Polution in China

What’s happening in China is always a big deal these days. But with all the focus on whether exports are up or down…or if debt levels are sustainable…or whether real estate prices or the stock market are bubbly…it’s easy to miss the bigger issues. And the biggest issue of all is that China faces is a potential major energy crisis in the not-too-distant future.

 

There’s always a lot of chatter about China. There has to be. The world’s most populous country will soon be the its biggest economy as well. It already is by some measures.

Environmentalists worry about cities that are clad in smog and rivers that are poisoned with industrial effluent. Foreign busybodies worry about human rights or the political system. Usually they are well meaning. But they often have little regard for the huge problems at home and should get their own house in order first.

Imperialists (or ex-imperialists) worry about the threat of China’s growing military might. Or its extension of soft power through increased involvement in the global financial system and infrastructure investments in far flung continents such as Africa or Latin America.

Investors worry about slowing rates of growth (although it’s inevitable), or real estate bubbles, or falling exports, or debt levels. (If you want to read more about the inevitable slowdown in Chinese growth, see here.)

There’s basically an awful lot of “worry” about China. And most of it’s misplaced. The worriers ignore the great strides that the country has made in the past couple of decades. I’ve been following China for nearly two decades now, and it’s always on the point of an implosion that never happens. China watchers seem perpetually preoccupied with all that could go wrong and ignore all that could go right.

The “Great Leap Forward” may have been a bonkers set of economic policies put in place under Chairman Mao way back in the 1950s and 1960s. Like all the top down plans of ideological fanatics it resulted in a great leap backwards. Not least, tens of millions of people died in a mass famine.

But in more recent times, with a more pragmatic and market friendly leadership, China has achieved a genuine “great leap forward”. Chinese real GDP per capita is up by a factor of 8 since 1990. Materially, at least, the Chinese people are much better off.

China isn’t immune to economic cycles just because it’s China. In that sense the country isn’t unique at all. But in the longer term it’s likely that it will continue to grow…

Of course there will be bumps along the way. China isn’t immune to economic cycles just because it’s China. In that sense the country isn’t unique at all. But in the longer term it’s likely that it will continue to grow, and China’s people will become richer. Most of them are still poor by global standards.

But there is one major thing that needs urgent attention. I don’t ever remember reading or hearing about it except in very vague terms. There’s still time to fix it, just about. But if it isn’t dealt with then China’s economic boom will come to a grinding halt.

I’m talking about China’s looming energy crisis.

 

Running out of power

 

Ensuring access to secure sources of energy is a big deal in China. This industrial powerhouse is already the world’s largest energy consumer.

China accounted for 22.4% of world energy consumption in 2013. That compared with 17.8% in the USA, and also means 40% of world energy is consumed by just two countries.

Using the latest figures from the last BP Statistical Review of World Energy, a respected point of reference on world energy markets, China accounted for 22.4% of world energy consumption in 2013. That compared with 17.8% in the USA, and also means 40% of world energy is consumed by just two countries. (By the way, 19% of the world’s 7.3 billion people live in China, compared with just 4.4% in the USA.)

For the Chinese economy to survive and continue growing it must have reliable sources of energy.

The good news is that the central Chinese government appears to be well aware of the problem, and the linked issue of pollution. The question remains whether they can act fast enough to deal with it.

On 28th February this year a hard hitting documentary about China’s pollution crisis was released over the internet. It was called “Under the dome”, in reference to the persistent covering of smog that shrouds many of China’s cities and industrial regions.

Parts of the film compare the problem in China’s cities to the “pea souper” smogs of 1950s London or 1960s Los Angeles, and how those problems were solved. It was a call to arms for existing environmental laws to be enforced and for new ones to be introduced.

At first the film appeared to have tacit official approval. In fact Chinese premier Li Keqiang said “Environmental pollution is a blight on people’s quality of life and a trouble that weighs on their hearts…We must fight it with all our might”. That was in his opening address to the National Peoples’ Congress on 5th March, a gathering of all the bigwigs from the Chinese “Communist” Party. The timing of the film’s release just before the NPC was surely no coincidence.

“Under the dome” was viewed a staggering 300 million times in just one week. But it caused such a storm of chatter on the Chinese internet that the government then censored it for fear of social unrest. However the sequence of events clearly showed that the current government wants a change of energy policy.

(If you live outside China you can view the film here, in Chinese with English subtitles. I highly recommend it if you have the time, especially if you think China is a “closed society”.)

Of course the suffocating smog in China has a cause, and this is where we really get to the nub of the matter. Let me explain, again using BP figures.

In 2013, 67.5% of China’s energy came from coal. That’s a huge concentration in the oldest and dirtiest form of energy. After all it’s the stuff that powered the “dark satanic mills” of the British industrial revolution, which got under way over two centuries ago. And China still gets over two thirds of its energy from this old fossil.

ChinaEnergy

Source: BP Statistical Review of World Energy 2014

For comparison, the USA gets 20% of its energy from coal, and the rest of the world 19%. In other words China is a major outlier in its reliance on coal. In fact China uses a little over half of all the coal burnt in the world. This largely explains the air pollution problem in China. But it gets worse.

China only has enough proven coal reserves to last another 28 years, at the current levels of production. This is known as the reserves to production (R/P) ratio.

Pollution may be the pressure point for change, but I bet the government’s even bigger concern is simply running out of reliable energy sources.

 Just think about that for a minute. That kind of time frame is nothing in strategic terms. Especially when the country currently must have coal for two thirds of its energy consumption. Pollution may be the pressure point for change, but I bet the government’s even bigger concern is simply running out of reliable energy sources.

To put it into perspective the world has 111 years of proven coal reserves left at current rates of production. The USA has 264 years. China’s will be gone in less than a generation. In fact if coal consumption grows even in low single digit percentages each year the Chinese reserves could have disappeared in as little as 15 to 25 years.

China’s massive reliance on coal and its fast dwindling reserves mean the country has a looming energy crisis of epic proportions. Part II will look at what is being done about it, and how investors can profit.

Stay tuned OfWealthers,

 

Rob Marstrand

robmarstrand@ofwealth.com