the steep road to transition by lifan li 6 china’s rise as a global economic power by elenoire...
TRANSCRIPT
Wor
ld E
nerg
y no.
37/2
017 -
Targ
eted
shot Number
DECEMBER 2017
37
30The sTeep roAD To TrAnsiTionby lifan li
6ChinA’s rise As A GlobAleConomiC powerby elenoire laudieri Di biase
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EnergyThe DArk siDe of GrowThby vaclav smil
AnalysisA new enerGy moDelby moisés naím
IEA Focus – NewPolicies Scenariowhen ChinA ChAnGesso Does everyThinGelseby editorial staff
One Belt One RoadA GlobAliZeD version of mArCo poloby paul sullivan
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Quarterly Year 10 - N. 37 December 2017Authorization from the Court of RomeNo. 19/2008 dated 01/21/2008
n Editor in chiefMario Sechi
n Editorial DirectorMarco Bardazzi
n Editorial committeeGeminello Alvi, RobertArmstrong, Paul Betts, IanBremmer, Roberto Di GiovanPaolo, Gianni Di Giovanni,Bassam Fattouh, FrancescoGattei, Gary Hart, RobertoIadicicco, Alessandro Lanza,Lifan Li, Molly Moore, MoisésNaím, Daniel Nocera, LapoPistelli, Carlo Rossella, GiulioSapelli, Lazlo Varro, EnzoViscusi
n Editorial teamCoordinator: Clara Sanna
Evita Comes, Simona Manna,Alessandra Mina, SerenaSabino, Giancarlo Strocchia, Manuela Iovacchini
n AuthorsGiuseppe Acconcia, FrancoCardini, Livio Cipriano,Demostenes Floros, WenranJiang, Elenoire Laudieri Di Biase,Nicolò Sartori, Vaclav Smil,Alessandra Spalletta, LelloStelletti, Paul Sullivan, DavideTabarelli, Alex Vines, Xiaolai Zhou
Thanks for collaborating in thecreation of maps and charts:Gianluca Chiodini, LauraLungarini, Riccardo Mercuri,Stefania Santomauro, SimonaSerafini (Eni)
n Editorial Staff Piazzale E. Mattei, 1 00144 Romatel. +39 06 51996385+39 06 59822894+39 06 59824702e-mail: [email protected]
Social:About Oil@AboutOil@about_oil
n Authors’ portraits Stefano Frassetto
n Infographic Gianluca Seta
n PhotographyANSA, Archivio Eni, Contrasto(Reuters; Redux); Getty (Corbis); IPA (Alamy); Sie Masterfile
n DesignCynthia Sgarallinon Graphic consultantSabrina Mossetton Graphics and layoutImPRINTing www.imprintingweb.comn PrinterStab. Tipolit. Ugo Quintily S.p.A. viale Enrico Ortolani, 149/151,00125 Roma
n Translated by:LOGOS GROUP -www.logos.net
Sent to press on December 18, 2017
Paper: Magno Natural 100 gr.
Publisher eni spaChairman: Emma MarcegagliaChief executive officer: Claudio DescalziBoard of Directors: Andrea Gemma, Pietro Angelo Guindani, Karina Litvack,Alessandro Lorenzi, Diva Moriani, Fabrizio Pagani, Domenico Livio Trombone
Piazzale Enrico Mattei, 1 - 00144 Romawww.eni.com
C O N T E N T S
All opinions expressed in WE represent only the personal viewpoints of individual authors.
ERRATUM CORRECTION.In the map on page 42 of the previous issue of WE (#36) the Republic of Armenia was not included. We apologize for the inconvenience to the Armenian Embassy in Italy and have re-published the correctmap here.
