The End of Growth: Adapting to Our New Economic Reality (33 page)

But how long can this go on? Will China escape the economic fate of older industrial nations, or is it poised for its own encounter with growth limits? There are four reasons for thinking current trends cannot be sustained.

1. Resource Depletion and Resource Competition:
The Story of China’s Coal

China’s appetite for resources and raw materials is driving up worldwide prices of a wide range of commodities including oil, iron, copper, cotton, cement, and soybeans. But for the Chinese economy, perhaps the single most important resource is coal. Indeed, it may not be an oversimplification to say that the fate of China’s economy rests on its ability to maintain growth in coal supplies.

China relies on coal for 80 percent of its electricity and 70 percent of its total energy; coal also supports China’s steel industry, the world’s largest. Altogether, China is one of the most coal-dependent nations in the world. In order to become the world’s second-largest economy, it has had to more than double its coal consumption over the past decade, so that it is now using nearly half of all coal consumed globally, and over three times as much as is consumed in the next nation in line, the US (which prides itself on being “the Saudi Arabia of coal”).

As China energy expert David Fridley and I argued in a recent op-ed in
Nature
, while China claims it has enough coal to fuel continued economic growth, that claim is questionable.
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The nation has recently updated its proven coal reserves to 187 billion metric tons, putting it second in line after the US in terms of supplies. That would be about 62 years’ worth of coal at 2009 rates of consumption (over three billion tons per year). But this simple “lifetime” calculation is highly misleading.

Reserves lifetime figures are calculated on the basis of flat demand and lose meaning if demand grows over time. China’s coal consumption is accelerating rapidly, so that the expected “62 years’ worth” must be adjusted downward. Demand forecasts from China’s Energy Research Institute would reduce the reserves lifetime to about 33 years; but if coal demand were to grow in step with projected Chinese economic growth, the reserves lifetime would drop to just 19 years.

Yet this still doesn’t capture the situation. Production will peak and decline long before China’s coal completely runs out. Further, as with oil production, coal mining proceeds on the basis of the “best-first” or “low-hanging fruit” principle, so we must assume that China is extracting its highest-quality, easiest-accessed coal now, leaving the lower-quality and more expensively mined coal for later. Unlike the US, China does not have vast deposits of surface-minable coal; over 90 percent of China’s coal comes from underground mines up to 1,000 meters in depth, and those mines face increasing engineering challenges.

Hubbert analysis, which has been used to forecast oil production peaks, can also be applied to forecasting future coal supplies. In 2007, Chinese academics Tao and Li forecast that China’s coal production will peak and start to decline perhaps as early as 2025.
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Other forecasts are more pessimistic. A 2007 analysis by the Energy Watch Group of Germany forecast a peak of production in 2015 with a rapid production decline commencing in 2020.
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And a 2010 study by Patzek and Croft forecast the peak of
world
coal production for this year (2011); they see China’s coal peak also occurring essentially now.
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China has few options for reducing its reliance on coal, since the fuel is used in so many ways. In addition to powering the electricity and steel sectors, coal provides winter heat to hundreds of millions of northern Chinese; it is also used in the cement, non-ferrous metals, and chemicals industries. While China is rapidly expanding its supply of natural gas, to replace just the coal used for heating would double total gas consumption.

China is quickly developing alternative energy sources. But can these be brought on line fast enough to make a difference? Let’s do some numbers. China aims to have 100 gigawatts (GW) of wind power capacity by 2020, and the nation’s leaders plan to expand installed solar capacity to 20 GW during the same period. These are truly astonishing goals, and, if China even comes close to accomplishing them, it will become the world’s renewable energy leader. But there is a problem. Total Chinese electricity generation capacity is 900 GW currently; with seven percent growth, that means the nation’s electricity demand in 2020 will be something like 1800 GW. Wind and solar together would supply less than seven percent of that. The only thing likely to boost that percentage much would be a dramatic reduction in growth of energy demand to, say, two percent annually.

The situation with nuclear power is similar: China has 11 atomic power plants now and is in the process of building 20 more, with a target of 60 GW of generating capacity, or possibly more, by 2020. But this will supply only between three and five percent of total electricity demand, depending on energy demand growth rates. In late 2010, energy policy makers in Beijing evidently began to take notice of the looming electricity supply problem, and rumors circulated of new efforts to construct up to 245 new nuclear plants over the next two decades (the US has only 104 in total). If this new target is real, and if the Chinese succeed in achieving it, a large fraction of new electricity demand for the coming years could be met through sources other than coal — but China would still have an enormous (though more slowly growing) coal dependence to feed. Meanwhile, China’s soaring demand for uranium would push up global prices for this energy mineral.
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In 2009 China was a substantial net importer of coal, having been a net exporter every year through 2008.
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China could import more coal to enable further growth, but the biggest exporters of coal — Australia, Indonesia, and South Africa — have much smaller reserves and production rates. The entire seaborne trade in steam coal (mainly used by power plants) currently amounts to only 630 million tons per year, and China could absorb this much with only three years of continued growth in coal demand. That’s not going to happen, though: Other nations need that export coal, too — including India, also major coal-based economy, and also a country needing to import increasing amounts of fuel.

The conclusion is unsettling but inescapable: China’s reliance on coal cannot be significantly reduced as long as its demand for electrical power continues to grow at anything like current rates. And even if energy demand growth tapers off and alternative energy sources come on line quickly, the country’s ability to supply enough coal domestically will still be challenged. This will drive up coal prices worldwide, while choking off economic growth at home. China’s energy economy is unsustainable and will cease growing in the foreseeable future, impacting many other nations as it does so.

