Research Proposal

Energy Crisis And Its Implications On Chinese Economy

Muhammad Babar Ali AbbasCourse Msc.(International Relations)

Class 2nd Smester (Evening)Session January-June 2010

Rashid Khan(Supervisors)

DEPARTMENT OF INTERNATIONAL RELATIONSNATIONAL UNIVERSITY OF MODERN LANGUAGES

ISLAMABAD

Statement of the Problem

This research work intens to study energy crisis in China and its implications on Chinese economy.

Problem Define

China has great contribution in global economy. Energy crisis may be referred to as an oil

crisis, energy shortage, electricity shortage or electricity crisi and China is suffering the

energy crisi, which affected Chinese economy and regional and international economy. China

has great coal resources but uses of coal causes pollution in China, In 1998 China accounted

for seven of the world’s 10 most pulluted cities. China’s energy crisi is the problem which

affected its domestic social situation and its export and import which influenced its economy.

Hypothesis

It is htpothized that energy crisis has affected Chinese economy in negative way.

Research Question

How energy crisis has affected Chinese economy?

Objective of Research

China has great contribution on global economy so the basic forecast objectives of this

research work is to know about Chinese economy after energy crisi in China. This research

work aims at to disclose the impacts and effect of the China’s energy crisis on Chinese

economy and also to know its implications Asian economy and on global economy.

Significance of Research

This research work will discuss the reasons and cause of energy crisi and its implications on

chinese economy and its implications on global economy. This research work will give

details, fact and figures to understand the entire curent circumstances of china’s enerygy

crisis and its impact on origional and international economy. This research work will

contribute information about Chinese economy, energy crisis, its reasons and its causes, and

Chines policies and projects to overcome this crisi.

Research methodology (qualitative and quantitative) will be taken in the research paper.

Several articles, books and journals are consulted in the research.

Literature Review

Jayanthi lyengar says in his article, And, the energy crisis seriously affects foreign firms operating

in China. Some, like Sony and Volkswagen, have cut back on production. Others have either left or

are wary. Even many foreign investors in power utilities have moved out. Taiwan warns its investors

to stay home, come home or invest elsewhere in Asia because of China's energy crisis, And as eve

cheng explains, “As a quick fix for China's worsening energy problems, in the first nine months of

2003 the country imported US$50 billion worth of energy resources and raw materials, mainly oil —

49% more than the same period in 2002 — according to the December 8 People's Daily. With the

price of oil hitting almost US$42 per barrel on May 18, China's energy import bill is set to blow a major

hole in the country's fiscal account. China's oil imports have soared 35.7% during the first quarter of

2004, to 30.14 million tonnes. Oil imports grew 31.2% in 2003 China's economy is on track to grow 8

percent in 2009, as new data suggest Beijing's massive stimulus spending continues to offset drops

in exports. China reports increases in industrial output, investment, loans and retail sales in August,

even as exports dropped more than 20 percent. August data suggests the world's third largest

economy is on a solid course for economic recovery. Terence Khoo is a partner at Sofaer Capital in

Hong Kong. He says Beijing most likely will reach its goal of 8 percent economic growth in 2009,

thanks in part to government backed spending programs. "The balance sheets in China are in far

better shape than in America because they basically tightened a lot earlier to prevent a crash," he

said. Last year, China introduced at $586 billion  stimulus package to boost domestic spending.

That helped offset a drop in exports to Europe and the United States, as global demand declined,

Khoo says. Between January and August, China's exports were down more than 22 percent,

compared to the same period last year. But, Khoo says, overall, China's economy has stabilized,

and he expects the solid growth will continue. "I think it will get bigger. The American people are

starting to consume. There's a bit more confidence," he said.Khoo says China's trade has stabilized

at a low level. Khoo says both American and European companies are beginning to feel more

confident and starting to place orders with Chinese factories, in anticipation of Christmas.And sound

advice to foreign, and Chinese firms: Get your own independent energy supply until China resolves its

energy crisis in the next couple of years - yes, there is light at the end of the tunnel. China may yet

become a nation of power surplus, making the second half of the current decade critical for investors

in China's power sector and other fields. Eva Cheng Stated that, “Towards the end of last year, when

winter fell, coal for heating in China's freezing north ran short. A regional drought had already

undermined the power supply in many provinces that rely on hydro-electric power. Twenty-one of

China's 28 provinces and autonomous regions were forced to ration electricity supplies, even hitting

the crucial coastal export belt, including Guangdong, Fujian, Zhejiang and Jiangsu provinces, as well

as major cities like Shanghai. In 2002, electricity rationing was applied in 12 provinces. In December,

most factories in Hangzhou, in Zhejiang province, only had access to power for four days a week.

