Boom Habits Hard to Break

China power use shows little effect from policy change.
By Michael Lelyveld
china-building-305.gif Pedestrians walk by an overpass under construction in Beijing, July 12, 2011.

China's government has been trying to steer the country away from construction-led growth toward a greener economy, but power consumption figures suggest it is having little effect so far.

In the first half of the year, electricity consumption jumped 12.2 percent from a year earlier with manufacturing, or "secondary," industries accounting for three-fourths of total use, the National Energy Administration (NEA) said.

Heavy industry consumed nearly 62 percent of China's electricity, despite threatened shortages. In the first five months, six energy-intensive industries, largely associated with construction, accounted for 42 percent of power consumption growth.

Over the past six months, the government has tried to rein in the building boom, cool down the property market, stop speculation and make housing more affordable with measures like higher down payments and limits on second homes.

"We must ... resolve the problems that the people most care about," Premier Wen Jiabao said in February, the official Xinhua news agency reported. "We must resolutely prevent prices from rising too fast ... and unswervingly do a good job of controlling the market."

Hard to turn off

Although some reports point to slower growth in property prices and even declines in some cities, others suggest the construction binge has been hard to turn off.

First-half investment in the property sector soared nearly 33 percent to 2.63 trillion yuan ($400 billion), with 36 percent growth in residential housing. Fixed asset investment climbed 25.6 percent to 12.5 trillion yuan, according to the National Bureau of Statistics (NBS).

The power consumption figures also show little reflection of a policy change, analysts say.

"We've seen a change in policy intent but haven't seen an impact of that in the first half," said Trevor Houser, a partner at the Rhodium Group, a New York-based consulting firm. "Energy demand continues to be driven primarily by energy-intensive industry, as it  has been in the past."

The six top power-consuming sectors include steel, building materials, non-ferrous metal mining, chemical engineering, petroleum and the electricity industry itself, the NEA said.

Last year, power use climbed 14.5 percent with manufacturing and industrial sectors accounting for 74 percent of consumption, showing little change from the figures so far in 2011.

Houser said the continuing double-digit growth is due to momentum and resistance from development interests.

"It takes a while for policy changes that have been enacted to take effect. It's hard to steer a train going that fast radically in any direction," he said. "But there's also significant political resistance both at the local and national level to some of the more  ambitious policy reforms required for economic rebalancing."

Mixed results

The government has tried to divert construction interests from speculative property development into affordable housing, but the push for less profitable ventures has achieved mixed results.

The State Council has called for completing 10 million affordable units in 2011, but only 5 million were started as of June. Fewer than 4 million are expected to be finished this year, Xinhua said.

Lending curbs have also done little to slow excessive construction. Although new bank loans dipped by about 10 percent at midyear, some developers have turned to underground lenders who charge higher interest. The funds are flowing to second-tier cities where building is still booming, the official English-language China Daily said.

David Pumphrey, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington, said the development habit is hard to break.

Although the central government has declared a change in policy, it can't just flip a switch and turn the development cycle off.

"It is generating quite a bit of wealth," said Pumphrey. "These things have become much harder to control as the economy has become more decentralized."

GDP growth has slowed to 9.6 percent in the first half, down from 10.3 percent last year, but the government has had little success in stemming inflation, which hit a three-year high of 6.4 percent in June.

Pumphrey said the government is still dealing with the after-effects of the 4-trillion-yuan economic stimulus package that boosted construction to fight off recession in 2008-09. Now, it is trying to engineer a soft landing that can slow the economy without
risking a bust.

The power numbers may mean slower progress on reducing energy intensity and the environmental consequences of development, but the government has many other problems on its plate.

"They're trying to balance out a number of different things at the same time," said Pumphrey. "It just takes time," he said.

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