China's Economic Shifts Threaten Environment Gains

An analysis by Michael Lelyveld
2015.08.17
china-coal-fired-plant-demo-aug-2015.jpg Seven coal-fired units with a total capacity of 680,000 kilowatts are demolished in Shandong province, Aug. 11, 2015.
Xinhua

As China struggles to meet economic and environmental goals, questions over the government's new currency policy have left the consequences in doubt.

After a week of turmoil following China's surprise devaluation of the yuan, analysts remain uncertain whether the currency shift is a "market-driven" reform as claimed or part of a broader stimulus plan to revive the flagging economy.

World markets have reacted sharply to the devaluation that began on Aug. 11, in part because it may signal that the government knows that its 7-percent official economic growth rate is not all it's cracked up to be.

"How bad is the Chinese economy if they're taking these measures?" said Art Hogan, chief market strategist at Memphis, Tennessee-based Wunderlich Securities, according to The Wall Street Journal. "That's a big concern."

The true state of China's economy may be reflected in the prolonged downturn in coal, which provides nearly two-thirds of its primary energy.

Partial coal data for the first half of 2015 have given the industry no reason to cheer after consumption fell 2.9 percent last year in the first decline since 1999.

Production through June dropped by a steeper rate of 5.8 percent from a year earlier to 1.79 billion metric tons, while imports of 99.87 million tons plunged 37.5 percent, the National Development and Reform Commission (NDRC) said.

July figures were barely better, as output fell 3.1 percent, the NDRC planning agency said last week.

Although the industry has yet to release first-half consumption estimates, the production numbers suggest the slide could extend through a second consecutive year.

The country's main industry group, the China National Coal Association (CNCA), started calling for output cuts of at least 10 percent in July 2014. But the first-half figures make the case that mines are still overproducing for a weakening economy, keeping losses high and prices low.

Over 70 percent of mid-sized and large coal companies ran in the red with first-half losses of 48.4 billion yuan (U.S. $7.8 billion), the NDRC said, according to the official Xinhua news agency.

As a group, major coal producers still made 20 billion yuan (U.S. $3.2 billion), but that was only about a tenth of their profits in the first half of 2012, Xinhua said. The proportion of loss-makers has stayed largely unchanged in the past year.

A slower economy, anti-smog measures and overproduction have ganged up to keep coal prices down.

Prices for steam coal used in power plants have hit rock-bottom as growth in first-half electricity use slid to 1.3 percent, its lowest rate in over 30 years. Power consumption fell 1.3 percent in July, the National Energy Administration (NEA) reported last week.

One sign of sustained weakness is that cheap coal prices have failed to rekindle the market, as power consumption in China's heavy industry dipped 0.9 percent through June.

If the negative numbers are indicators of economic weakness, they may signal what China's policy makers will do next.

Implications for environment

If devaluation is only the first step in a broader new stimulus, the outlook could improve for coal producers and industrial output, but all bets may be off for environmental gains.

The bad news for miners has been better news for environmental advocates, who have given China's government high marks for pursuing climate change plans.

In May, Greenpeace/Energydesk China estimated that an 8-percent drop in coal consumption in the first four months of the year would translate into a 5-percent cut in carbon dioxide (CO2) emissions compared with the year-earlier period. China's coal use accounts for half of the world's consumption of the high-polluting fuel.

In a breakthrough bilateral accord with the United States last November, China agreed to reach a peak in its CO2 emissions "around 2030" and increase its non-fossil fuel share of energy to around 20 percent.

Under the agreement, the United States also set a new target to reduce its carbon emissions in 2025 by 26-28 percent compared with 2005.

In June, China formalized its national climate change pledge to the United Nations, vowing to cut CO2 emissions per unit of gross domestic product (GDP) by 60 to 65 percent in 2030 from 2005 levels, raising its target from the previous commitment of 40-45 percent.

China has already lowered its CO2 intensity by 33.8 percent from the 2005 mark by the end of 2014, the official English-language China Daily said.

The national push has been backed by local efforts to limit coal use.

Last month, Xinhua said industrialized Hebei province next door to Beijing has removed nearly 700 furnaces so far this year to reduce coal consumption and major pollutants. Demolition of smokestacks and furnaces means their capacity for coal burning has been eliminated permanently.

Tougher enforcement under a revised environmental protection law has also led to the shutdown of 9,300 companies and the suspension of 15,000 others in the first half of the year, China Daily reported.

All this has raised hopes that China will soon reach a peak in coal consumption, perhaps even that it already has, curbing the world's biggest source of man-made CO2.

In June, a study by environmental analysts at the London School of Economics said a peak in CO2 emissions may be at hand, well before China's promised 2030 deadline and perhaps even earlier than 2025.

Early "peaking" could make it possible to stay within the 2-degree Centigrade (3.6-degree Fahrenheit) warming limit, established by the United Nations Intergovernmental Panel on Climate Change (IPCC) to avoid the most severe environmental effects.

That makes China's continued decline in coal use crucial.

Risk of new stimulus

But China's consumption trends can change quickly, as illustrated by a bullish CNCA forecast in November 2013 that China's coal consumption would rise to 4.8 billion tons in 2020.

The forecast less than two years ago gave no clue that consumption would fall from 3.65 billion tons to 3.51 billion tons last year. But the trend could turn around again if the devaluation is a step aimed at pumping up the economy.

The risk of a new stimulus plan has risen along with suspicions of official growth rates, which economists have eyed with a nod and a wink for years.

"To be honest, no one has a clue where the economy is, and I don't think that it's properly measured," Viktor Szabo, senior investment manager at Aberdeen Asset Management in London, told The New York Times.

"Definitely there is a slowdown," Szabo said. "You can have an argument about what level it is, but it's not 7 percent."

Philip Andrews-Speed, a principal fellow at the National University of Singapore's Energy Studies Institute, said the latest data suggest that "peak coal use in China now looks much closer than before."

But in a recent column on his website at www.andrewsspeed.com, he questioned whether the lower-consumption trend would continue, arguing that coal use over the past three decades has been linked to GDP growth in more than one way.

On the simplest level, higher growth has generally led to more coal consumption. But bigger leaps have resulted from spurts in stimulus spending on infrastructure projects in the early 1990s, in the boom years starting in 2003 and in 2011, Andrews-Speed said.

The government has previously resisted calls for major stimulus to spur the economy after experiences with higher pollution, energy consumption and debt from the 4-trillion yuan (U.S. $626-billion) stimulus package announced in 2008.

"The outlook for China's coal consumption over the next year or so depends critically on whether the government decides to boost economic growth through a new infrastructure program," Andrews-Speed wrote.

In an email message, he noted that the low figures on electricity and energy use have raised doubts about official claims that GDP growth in the second quarter and first half have been sustained at 7 percent.

Last month, the NEA said China's total energy use in the first half rose by only 0.7 percent.

In an earlier RFA interview, Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington, estimated that China's actual GDP growth rate may be 4 percent "at best."

"I do wonder if economic growth really is 7 percent. Some have speculated that it might be much lower, in which case, the likelihood of a government stimulus is greater," Andrews-Speed said.

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