Blackouts became the norm. Many factories resorted to in-house generators for power, which mostly

run on diesel. Soon diesel supplies also ran out. However, this has not deterred rampant speculative

investment, which has worsened energy shortages further. For example, new investments in iron and

steel plants skyrocketed by 107%, and cement works by 101% during the first quarter, compared to

the same period for 2003. In its first quarter monetary report for 2004, China's central bank warned

that the 35.5% increase in fixed assets for the quarter was already greater than the rise in 1992-93,

the last overheating wave. The bank added that there were too many excessively large new projects,

which were creating “irrational structural” consequences.

With the northern summer fast approaching, China's precarious power supply capability will be further

strained. The deputy chairperson of China's State Electricity Regulatory Commission, Song Mi,

expects China's electricity shortage in 2004 to be 20 million kilowatts, double the 2003 figure,

according to a Xinhua News Agency article on April 6. The sharp rise in oil prices makes things worse.

China increasingly depends on oil, especially imported oil, to meet its energy and industrial needs.

Some 21% of its primary energy consumption come from oil, and 36.1% of its oil needs were imported

in 2001. Alternatives to coal China's energy problems didn't emerge overnight. The country is rich in

coal, so after the 1949 revolution China overwhelmingly relied on coal for power generation — 94% in

1953. The discovery of a major oil reserve in Daqing, in north-eastern China, in the late 1950s brought

much needed diversity, helped by smaller offshore oil finds in the 1970s. Coal's share of China's

primary energy consumption had dropped to 71.8% in 1975. However, following aggressive oil

exports that followed the Chinese Communist Party's “open door” economic policy launched in 1978,

the country's coal dependence had risen to 75% in 1990. Richard Laster and edward Ateinfeld

say.”Pollution caused by coal extraction and consumption was so serious, and acid rain so rampant,

that in 1998 China accounted for seven of the world's 10 most polluted cities. The need to reduce coal

dependence was not in doubt, but the problem was the lack of an affordable and clean alternative.

Hydro power has been a major focus of alternative energy development due to China's abundance of

rivers. The US$22 billion, 18.2-gigawatt Three Gorges Hydro project began construction a decade

ago but is not due to be completed until 2009. Another hydro project, twice the size of the Three

Gorges project is on the drawing board, but will probably take even longer to complete. Hydro-

electricity accounted for 21.2% of China's electricity generation in 1990, but that ratio slipped to 18.5%

in 2001. Overall, hydro power accounted for 2% of China's primary energy consumption in 1995 and

that ratio will not change dramatically shortly. Natural gas is another alternative. Its production grew in

the 1960s and '70s after the discovery a major gas field in Sichuan province in China's remote west.

But the sector's growth has lagged due to the cost of delivering it to the population centres in the east.

Still, construction of a $18 billion, 4200-kilometre pipeline began in 2002 to bring gas from Xinjiang in

the west to Shanghai. Another 4000 km pipeline is being built to bring offshore gas from Hainan Island

to the southern and eastern coasts. Construction could take 15 years, so natural gas' contribution to

China's overall energy consumption (2% at present) will not significantly increase for some time.

Towards rge end of the last year , when winter fell, coal for heating in China’s freezing north ran short.

The broad consensus is that the power shortage will continue in the near future due to China's

economic growth, which is being driven by the infrastructure and manufacturing industries. These are

pushing up electricity consumption and putting a strain on energy resources. "While the cooler months

of winter may provide a reprieve as demand for air-conditioning decreases, easing the electricity

shortage to a certain extent, the problem will continue. Steps are being taken to rectify the problem

such as building new power plants across the country, but it could be years before many of these are

up and running," Xiaohu Ma, a partner at Morrison & Foerster LLP's Hong Kong office, summarized

the situation for Asia Times Online.

Investors who have worked in China for the last five years attest to how China veered from a nation of

power surpluses to one of shortfalls. The shortages began in mid-2002. By late 2002, 12 provincial

grids had to resort to power-shedding during the torrid summers and dry winters. By 2003, the figures

had escalated to 23 provincial grids. In 2004, the energy crisis had spread further. At the end of the

first half of the current year, 24 provincial grids had resorted to blackouts or power-cuts and rationing.

Alternatives to coalChina's energy problems didn't emerge overnight. The country is rich in coal, so

after the 1949 revolution China overwhelmingly relied on coal for power generation — 94% in 1953.