Editorial The empire of ThefuTureby mario sechi
ScenarioChinA’s rise As A GlobAleConomiC powerby elenoire laudieriDi biase
Xi Jinping’s profileA GreAT leADerby elenoire laudieriDi biase
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The heart of exchangesirAn’s new roleby Giuseppe Acconcia
RenewablesThe sTeep roAD To TrAnsiTion by lifan li
Shale gasThe fuTure is TheshAleby Xiaolai Zhou
China vs. United StatesThe rACe for ThefuTureby ian bremmer
China vs. RussiaAn inCreAsinGlysoliD AXisby lello stellettiand livio Cipriano
China vs. Africa/TheAtlantic Council’s J. PeterPham weighs inA sTrATeGiCConTinenTby Clara sanna
China vs. Africa 2Double sTroke Tieby wenran Jiang
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29 Asia vs. Africain seArCh of A new roleby Alex vines
China vs. EUso fAr, yeT so Closeby nicolò sartori
HistoryThe GreAT GAme revisTeDby franco Cardini
Climate changeAlArm overemissionsby Davide Tabarelli
MarketsGrowTh: The miDDle kinGDom AT TheforefronTby Demostenes floros
InvestmentsThe DrAGon shopsby Alessandra spalletta
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ChinA AT full power
PortfolioolympiAns of TheCelesTiAl empire
Point of viewA JAnus-fACeD view on TheenvironmenT AnD DevelopmenTby roberto Di Giovanpaolo
GeopoliticsXi JinpinG’s hiGh-risk AmbiTions for ChinAby Geminello Alvi
Data“welCome bACkTo The siXTies”edited by Anna Capalbo,simona serafini and francesca vendrame- eni
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AlArm over emissionsby Davide Tabarelli
infographic
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Editorial/Flying low over a laboratory country
China is the giant in competition with America, the “revisionist power” working towards overtaking it. This was one of the key takeaways from the last Congress of the Communist Party of China
The Empire of the Future
THE OVERTAKE
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uring the U.S. presidential cam-paign, a video comprised of snippetsof Donald Trump obsessively re-peating “China! China! China!” wentviral. The fixation of the then-can-didate for the White House has sincebecome the reality of daily politics,with President Xi Jinping as the op-ponent—and, let’s not forget, thepartner—to be reckoned with on adaily basis. The Trump administra-tion’s new National Security Strate-gy, a document putting America Firstin black and white and the nationalstrategy paramount, acknowledges therenaissance of power politics in in-ternational affairs. It makes the sen-sitive issue with Beijing all the moreclear: “China and Russia challengeAmerican power, influence, and in-terests, attempting to erode Ameri-can security and prosperity. They aredetermined to make economies lessfree and less fair, to grow their mili-taries, and to control information anddata to repress their societies and ex-pand their influence. At the sametime, the dictatorships of the Demo-cratic People’s Republic of Korea andthe Islamic Republic of Iran are de-termined to destabilize regions,threaten Americans and our allies, andbrutalize their own people.”
The giant competing to overtake AmericaBeijing. And Moscow. Xi Jinping.And Putin. Two massive countriesand two charismatic leaders. ButChina is the giant in competitionwith America; it is the “revisionistpower” working towards a goal ofovertaking it. This was one of the keytakeaways from the last Congress ofthe Communist Party of China.This issue of World Energy flieslow over this scene, over a laborato-ry country where the largest social ex-periment in the world has been un-derway for decades. It is no coinci-dence that Moscow and Beijing formpart of the same picture. China hasclose ties with Russia, with oil and gasunder its permafrost, and the talentedtactician Vladimir Putin in the Krem-lin. Trump’s America First is Xi’s Chi-na First, in reverse. Washington’sfortress mentality is similar to Bei-jing’s insular movements. In the end,the two highly disparate culturesboth have a centuries-old vocation ofimperialism. Trump’s recent visit toBeijing ended with the signing of avaluable contract for $250 billion forthe Americans, although this is onlya tactic by Xi to buy the time Chinaneeds from the Americans, as we will
see in this issue of WE, time to speedup their transformation. The nation,the empire, the framework. We facea new era of globalization. The pil-lars of the first were the galleons ofthe Spanish Armada, the ships of theRoyal Navy, the Amsterdam of theEast India Company, plotting theroute with compasses and sextants.The energy came from the sailsblown by the trade winds and thethunder of cannon. It was that flat,crowded, warm world where explo-ration and conquests began. This isthe basis for the unrelenting drive ofmodern times, forming the future ev-ery day before our eyes. The “new”is constant making and unmaking.When we see a light on the horizon,that is a change of pace, a doorspeeding up change that, in truth,never stops. This pathway is set outbeautifully in Carl Schmitt’s Landand Sea, where we discover twostrategic dimensions (with a third,space), one arena and one goal:world domination. The search forphysical space, power, energy. Chi-na is like Jupiter in our solar system,immense and mysterious, with itsswirling great red spot, its storms andits huge expanses of solitude and mul-titude. While the European powers
DMARIO SECHI
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were committed to the race for theModern, China had already devel-oped a highly sophisticated eco-nomic, political and cultural sys-tem. In the 9th century, Chinese al-chemists had already discovered gun-powder. The oldest gun and rocketin the world are both Chinese. War.And energy.
