Attempts by Chinese leadership to guide the country’s economic narrative and reform the more egregious weak points of the economy show a commitment to change, but also a reluctance to give up control. As a result, China’s energy future is uncertain. How much impact market forces will have on China’s “zombie” coal and steel industries is questionable if government officials are still picking winners and losers.
Transparency is one quality that China’s economic and political picture lacks. Omissions of key data, mercurial measurement standards, and suppression of dissenting voices are just a few of the tools commonly used to keep the economic story line under control. As reported by the New York Times, China’s central bank and national statistics bureau “are constantly changing, redefining, introducing and excluding statistics, and I don’t think it is by accident,” said Christopher Balding, an associate professor at Peking University HSBC Business School. Experts have long called for an end to the practice of setting economic targets. They claim that it encourages the falsification of data and a focus on the short-term appearances rather than long-term stability. The costs of growth-at-all-costs policy are already visible in the massive amount of wasted investment and debt poured into heavy industry in China. The Chinese National People’s Congress announced a target range for 2016 instead of a particular threshold but the worth of any stated goals for growth remains questionable. China is the only major world economy to set a hard annual growth target for GDP.
Attempts to increase confidence in the economic data provided by the government were much more common before the downturn. However, now that recent numbers have begun reflecting the less than stellar situation China is in, China’s leader Xi Jinping has become much more sensitive to any data which puts his abilities in question. Critics face fines and censorship as was the case with prominent real estate mogul Ren Zhiqiang who had his microblogging accounts shut down after lambasting Mr. Xi and the targets of political crackdowns meant to increase central control. Corruption charges against party officials in target areas is a common method of pushing difficult reforms in China. Politicians within China’s industrial rust belt are especially vulnerable. Keeping a cap on dissent will be especially important as the national legislature discusses the party’s new five year plan and remedies for an economy rife with overcapacity and debt-ridden companies.
Without a good understanding of what China’s economic future will look like, it will be difficult for companies to predict China’s energy needs. The current economic plan, outlined by Mr. Xi, would lay off about 1.8 million steel and coal workers from the country’s bloated state-run enterprises. Specifically, about 1.3 million workers in the coal industry and 500,000 in steel would be cut, according to Yin Weimin, human resources and social security minister, as posted on the government’s website. This news implies a substantial reduction in coal usage for industry is at least planned though, in China, reform is easier said than done. Necessary cuts in production would involve mass layoffs in towns with few alternative employers, and could threaten the companies of politically connected executives. If Mr.Xi fails in his drive for reform, it will not be for lacking ability or ambition; it will be because he might be forced to choose between Party and economy and, in China, the Party will always come first. And that means stimulus trumps reform.
Chinese consumption of coal in 2015 was below 2014 levels indicating the country’s coal consumption, the highest in the world at about half of total consumption, may have peaked. Prices for hard coking coal, used in steelmaking, have fallen 43 percent since the beginning of 2014 on weak Chinese demand mirroring the pains felt by oil and gas companies also suffering from low prices. Efforts to reign in air pollution, reduce energy use, and cut overproduction in industries of heavy coal use are putting immense pressure on the coal industry in China and as much as 15% of the workforce in steel and coal could be laid off under reform plans in an undefined time frame. The recent imposition of tariffs up to 266% on Chinese steel by the US underscores the extent of overcapacity in China’s heavy industry sector. Still, those “zombie” industries remain subsidized by cheap loans and their relative size gives them priority over renewable energy alternatives.