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China's Propaganda Spin on Emission Reductions

By Arthur Thomas - posted Friday, 24 September 2010


In the July 7, 2010 edition of the Sydney Morning Herald, John Garnaut's article, "Beijing Shuts Smelters to Meet Energy Targets" heralded the initiation of a media campaign drawing domestic and international attention to drastic action and sacrifices that China is claiming to meet Hu Jintao's pre Copenhagen commitment to reduce China's energy intensity.

The ensuing flow of media reports focussed on reduction of output and closures of energy intensive industries including power generation, steel mills and coal processing  in Hebei and Beijing. The closures and reductions are said to be designed to reduce overall CO2 emissions from industry and power generation.  But the whole program can be seen to be a massive subterfuge to disguise problems in the Chinese economy.

The campaign is the brainchild of low profile Li Changchun, the head of China's vast propaganda and media censorship network that includes numerous ministries and departments. The Central Propaganda Department is not a ministry or part of China government, but part of the Chinese Communist Party (CCP). Li Changchun is one of the most influential men in China, yet holds no ministerial post and is not seen as part of China's government policymaking.

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2009 and 2010 have not been good years for the CCP's planed future growth for China.

Confidence in China's continuing long-term demand for resources is slowing. China's property, stock market and debt bubbles are creating concern and several prominent IPOs were deferred or drastically reduced. The rate of foreign direct investment is declining as increasing numbers of articles question the future of China as the country of easy gains. China's banks came under scrutiny as the property market slowed and the prospect of massive hidden local government debt raised the spectre of a new flood of nonperforming loans.

One recent survey estimated that there are 64.5M empty apartments in China. The survey was based on building power consumption. This raises the following questions. Which banks are holding the mortgages? Who is paying the interest? What happens as property values decline?

Following its successful bid to raise US$22B by its initial public offering, the Agricultural Bank of China immediately suspended new lending. Another major state bank followed suit and froze lending to the property sector. These two events also raised speculation as to the real level of non-performing loans at the two banks.

Then in August, China's own regulator found risks following the China Bank Property Stress Test.

These were not the only problems.

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Since early 2009, there has been rising concern of overcapacity in many of China's major industries, including steel, aluminium, cement, coke, chemicals and even the auto industry. Concern was even being aired publicly by many prominent bureaucrats, raising the ire of the CCP.

From mid 2009 and throughout 2010, China's economy and heavy industry has been driven by Beijing's massive stimulus package intended for the world's biggest infrastructure programme.

The diversion of bank lending into the stock and property markets as well as local government special purpose investment funds diluted the overall effect of direct spending on the massive infrastructure objective.

International concern grew over bubbles in stock and property markets fuelling concern over bank, local government, corporate and private debt.

Beijing's goal of China becoming the world number one steel producer drove the restructuring of China's diverse steel industry into four or five highly efficient hi-tech mega steel mills centred in northern China.

Like much of China's mega planning it was oversimplified and lacked detailed strategic long term planning in favour of political objectives. It overlooked the fact that this restructuring strategy translates into less labour required to produce one tonne of steel or steel product. Despite the major lift in capacity, the new mega mills could not effectively employ the numbers of workers that would be made redundant.

The mergers  are forcing the closure of mills in several provinces creating friction between provinces and provinces and the central government. The threatened closures have the potential to create unemployment, as well as loss  of taxation revenues and government services revenues from local power generation and coal mining as well as the decline of local transport.

Steel is China's major iconic industry and employer and runs in parallel with coal.

In 2008, following several years of adverse international media coverage of safety issues, fires and mining deaths, Beijing ordered the closure of thousands of small inefficient, polluting and dangerous coalmines in Shanxi and the development of the vast high quality open cut mines in Inner Mongolia.

Inner Mongolia is now the major supplier of coal for power generation, coke production, coal-based chemicals, and the steel industry in northern Hebei province and Beijing.

China faces a 2011 in which the economies of its two major export markets are running flat and the global economy is well below the recovery line resulting in a decline in China's trade balance and rising imports.

China's stimulus spending has been the major driver of the steel industry, demand for iron ore and rising ore and steel prices, but that terminates in the first quarter of 2011 and demand for steel and iron ore will fall.

China's steel industry raised capacity in 2009 by 58M tons to 660M tons, and succeeded in achieving overcapacity of 200M tons. As demand declines with the termination of the stimulus package, that over capacity rate will rise and is the cause for increasing concern within the CCP.

China's quirky metal ore trading market however added speculation to mill demand and the surge in iron ore buying by a steel industry focussed on production rather than market forces and profitability.

Ore prices are in decline and steel mills are reducing inventories, buying from ore stockpiles at China's ports, and cutting orders for local and imported ores.