Looking to the past to understand the futureThis issue of World Energy offersa view of the present and the future.I like to look forward, keeping inmind a few old books, signs of remotecivilizations, and the blinking lightsof yesteryear that show us the precisedirection of tomorrow. Many are stillamazed by the incredible develop-ment of Chinese capitalism. Justread Adam Smith in Beijing, a bookby Giovanni Arrighi, to understandthe inevitable reversal. Karl Marx inDetroit and Adam Smith in Beijing.The figureheads of ideology are notas reversed as it may seem. They areonly driven by the winds of historytowards the position imposed bythe facts, events and milestones of“civilization.” It is not human whim-sy, but the Zeitgeist, the Sign of theTimes, that fills the album of
Mankind. This flow of capital, the or-ganization of all the inputs (with en-ergy the initial spark) towards theEast is inevitable and inexorable,driven as it is by the forces of de-mographics and technological de-velopments at ever-lower cost. I wasfortunate enough to present at theWorld EnergyOutlook conferencea few weeks ago, alongside ClaudioDescalzi, Fatih Birol, Carlo Calen-da and Gianluca Galletti (see page20). Once again, it was confirmedthat when populations increase, sodoes production and demand forenergy. China and India will producea wave of innovation destined tochange a picture already disrupted bythe United States, now #1 in the Oil& Gas sector. However, it is not yetgame over, nor will American pri-macy go on forever. The story toldin this issue of World Energyconfirms the great dynamism and allthe unknowns that the two “Em-pires”— China and the UnitedStates—must face in the near future.Personality, human choices, aspira-tions, peoples’ wishes and the un-predictable, powerful movements ofthe masses all come into play here. Tounderstand the strengths (and weak-nesses) of China, read the words of
the uninformed yet eager masses inElias Canetti’s Crowds and Power, inits luminous passages on the powerof the silent, the masses, and the dif-ficulty of governing them. While wein the West quote Machiavelli’s ThePrince to evoke dark forces, reasonand the drive for power, in the East,The Book of Lord Shang is evoked toreveal “a political theory of un-scrupulousness, up against whichmodern formulations —Machiavel-li and Hobbes included—seemtimid.” Governing events and peoplein China is smoothed by the inces-sant drip-drop of history and the su-perficially-calm yet ardent flow of therivers at its base.
Energy speaks of a country’s developmentChina’s energy mix, the exponentialgrowth in the use of renewables andthe transition to natural gas, in par-allel with the still-huge demand foroil, provide a far better explanationthan we might think of the history ofChina and its relationship with thegovernment, the exercise of powerand the distant gaze of its leaders ofthe past, present and future. Tradi-tion, change, persistence. The Chi-nese songsheet is made up of ties andchromatic signs that highlight di-versity, yet are also bound to tradi-tion. This transition and picture ofinnovation must still take into ac-count coal and oil. Transformation ofinfrastructure requires time, plan-ning, action, capital, and a vision. Thestatements from the Congress ofthe Communist Party of China plotthe route, but the U.S. cannot beovertaken by just explaining a plan.It has to be implemented. Thechange in the energy landscape is theengine of this project. The Trumpadministration’s National SecurityStrategy mentions China on 16 of its53 pages, and the word “energy” on10 pages. These two words are in-extricably linked to their final out-come, power. In turn, in a passageevoking Nietzsche, power is linked todesire. China’s strength is to comefirst, to overtake, to regain the dom-ination it had many centuries ago.There is nothing unusual in all this—in history’s cycle of eternal recur-rence. It is natural, and only a mat-ter of dates. It is the pendulumswinging between East and West, thedrill of time ultimately finding the de-posit of the present after exploringmemory and excavating the ancientGreat Wall. Energy power is juxtaposed withthat of data, information, and com-puting capacity. Combining these el-ements is essential for an interpre-tation of the contemporary world. Inthe first issue of World Energy, Iwrote that defining energy as a “sec-tor” is an error, a source of ambigu-