The situation has been so severe and widespread that by one estimate, there were 175,000 power

cuts in China, with the problem being more severe in the east and south. There,over 10,000

manufacturing units had to live with the reality of power rationing. Though the government bent over

backwards to accommodate foreign investors by imposing lower levels of cuts and rationing -

alternate days as against four days a week for local units in many areas - companies such as

Volkswagen and Sony were forced to cut production. This raises some tricky questions:

How severe is the power situation? How long will it last? What are the prospects for improvement? What should investors, including foreign investors, do in short and long term to protect their

interests?

Severity of the situation

Despite a scorching summer just past and an economic slowdown on the cards in the third and fourth

quarters of the current year, the consensus among independent experts and top Chinese officials is

that the rest of 2004 will continue to see power shortages. However, it's possible these shortages may

not be as great as initially predicted. Further, they say the shortages will ease in 2005, disappear by

2006 and by 2007, the Middle Kingdom may actually shift gear once again from being a power-

deficient to a power-surplus nation. All these predictions are based on several calculations, including

the demand for and supply of power as well as the rate of growth of the Chinese economy. The future

trend is of immense importance to investors, considering that many of the authoritative projections

about the country, including the government's, have been proved wrong, leaving existing and potential

investors on tenterhooks.

Points Of Agreement And Discord

This August, China's department of electricity estimated the shortfalls in 2004 would be in the range of

20,000 megawatts. This is 10,000MW less than what was originally projected, but a significant

shortfall all the same. The department, which is part of the country's energy bureau under the National

Development and Reform Commission, further predicted the situation would improve in 2005 and the

shortages would disappear by 2006. Experts agree this is likely to be the situation up to 2006, though

there are different opinions on what the situation will be like after that. This is partially because

estimates of demand for power vary,though it is clear the Chinese government is rapidly adding

generation capacity, which would ease supply constraints by 2006.

"With the massive program of power station construction in progress, the situation should start to

improve in 2005 and resolved by 2006, provided sufficient and appropriate transmission lines are put

in place and enough coal reaches the power stations," Dr Philip Andrews-Speed, China energy expert

and director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of

Dundee, told Asia Times Online. An energy analyst with a global market research agency, who asked

not to be named, seconds this estimate. He calculated that the country is adding 35,000-40,000MW

annually, which is the equivalent of 9-10% growth in the supply of electricity. "However, if the demand

for power continues to be above 10%, as was the case this year, the supply tightness would persist,"

he said, adding that the shortfall will continue until 2006.

Steps under way

China had 380,000 MW of installed power generating capacity by the end of 2003. The level is likely

to exceed 450,000 MW by 2005. It now has touched 400,000 MW, 680,000 MW by 2010 and around

1 million MW by 2020. Meanwhile, power consumption is expected to touch 3.09 million Giga-Watt-

hours (GWh) by 2010 and increase to 4.6 million GWh by 2020, according to Zhao Xizheng, president

of the state grid corporation of China World. This clearly means that along with traditional thermal

power generation, China will have to explore other electricity alternatives.

Genesis of the problem

The genesis of China's power shortages lies in some policies it initiated in the late 1990s. With market

reforms gaining momentum, the country closed down some of its inefficient public sector companies

in the late 1990s. These units were electricity guzzlers and their closure created an oversupply.

Beijing sought to tackle this oversupply by closing down some of its small thermal power plants. It also

regulated the opening up of new units, with a few exceptions. The measure had the desired effect: the

supply adjusted itself to the demand as the already approved projects in the mid-1990s fed the

enhanced demand for power untill mid-2002. However, the miscalculation occurred since very few

anticipated the kind of growth that China would notch up since the turn of the century. The Chinese

government again tried to intervene and correct the situation by lifting its ban on new units. However,

the dye had already been cast for the current round of shortfalls. Power shortfall began to rear its ugly

head in mid-2002. By 2003, the Chinese government was approving power projects by the truckloads.

Over 30 major new electric power projects were approved during the year, with the potential of

creating additional power generation capacity amounting to around 22,000MW. However, power

projects take time to commission. For this reason, experts say 2005 will see the easing of the situation

while 2006 is likely to render the country power-sufficient - if not power-surplus - as many of the

projects cleared in 2002 go onstream and begin commercial power generation.

Work in progress

Among the major projects commissioned include the Three Gorges Dam. When completed in 2009, it

will include 26 separate 700MW generators churning out 18,200MW. Another large hydropower

project involves a series of dams on the upper portion of the Yellow River. Shaanxi, Qinghai, and

Gansu provinces have joined to create the Yellow River Hydroelectric Development Corp, which

would construct 25 generating stations with a combined installed capacity of 15,800MW.

