Energy and Geopolitics in China

-->Mixing Oil and Politics
By Robert E. Ebel
Nov 17, 2009

The world was surprised when China emerged in 2004 as a major importer and consumer of oil. Today, that surprise has been replaced by growing concern that the China of tomorrow may be in a position to challenge the United States not only for economic leadership but for political leadership as well.

Are these concerns justified? This report explores, among other issues, the limits to growth that currently confront China. The author analyzes how the country seeks to reduce its vulnerability deriving from its ever-increasing reliance on imports of oil, including the issue of diversity among sources of supply and how that supply moves to China. Threats to supply lines are examined and means to offset those threats are spelled out. In addition, the report considers China’s demographic dilemma—an population and declining birthrates—a challenge that may very well define China’s future.

Other fuels—coal, natural gas, nuclear energy—are examined in terms of current and likely future contributions to domestic supply. But it is those alternative forms of energy that appear to be attracting particular attention, in large part because of their role in helping China meet the goals of responding to global warming. The report concludes with a look at how China plans to secure its energy future. Do these plans differ from those of other countries? No, they do not.
Publisher CSIS

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EXCERPTS

Overcapacity and Underutilization
Emerging overcapacity has been present now for some time in certain of the more important sectors of China’s economy, foretelling a coming slowdown in investment and new construction. For instance:
■■ Current steelmaking capacity exceeds demand.
■■ One-quarter of electrolytic aluminum capacity stands idle.
■■ Only about 40 percent of the ferroalloy industry is operational.
■■ Fully half the production capacity in the calcium carbide industry stands idle.
■■ Excess capacities exist in the cement, coal, and textile industries.

What if the growth rate of the economy continues to slow? The burden of overcapacity will
become even more threatening, more factories will close, and workers will lose their jobs while
those still employed will save as much as they can because of an uncertain future. The government recognizes this pattern, and it is doing what it can to shore up consumption.

Finally, what does one do with the foreign exchange reserves, with these reserves increasing at a rate of $1 million every minute—a growth rate achieved during the first quarter 2007? By mid-2009, foreign currency reserves approximated $2.1 trillion. Some of these dollars are being carefully invested in areas where the anticipated return will be higher than that now being secured.

There is good evidence, however, that China—like Brazil, Thailand, and India—will endeavor
to keep its exports competitive in Western markets by curbing the yuan’s appreciation against the dollar. Then, dollars will be bought from the exporters, who will receive yuan in return.
In sum, the multiple obstacles to growth carry broad implications for both China and the
world as a whole. Is a slowdown inevitable? As with so many issues regarding China, the answer
is not readily apparent. The nation will attempt to bring about a soft landing, but how does its
government convince its 1.3 billion people that though some may suffer, on the whole the country will be better off?