2. Export-Led Development Model

The fundamental economic model that China has depended on for the past couple of decades was borrowed from Japan, and consists of producing low-cost export goods to fund investment at home. Essentially the same model is being pursued by Thailand, Vietnam, Taiwan, Malaysia, Singapore, the Philippines, and Indonesia. The story of what happened to Japan as a result of following this strategy should be a cautionary tale for its neighbors, and for Beijing in particular.
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The post-war Japanese export boom resulted in spectacular growth for four decades, but the undervalued yen eventually caused a deflationary contraction of Japan’s economy, which is smaller today than it was in the late 1990s. There are good reasons to think the same policies will achieve the same results in China. However, China is much larger than Japan, and the world economy is today far more fragile than it was in the late 1980s when the Japanese bubble burst, so the global consequences of a Chinese crash would be far greater.

After World War II, Japan kept its yen weak, making exports relatively cheap to foreign buyers. Japan also benefited from a high savings rate, which enabled massive investment in infrastructure and manufacturing capacity. The country’s GDP ballooned by 600 percent from 1950 to 1970, pulling more people out of poverty more quickly than had ever been done anywhere previously.

Export- and investment-driven growth typically discourages consumption, as domestic prices are kept high and salaries low (to help fuel exports). In the case of Japan, yields on savings were suppressed so that available capital would flow to corporations and the government.

All of this resulted in a lopsided economy. In most modern market economies, consumption accounts for around 65 percent of GDP (in the US, the proportion is 70 percent), while investment in fixed assets such as infrastructure and manufacturing capacity makes up 15 percent. In 1970, Japan’s domestic consumption contributed 48 percent of the economy and fixed investment 40 percent. As Ethan Devine put it in his article “The Japan Syndrome” in
Foreign Policy
, “In plain English, the Japanese were consuming relatively little while investing heavily in steel plants and skyscrapers, which didn’t leave much for fish or tourism. Belatedly, Tokyo realized that a balanced economy must also have consumption and that coating the country with factories and infrastructure wouldn’t do the trick.”
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Throughout the 1970s and early 1980s, Japan gradually strengthened the yen so as to support the development of a consumer culture, and consumption rose to more than half of GDP. In 1985, Tokyo let its currency appreciate more rapidly. But the result was simply a spectacular inflation of real estate and stock prices. The bubble’s collapse lasted more than a decade, with stock prices scraping bottom in 2003 (before plummeting even further after the commencement of the current global crisis in 2008). Export-oriented industries could not adapt to a domestically led economy because there was insufficient consumer demand. And so rapid growth turned to stagnation, which has persisted up to the present.

Japan still runs on exports, but now government spending is an essential prop for the economy. Twenty years of fiscal stimulus have done little more than stave off even more serious economic contraction, while government debt has grown to nearly 200 percent of GDP.
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Fast forward to China, 2011. Like Japan, China subsists largely on exports while investing heavily in infrastructure, paying for the latter with private savings that come from tamping down consumption. Beijing adopted the Japanese growth model in the 1990s, when its deregulation and opening up of the country’s economy was widely praised. While these policies created tens of millions of jobs, as well as thousands of new roads and millions of new buildings, they have also generated imbalances reminiscent of Japan in the 1980s — except that in many ways China has gone even further out on a limb.

Devine recites the startling numbers:

China is far more dependent on exports and investment than Japan ever was, and the numbers are still moving in the wrong direction. Investment accounts for half of China’s economy while consumption is only 36 percent of GDP — the lowest in the world, drastically lower than even other emerging economies such as India and Brazil. But as the Japan example illustrates, low consumption leads to high savings, and China’s thrifty citizens, coupled with booming net exports, have bestowed upon the country the world’s largest current account surplus, triple that of Japan’s in 1985.
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China’s legendary trade surpluses cause problems for its trading partners while stoking price inflation at home. And inflation, the usual result of an undervalued currency, is dangerous in a country where hundreds of millions of people still have trouble affording basic essentials.

To outsiders, China has looked like a shining example of what growth can accomplish, yet it has achieved its success by strangling personal consumption (which was the engine of growth in the US and Europe) and sidelining small-scale entrepreneurs in favor of state-owned businesses and selected multinational corporations. Only a small percentage of its population has shared in the bounty.

China’s leaders are aware of the pitfalls of pursuing the Japanese development model, and have issued a comprehensive slate of reforms to foster consumption and curb excessive capital investment. But these efforts will only work if the US and the rest of the world return to a path of growing consumption. If not, China’s choices may be limited. An export-driven economy can only succeed if others can afford to import.

3. Demographics: Old/Young, Rich/Poor, Urban/Rural

Beijing’s one-child policy, introduced in 1979, was largely effective — though it had the abhorrent side effect of encouraging a disdain for female infants, a prejudice that has led to abortion, neglect, abandonment, and even infanticide. Applying mainly to urban couples of Han descent, the policy reduced population growth in the country of 1.3 billion by as much as 300 million people. This meant that by the 1980s and ’90s, young workers had fewer dependents to support — and China’s manufacturing boom drew strength from young people moving from country to city to work in factories. For the nation as a whole, having a few hundred million fewer mouths to feed has acted as a social safety valve so far, and will reduce misery in the decades ahead as world resources deplete and human carrying capacity disappears.

However, there is a demographic price to pay. Beginning in 2015, China will see a growing number of older citizens relying on a shrinking pool of young workers.

Most of the nation’s factories are located in its coastal cities, of which some, like Shenzen, were built from scratch as industrial centers. Shenzen hosts the Foxconn Technology Group, an electronics manufacturer that makes components for Dell, Hewlett-Packard, and Apple; nearly all its workers are under 25.