Further, despite the costs, nuclear power generation capacity is being promoted extensively. The

country's total installed capacity for nuclear power generation has already increased from 2,100MW in

the beginning of 2002 to 8,700MW by June 2004. The Lingao nuclear power plant in Guangdong

province that began commercial operation in May 2002 is currently generating 2,000MW. Another

1,200MW has been generated by the Qinshan nuclear power plant in Zhejiang province since

December 2002. A new 6,000MW nuclear complex is set to come up at Yangjiang in Guangdong

province. This will go on stream in 2010 while yet another facility has being planned for Daya Bay.

Since much of the energy produced in China is from coal-fired units, steps have been taken to

modernize coal production as well and try and minimize dependence on coal-based energy.

The coal situation

China is the world's largest producer and consumer of coal though its share in the overall energy

consumption is projected to fall in the coming years. Like power, the country had coal surpluses in late

1990s. It was then that the Chinese government started to reform the coal-mining sector. In 1998, it

began the process of closing down the small and unlicensed mines to improve the financial viability of

the large, loss-making, government-owned mines, perhaps in preparation for privatization. This step,

along with exports to Japan and South Korea, was supposed to have brought down the domestic

availability of coal. But as the Washington-based Energy Information Administration (EIA) pointed out,

"It has become clear, however, through much anecdotal evidence, that not all of the 'closed' mines

have actually ceased operation." Hence, coal availability is higher than what was originally envisaged.

However, the Chinese government is alert to the fact that absolute demand for coal will go up though

in percentage terms, dependence on coal for energy generation would fall from the current 67%. The

shift would be in favor of natural gas, with the change being forced upon Beijing by growing

environmental concerns, particularly in the more advanced and industrial coastal provinces, but it

would still have to keep pace with demand from the energy sector.

Hence, a conscious effort is being made to enhance domestic coal availability, to modernize existing

units and to introduce clearer technologies that would convert some of its traditional coal-fired power

utilities from smoke-belching monsters to more environmental-friendly units. To keep pace with

domestic demand for coal from thermal power units, 2004 has already seen a cut in exports. Foreign

investments have also been invited in the coal sector in recent years. Foreign Direct Investments

(FDI) have been sought in areas requiring environment-friendly and cutting-edge technologies such

as coal liquefaction, coal bed methane production and slurry pipeline transportation projects.

China's interest in new technologies in the coal sector stems from its desire to reduce its dependence

on coal. For instance, the country now actively pursuing coal liquefaction projects and fuel cell

technologies despite the costs, since it would like to develop cost-effective coal substitutes to meet

some of its energy demand in the course of time. In keeping with this broad perspective, 2001 has

seen BP, ChevronTexaco and Virgin Oil being awarded a concession for exploration for coal bed

methane production in Ningxia province. The country's first small-scale project for coal gasification

and a coal slurry pipeline to the port of Qingdao have also been approved during the period while the

United States multinational Far East Energy has received approval for an agreement with

ConocoPhillips in April 2004. Under this agreement, Far East Energy has been permitted to undertake

exploratory drilling for coal bed methane in Shaanxi province, which is near an west-east pipeline

route. This ambitious pipeline project is being commissioned to carry natural gas from its largest

reserves in western and north central China to the eastern cities of Shanghai and others.

The China National Coal Import and Export Corporation is the primary partner for foreign investors in

the coal sector. The country also has several projects on the anvil to upgrade the "coal by wire"

projects. These are the traditional coal-fired power plants located adjacent to large mines. By the end

of 2005, to meet the funding requirements for the modernization of the coal sector, the Middle

Kingdom will be following its oil sector model, whereby its numerous coal mines would be

amalgamated into seven large corporations, similar to the crude oil sector revamp of China National

Petroleum Corporation (CNPC) and China Petrochemical Corporation (Sinopec) into two regional

entities.

Prior to reorganization, CNPC was an oil and gas exploration and production company while Sinopec

was involved in refining and distribution. Now, while CNPC concentrates on the north and west,

Sinopec dominates the south. Product-wise, however, CNPC's strengths lie in crude oil production

and Sinopec's tilt is toward refining. Both these companies have tapped the international markets for

expansion. The mega-coal mining corporations would follow this growth path once the reorganization

is complete. Despite these measures, experts like Andrews-Speed point out that cost and timely

delivery of coal to thermal power utilities would continue to be the key issue determining whether

China would be able to transform itself from a power-deficit to a power-surplus nation by 2006.

Economic growth

The Chinese economy has been playing the maverick. Unexpectedly, it has galloped at an

unprecedented growth rate of 9.1% in 2003, with the first quarter growth in 2004 peaking at 9.8%.

