouts as the grid ran short of power. That prompted millions to buy diesel generators, which in turn led to a 10% jump in oil imports in 2004. Since then electricity companies have been building power stations with gay abandon. In 2005 and 2006 they added more generating capacity than France has in total. That has boosted demand for coal, since most of the new plants are coal-fired. But most of China's coal comes from the country's interior and must be transported to coastal power stations by train. That is using up a lot of diesel (on which the trains run) and clogging up the rail network. So power stations have begun shipping in coal from overseas, turning China into a net importer in the first half of 2007 and prompting the huge queues of freighters outside coal ports such as Newcastle, Australia. These lurches in demand for different resources have added to the jitters in commodity markets and helped to amplify price rises.

The government is also worried about security of supplies. Senior figures still daydream about self-sufficiency, looking back to Maoist doctrine and to the terrible man-made famine of the late 1950s. They fret, too, that foreigners might attempt to blockade the country in the event of a war over Taiwan. In particular, the government is anxious about its oil imports from the Middle East and Africa, all of which pass through the narrow Singapore Strait. So it has been pushing for alternative routes, such as a pipeline from Kazakhstan, which opened in 2006, and another one from Russia, which has been under discussion for the past decade. The government has also created, and started filling, a strategic reserve, which should eventually hold 30 days' worth of imports, says the IEA.

The environmental fallout from China's burgeoning demand for natural resources is another source of concern. Processing iron ore, timber or oil requires electricity, and 80% of China's electricity comes from coal. But the sulphur that spews from the smokestacks of coal-fired power stations causes acid rain and the soot generates smog. In many Chinese cities, a thick shroud of pollution literally blots out the sun much of the time. Acid rain, meanwhile, reduces agricultural yields and eats away at buildings and infrastructure. The OECD cites a finding that air pollution alone reduces the country's output by between 3% and 7% a year, mainly because of respiratory ailments that keep workers at home.

A dry subject
China's water supply, too, is in a parlous state, thanks to ever-increasing industrial and agricultural use. The amount of water available per head of population is only a quarter of the global average. In the arid north and west of the country that figure falls to a tenth. Two in three cities already suffer from shortages. Groundwater is being pumped out much faster than it is being replenished.

Not even Beijing treats all its sewage; other cities treat none at all. Famous beauty spots, such as Taihu Lake near Shanghai, are often afflicted by hideous algal blooms, while effluent from polluted rivers has contaminated 160,000 square kilometres of ocean off China's shores, officials say. Over half the water in the seven biggest river basins is unfit for consumption, according to a recent report from the World Bank. The resulting health problems reduce rural output by 2%, it found, and the costs to industry and agriculture of dirty and scarce water sap GDP by another percentage point.

All told, the World Bank put the price tag for China's air and water pollution at $100 billion a year, or about 5.8% of GDP. It is said that the same report originally put the number of deaths caused by the two scourges at 750,000 a year—until the Chinese government complained and asked for the figure to be removed. Pan Yue, a deputy minister at the State Environmental Protection Administration (SEPA), China's paramount environmental regulator, estimates the annual cost of environmental damage at 8-13% of GDP—much the same as the overall economic growth rate. If it continues like this, he expects levels of pollution to double over the next 15 years.

Then there is global warming, which is already exacerbating China's environmental problems. The latest report from the Intergovernmental Panel on Climate Change notes that temperatures in China are rising and extreme weather, including cyclones, droughts and floods, is on the increase. Worse, the Himalayan glaciers that feed China's biggest rivers (and account for a large portion of flows during dry spells) are melting. “If the present rate continues,” the report says, “the likelihood of them disappearing by the year 2035 and perhaps sooner is very high.”

Among other things, this will make life even more difficult for China's farmers. Northern China, which lost some 36,000 square kilometres to desertification between 1990 and 2000, will become even more arid. Its water supply, the IPCC predicts, will fall 30% below requirements. Moreover, rice yields will drop by 10% for every degree the temperature increases. Rising sea levels and the associated intrusion of salt water are likely to reduce the amount of arable land even further.