The Ministry of Industry and Information Technology reported that from May 27 2010, Beijing would no longer provide financial support, or approve projects that expand production capacity in industries already marked by excess capacity, high levels of energy demand and pollution.

It would appear that government demands for cuts in production and energy emissions would be timely for China's steel mills in the fourth quarter of 2010, especially as an excuse for delaying deliveries and the placement of new orders.

Inner Mongolia produced 602 million tons of coal for 2009.

Production increased nearly 19% in the 1st half of 2010 to almost 338 million tons and is expected to reach 730 million tons for 2010. That is a 158 million tons increase in 12 months or more than 120%.

Due to capacity restrictions, railways carried less that 40% of Inner Mongolia's coal (200 million tons) in 2009, diverting the excess 361 million tons onto road transport.

Based on 2010 capacity, railways will carry just 33%, leaving 490 million tons to be transported by road. That translates into an estimated 1.4 million tons of coal per day being transported on the coal highways.  By the time the proposed new railways are in operation more than two years from now, the Inner Mongolia - Beijing highways will be in permanent gridlock with coal trucks alone. Even diverting a substantial tonnage of coal traffic onto the toll roads and freeways would not be an option.
  
Inner Mongolia's coal production increased 18.79% in the first half of 2010 year on year, reaching 337.78M tons and is estimated to reach 730 million tons for full year 2010.

Traffic jams were occurring on the 483 km Hohhot-Beijing highway during 2009 following the closure of coalmines throughout Shanxi. The rapid rise in coal production in Inner Mongolia triggered a massive demand for thousands of coal trucks to haul the coal to Hebei and Beijing.

Traffic density and loading already exceed the highway's maximum designed capacity by 300% and traffic continues to rise.

From March 2010, road traffic on the highway had been slowing and during April, May and June 2010, drivers were reporting increasing lengthy delays and coal truck were taking up to 20 days to travel the normal 3 days journey.

Beijing was very well aware of the looming crisis in the 3rd quarter of 2009 and watched the situation worsen following winter into April, May June, and July.

Chinese media were instructed not to report on the escalating problem until August 14, when modern communication technology alerted the outside world to the 150 km traffic jam. State media reported the problem 9 days later.

Despite state media reports and government statements that the gridlock was over, it has since taken the form of a continuous rolling blockage as repairs to some parts are completed, and work starts on others and the jams begin again.

The traffic jams have been affecting local traffic in Beijing city with record numbers of jams clogging the highways and ring roads.

The traffic jam will create severe economic and personal hardship for residents of northern Hebei and Beijing resulting from a major shortfall in coal deliveries of coal for steel mills, power generators and coal related industries. Coal deliveries are crucial to build the critical stockpiles to tide the region over the harsh winter.

The mid Autumn Festival and the National Day holiday will only add to traffic confusion and gridlock.

In an effort to spread blame, even the motor car has come under attack with state media pointing to vehicle ownership in Beijing where registered vehicles exceed 4.5 million and will pass 5 million in 2011

The real problem is Beijing and Hebei coal demand. It is not by accident that the emissions constraints are focussed solely on Beijing and Hebei, while excluding the heavy polluting centres of Benxi, Linfen, Datong, Baotou, as well as other industrial, steel  and coal fired power generating centres in other parts of China.

The gridlock on the Inner Mongolia-Beijing highway is starving northern Hebei and Beijing municipality of coal in the run up to what has been forecast as another severe winter and the CCP is attempting to divert blame.

Hebei is China's major steel producer. Beijing and Hebei are major consumers of power generation and major consumers of Inner Mongolia's  coal.

Beijing and Hebei are the only regions reliant on coal using that highway from Inner Mongolia.The flow of coal will continue to decline and severely reduce the time available to stockpile adequate coal reserves for Hebei and Beijing for the coming winter.

This gridlock has been in the making since early 2009 and Beijing has been fully aware of the implications, but does not have the capacity to accelerate road repairs.

So Beijing is desperate to find an excuse for the event that could have serious repercussions for industry and energy supplies during the coming winter.

It will also conceal, in the short term at least, the real reasons for declining iron ore and coal imports during the 4th quarter of 2010 and the 1st quarter of 2011.

The cuts, blamed on emission reductions, will conceal overcapacity and be welcomed by the steel industry and temporarily, divert some attention away from China's economy.

In summary the media blitz will:

  1. Seek international support for China's climate change proposals
  2. Seek national support for the CCP's efforts to reduce climate change while the major powers, and the US in particular, are not.
  3. Provide an excuse for a major shortfall in coal for power generation in Northern Hebei and Beijing during the coming winter.
  4. Conceal poor management and inept policy making in planning coal development and transport in Inner Mongolia.

Countries like Australia, exposed to, and dependent on China’s continued growth, need to be aware of these issues and not rely on official statistics and narratives when planning their own economic strategies.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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