Such frightening growth has created shortfalls in many sectors, particularly in demand for core inputs

such as steel, coal and power. To cope with the shortfalls and the consequent inflation, the Chinese

have tried to cool down the overheated sectors. Investments in infrastructure are being curtailed and

non-intrusive monetary measures have been adopted to correct the situation.

While experts are divided over the efficacy of these measures, the fallout of the constantly changing

dynamics is severe for the power sector. In the short term, relief from the debilitating shortfalls may

actually be at hand for some. "On a nationwide basis, yes, a slowdown will ease the power shortage.

But for individual locations, this will depend on whether the power stations are receiving enough fuel

(coal) and whether there are sufficient and appropriate transmission and distribution wires in place,"

said Andrews-Speed. It is also quite possible that the country may yet again enter an era of power

surpluses, making the second half of the current decade as critical for investors in China's power

sector asthe first half has been for industries. There could be issues of survival, particularly in an era

when electricity pricing according to market norms would still be at a nascent stage.

The Chinese government is currently in the process of reforming its power sector by separating

transmission from distribution and strengthening the balance sheets of distribution companies. Yet,

even in the post-reforms period, it has decided to regulate electricity pricing. A 1995 law also needs to

be replaced with a new one, which would lay down the rules of the game in a new reform era, one

focused on cooling overheated sectors and on rational, balanced growth.

"Foreign investors in power utilities are aware of the challenges, and that's why many have left. Those

that remain are doing well in this time of power shortage, but when a surplus appears in two years,

they may face a tough time as there is currently no regulation," said Andrews-Speed. This raises the

question of what foreign investors in China can do in the short term to protect their interest. Andrews-

Speed suggests that any foreign investor, who can afford to, "should have stand-by power generation

facilities...Without that, they are at the mercy of planned power cuts either just at peak time or

sometimes for whole days or weeks."

This is exactly what has happened in many parts of Asia such as power-deprived India, where

industries have created additional capacities on their own rather than rely on public utilities. If

companies in China also opt for this route, it could again upset demand and supply projections.

Captive generation is almost like a parallel power economy. Estimates of such generation are often

difficult to make, and then often inaccurate. Another wild card in the scheme of things could also be

China's capricious and often inclement weather. The sweltering summers of 2003 and 2004, marked

by scanty rainfall in many parts of the country, have heightened the shortages during the sweltering

summers and dry winters in the last two years. If this continues, it could further upset power demand

estimates.

Outlines

Introductions

1. Energy Crisis

a. Defination of Energy and Energy Crisisb. Reasons of China’s Energy Crisisc. Importance of Energy for Growing Economy

2. China’s Energy Historical and Current Scenarioa. Oil and Gas Before the Establishment of the people’s Republic of Chinab. The petroleum Industry during The Soviet’s Supportc. China Depends on Oil and Imports Oil

3. Energy Crisi Implications on Chinese Economy and China’s Policy.a. How energy Crisis Affected Chines Economy?b. Investors are avoiding to Invest in Chinac. In China’s Energy Crisi has an Impact on Global Economy?

References1. Jayanthi Lyengar, September, 2004 China power crisis dims production,

http://www.atimes.com/atimes/China/FI24Ad06.html

2. Eva Cheng, 30 May, 2004, Energy Crisis Looms Over China, http://www.countercurrents.org/peakoil-cheng300504.htm

3. Kari Jensen, 11 September, 2009, China’s Economy Stays on Course to Grow & Percent in 2009, http://www1.voanews.com/english/news/a-13-2009-09-11-voa49-68665027.html

4. Op.cit, Eva Cheng, Available: http://www.countercurrents.org/peakoil-cheng300504.htm

5. Ibid.Available:http://www.countercurrents.org/peakoil-cheng300504.htm6. Richard Lester and Edward Steinfeld, China’s Real Energy Crisis,

http://www.hcs.harvard.edu/hapr/winter07_gov/lester.pdf7. Ibd.Available:http://www.hcs.harvard.edu/hapr/winter07_gov/lester.pdf8. Op.cit, Eva Cheng, Available:http://www.countercurrents.org/peakoil-

cheng300504.htm9. Ibd,Available:http://www.countercurrents.org/peakoil-cheng300504.htm10. Op.cit, Eva Cheng, Available: http://www.countercurrents.org/peakoil-

cheng300504.htm11. Ibd.Available:http://www.hcs.harvard.edu/hapr/winter07_gov/lester.pdf12. Jayanthi Lyengar, Available: http://www.atimes.com/atimes/China/FI24Ad06.html