As it is, in villages like Beihuadan, in Hebei province, just a few hours' drive from Beijing, the water table is already falling rapidly. A shuffling farmer in a flat cap and worn woollen sweater pumps furiously at the well in the courtyard of his house to show that it has run dry. It is only 19 metres deep, he explains, but there is no water these days for at least 70 metres, and often not for 100 metres or more. A few houses away a group of old men interrupt a game of cards to point out another dry well. For five years, they say, there has been no water in the Beijuma river, which runs past the edge of the village, and the authorities do not provide adequate alternatives supplies through the local irrigation network.

The government is planning to invest billions in a system of canals, pipelines and aqueducts to divert water from the soggy south to the parched north. But the scheme is only a temporary fix, and is just the sort of grandiose engineering project that tends to cause environmental problems of its own. Many NGOs and hydrologists are adamantly opposed.

As it is, the environment is the second most frequent subject of public protests after disputes over land, according to Mr Pan. In 2005 the authorities recorded 50,000 such protests, he says, and that was a 30% increase on the year before. Last year 10,000 people turned out to demonstrate against a planned chemical plant in the city of Xiamen. Earlier this year hundreds of Shanghainese protested against a proposed extension to the city's maglev train, worried about health risks. Such protests are particularly unnerving for the authorities because they involve educated, articulate and well-organised urbanites, not the country folk who normally suffer most from abuse by officials.

The best response to all these worries is to encourage more sparing use of resources, and that is what the government is trying to do. The current five-year plan, which contains few other numerical targets, envisages a 10% reduction in concentrations of the worst air pollutants and a 20% increase in energy efficiency over the period. The central government has assigned specific energy-efficiency goals to each of China's 1,000 biggest enterprises and encouraged lower levels of government to do the equivalent.

Eyepress

Still belchingThe government has set relatively stringent fuel-economy standards for cars, as well as minimum energy-efficiency requirements for all manner of appliances. On average, cars in China are about 50% more efficient than in America. Subsidies on energy consumption have also been falling steadily. The IEA calculates that their total value in 2006 was roughly $11 billion, less than half the amount for 2005. That is all the more remarkable given that international oil, coal and natural-gas prices were rising rapidly at the time. Petrol prices, for example, have been going up even faster for Chinese drivers than they have for Americans or Europeans, although they remain low in absolute terms.

To discourage energy- and import-intensive metals-processing, the government raised export duties on iron, steel and related alloys to 25% in December. It also abolished all duty on imports of copper, in the hope that higher imports of finished metal might displace some domestic smelting. And on two previous occasions it has reduced the level of tax rebates that exporters of energy-intensive goods can claim, in some cases down to zero.

There is also a move to diversify away from coal. In big cities (especially Beijing, in preparation for the Olympics), coal-fired heating and power plants are having to be modified to run on natural gas. In the Beijing suburb of Fengtai, where the switch has already taken place, residents recall how the constant dusting of soot from the power plant used to stop them drying clothes outdoors or even opening their windows. Now they can hang out their washing without fear, and sometimes even sit outside.

Nuclear options
The government is planning to increase the country's nuclear generation capacity almost fivefold by 2020. It has ordered new reactors from two of the world's nuclear giants, Areva and Westinghouse, and is also building some of its own design. Power from wind turbines is meant to double by 2010 and grow by a factor of 12 by 2020. Hydropower is supposed almost to triple by the same date. Overall, renewable sources should account for 15% of energy consumption by 2020.

At the same time SEPA is trying to clean up China's coal-fired plants. All new ones are required to install filters in their smokestacks to remove sulphur dioxide, the main cause of acid rain. The biggest existing plants are supposed to retrofit such equipment. Roughly half of China's coal-fired generating capacity is now said to have installed this kind of technology. Between 2000 and 2005 SEPA tripled the fines on polluters. The government has also hired Veolia, a French conglomerate, to build and run model waste-water treatment plants in several big cities.

