Drought, Energy Shortage Upset China’s Growth Plans

Posted On May 26, 2011

Today, China is the world's second-largest economy and second-largest trader. So, what happens in China and how China handles its economy are of absorbing interest to analysts and planners everywhere. Also how it manages its inflation – the text book way with liberals in the lead or traditional way with apparatchiks in the forefront.

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Central and Eastern China, known as the home of rice and fish, are in the grip of worst ever drought for more than a century. This has impacted more than 34 million people. About four million people do not have access to drinking water, even according to official data.  Direct economic loss is estimated to be around 14.94 billion yuan ($2.29 billion).  

Poyang Lake, the country’s largest water body, has become a vast stretch of lush grassland in Jiangxi province. The volume of water in the 160 kilometre long lake is now a tenth of its normal level. Water level in Dongting Lake, China’s second largest, is so low that experts have issued warnings of a possible explosion of the lake’s rat population. Lakes and reservoirs in the provinces of Jiangsu, Anhui, Hubei and Hunan are close to historic lows. More than 20,000 acres of fish farms have been severely damaged in Hubei province alone.

Rainfall levels from January to April in the Yangtze River basin, the country’s longest and most economically important river, have been up to 60 percent lower than average levels of the past 50 years. Large areas of farmland are cracking, making it impossible for early rice to take root. Naturally, China’s Civil Affairs Ministry is worried about the impact of drought on price-line since grain prices are witnessing a steady climb in the global markets. The drought has pushed up vegetable prices in major cities by almost 30 per cent.

If the drought continues, and if there is no rainfall before June 10, power generation will be hit badly particularly at the Three Gorges Dam, the world’s largest hydro-electric project. Already, the dam has cut back on electricity generation. During May – October 2010, hydro-power contributed just a fifth of total generation. And now the State Grid Corporation of China forecasts a power deficit of over 30-40 gigawatts during the summer peak season.

A contributory factor for Chinese power crisis is the mismatch between production and demand, which in turn is a result of a lop-sided policy. The Communist party authorities frown upon any increase in tariffs to off-set production costs.  Such a policy acts as a disincentive to a producer, who turns to the best available option for survival. It is cutback in production. This is what has happened in China leading to the worst power shortage in seven years.  The shortage is set to worsen as electricity demand rises during the peak summer months – a period when there is less water in hydel reservoirs and hence less power generation.

Energy crisis is not new to China. 2004 was the worst year when demand outstripped generation and supply. The power shortages this year could be worse than in 2004 when coal supplies to power plants were hit by bottlenecks in train transportation.  Today the country has the capacity to generate enough power. Rail transport is no longer a hurdle race. What China lacks, however, is the political will to produce enough, if not more. It is at sixes and sevens at balancing the interests of producers and consumers.
Keith Brasher in the New York Times (May 25, 2011) summed up the equation as Power vs. Profit.  “It is a power struggle that is causing a power shortage — one that has begun to slow China’s mighty economic growth engine”, he said in his despatch from the south-central Chinese town of Yiyang in Hunan province.  

Much of China’s electricity generation is coal based. There are 436 coal based power plants in the country. Coal prices are looking north and have already registered a 20 per cent jump. But there is no corresponding increase in tariffs. So, the power utilities are faced with bankruptcy. The tricks they and the coal companies are adopting to cope with the diktats from Beijing masters convey the home truth that there is no middle path in market economics. Either the increased costs of production should be passed on to the end user like in a full-fledged capitalist market or absorbed by the state like in a controlled economy. Otherwise ruin stares at the state enterprises.

Keith Brasher gives a graphic account of ‘survival’ regime adopted by the utilities.   These steps range from production cuts, and close downs for maintenance to running the plants for a few hours in a day. Coal companies on their part, are circumventing the official diktat to supply at old prices by despatching lowest-quality coal with the high sulphur content.  As a result, many power plants are now paying penalties to yet another arm of the government — environmental regulators — for burning the sulphur-spewing coal. That has further added to their costs in what is a new version of Chinese chequers.  

All this raises some pertinent questions: Does the left hand of Communist China know what its right hand does? What has happened to the famed Communist party grip over the state machinery? Has three decades of liberalisation created an immune system that has numbed the senses? These questions are relevant since the authorities are refusing to think out of the box to tide over the crisis.  More so since China has emerged as the world’s largest consumer of electricity after three decades of phenomenal economic success.

Conventional steps – restrictions on consumption by big users like steel mills and aluminium shelters, glitzy neon-lights in energy guzzling Shanghai, ban on diesel exports – offer no power nirvana nor will they avert the slowdown of the economy which topped ten percent last year.   In fact, there is a real danger to China’s USP – cheap labour, cheaper land, and cheapest inputs.

No surprise, therefore, market analysts have begun to lower China’s growth forecasts. And have begun to speculate whether the Chinese economy is coming in for some sort of hard landing. In the late 1990s, when China witnessed its first slow growth rate, the world was not worried much. It took the development in its stride.

Today, China is the world’s second-largest economy and second-largest trader. So, what happens in China and how China handles its economy are of absorbing interest to analysts everywhere. Also how it manages its inflation – the text book way with liberals in the lead or traditional way with apparatchiks in the forefront. Monetary controls to tame inflation and rein in cost push factors will stifle growth.  The situation calls for a focus on the root cause of the malaise.


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