An open-and-shut case
As the big power plants, factories and coal mines raise their environmental standards, the small ones are meant to shut down altogether. Cyrille Ragoucy, the local head of Lafarge, a cement giant, says that the authorities have encouraged the firm to expand rapidly in the south-west of the country in order to replace the existing stock of old-fashioned, energy-intensive and polluting cement kilns. At the same time local governments have been ordered to close coal-fired power plants with a capacity of less than 25MW and to bar the construction of any new plants of less than 300MW. The larger scale, along with more modern technology, should improve efficiency dramatically. All told, the government plans to close 50,000MW-worth of small plants by 2010.

The biggest push concerns small coal mines, in which thousands of workers perish every year. They also tend to produce poor-quality coal which generates relatively high levels of pollution when burned. In addition, many of the mines contaminate local water supplies and produce unhealthy, smog-inducing dust in great quantities. So the central government has instructed local officials to shut down any small, dirty and unsafe mines. According to Xinhua, China's state-run news agency, 11,155 such facilities have been closed since the campaign started in 2005. The government wants to eliminate another 4,000 by the end of this year.

But a visit to the province of Shanxi, in the heart of China's coalbelt, reveals why such plans should be taken with a pinch of salt. The Jinhuagong mine, a spokesman explains, is something of a model. It produces 4m tonnes of high-quality coal a year, using the latest British and German machinery. There have been no fatal accidents for two years. The mine's managers are so proud of it that they have opened it up to tourists. Visitors can dress up in jumpsuits and hard hats and descend in a creaking elevator to the coalface 300 metres below the surface. There, a bone-jarring miniature train hauls them a few kilometres deeper into the mine, where they can look at an exhibition on the gradual improvements in safety standards over the years. All the mines in the area that did not comply with safety regulations, the spokesman explains, have been closed.

Yet a taxi driver hailed outside Jinhuagong's gates says he knows of plenty of mines that remain open in defiance of the central government's orders. Waving at Shanxi's bleak landscape of barren, eroded hillsides and jagged valleys, he says: “There's coal everywhere. Wherever there's a road, there's a coalmine.” Sure enough, a half-hour drive through the hills reveals several tiny operations where jerry-rigged conveyor belts carry coal to waiting lorries and workers scatter at the sight of an inquisitive foreigner.

The incentive to continue mining is overwhelming, locals explain. The same shortage of coal that is driving up imports has also pushed up the price. In January power companies had to shut several coal-fired plants because they did not have enough fuel to go round. The government has withdrawn all export credits on coal and imposed taxes instead, but supply continues to fall short of demand. Moreover, the officials who are responsible for closing mines are often shareholders in them too. And even if they have no financial interest in them, they still view economic growth and job creation as the chief gauge of their success.

The intentions are good
SEPA did come up with an alternative yardstick, dubbed “green GDP” and intended as a joint measure of both environmental and economic stewardship. But sceptical officials rebelled, so the central government quietly shelved the scheme. Regulators concede that poor enforcement is undermining most of their attempts to improve the state of the environment. SEPA has less than a tenth of the staff of its American equivalent to police a country with over four times the population. To enforce its rulings, it relies on local bureaucrats over whom it has no authority. “Overall, environmental efforts have lacked effectiveness and efficiency, largely as a result of an implementation gap,” as the OECD's report puts it.

That is why Jim Brock, a consultant to domestic and foreign energy firms in China, thinks it is unlikely that many small power plants are in fact being closed down. Even those plants that have the equipment to remove sulphur dioxide from their flue gas often do not bother, officials concede, because the process uses power and so reduces profits. At any rate, emissions are not yet falling fast enough to meet the government's targets.

What is more, the proliferation of coal-fired plants is swamping the growth in renewable power. Some 90% of the power plants built in 2006 run on coal, the IEA notes, against 70% of those built in 2000. And heavy industry such as steelmaking continues to grow, says Rui Susheng, the director of the China Coal Society, despite the government's attempts to curb it.

All this means that the government is falling short of its energy-efficiency targets. In 2006 China's energy intensity (the ratio of energy consumption to economic output) fell by 1.2%, well short of the government's goal of 4% a year until 2010. That was an improvement on the previous few years, when it actually rose. Yet the impression remains that the government is fighting a losing battle.