ities, understatement, misunder-standings, and deviations in publicdebate. Those who extract the rawmaterials for energy transform them,distribute them, make them availableto those who need them. They arethe blacksmiths beating the iron ofmodernity like no other. Now onlythe architects of the digital worldhave the same ability to shape the fu-ture, although there is a slight dif-ference. If there is no energy, supercomputers and algorithms do notwork. Energy is a crucial factor inchange, and is now closely linked tothe development of pervasive com-puting and big data. China is a hugetechnology laboratory, transform-ing its manufacturing and energy gridto become the #1 world power. In ascenario that recalls the politics of theWestphalian great powers, this playof atoms and molecules, extractionsand refining, liquefaction and com-pression, startups and shutdowns isthe forest drum beating out China’srhythm of growth, contraction andexpansion. Since the days of the an-cient Silk Road, China has beenconnection and disconnection, un-derstanding and misunderstanding,the encounter and the clash be-tween the East and West. Readers ofthe works of René Guenon knowthese refined, incisive insights, theGreat Game admirably recounted byFranco Cardini in this issue ofWorld Energy. This ping-pong—no coincidence in the reference toNixon and Kissinger’s ping-pongdiplomacy—on the table of geopol-itics is played on raw materials andtheir transformation, their distribu-tion and efficiency. The U.S. remainsthe leader in technology research, butit is on thin ice and is no longer onlyrelated to military research devel-opment. Digital development beganat DARPA (the Defense AdvancedResearch Projects Agency, the U.S.government agency responsible forthe development of emerging tech-nologies for use by the military), thenbecame a mass reality in the garagesof Silicon Valley kids. The entrythreshold—even in energy research,still in need of major investment—hasbeen lowered. A dwarf can stand onthe shoulders of giants. It may seemlike Tolkien’s Middle Earth of giantsand dragons, but this is the reality ofharking back to where the story be-gan, in the East, to the world whereEmperor Qianlong replied to KingGeorge III of England: “Our Celes-tial Empire possesses all things inprolific abundance and lacks noproduct within its borders.”
@masechi
THE OVERTAKE
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hina’s phenomenal rise as a globaleconomic power is a source of won-der to the rest of the world and con-tinues to puzzle many political ana-lysts and economists alike.How could an underdeveloped andpoverty-stricken country with over1.3 billion people become the world’slargest manufacturing powerhouse injust three decades the world largestmanufacturing powerhouse? Suchtransformation is almost beyond be-lief, though China is not new to as-tonishing achievements. China was first with many break-throughs and engineering feats ofglobal significance including threegreat inventions that changed theworld, namely papermaking, gun-powder and the compass. Since Marco Polo, seven centuriesago, first disclosed its marvels to theWest, the wealth of China’s majorcities and the level of craftmanshipamazed many first-time Europeantravellers. In 1750, China produced33 percent of the world’s manufac-tured goods, and for more than twothousand years, the so-called silk-roadwas an intercontinental trade route forexport of Chinese silk, textiles andporcelain wares to Europe. In the 19th century came the Britishwarships, the Opium Wars, the col-lapse of China’s imperial system, thedysfunctions of the first republic, theJapanese invasion, the civil war, the
CELENOIRE LAUDIERI DI BIASE
She is a Sinologist at MelbourneUniversity, Australia, and Ca’ FoscariUniversity, Venice. She is a Senior Analyston Asia for the NATO Defense CollegeFoundation and Editor in Chief for Europeof the Australian Segmento magazine.She has authored numerous studies onChina and writes articles on economic,diplomatic and cultural topics for variousChinese government and Italianpublications.
If the 20th century has been theAmerican Century, the 21st isdefinitely shaping up as thecentury of China, whose politicaland economic strategy lookspotentially beneficial for all
China’s Rise as a GlobalEconomicPower
Scenario/The future in light of the past
7
THE OVERTAKE
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If Machiavelli were alive
today, he would probably
consider the current
president of China as the
epitome of the ideal ruler. As a
matter of fact, in the first
speech Xi Jinping pronounced
in 2012 upon becoming
China’s supreme leader, he
used an expression that
seemed suited to
“Machiavelli’s The Prince.”
Referring to the need to
eradicate corruption, he said
that “to forge an iron, you
need a strong hammer.”
Yet it is not because of the
sternness of this statement
that Machiavelli would like Xi
Jinping. Contrary to popular
opinion, the Florentine thinker
did not just expect a leader to
be unscrupulously forceful. His
views of course reflected the
Italian reality of his times but if
we put them in a modern
context, his ideal ruler, besides
being iron-willed, should be a
charismatic and intelligent
figure devoted to the progress
and well-being of his people.
birth of the “People’s Republic of Chi-na” under Mao’s communist regimeand finally the human and economicdevastation brought about by theCultural Revolution. It seemed that what was once one ofthe world’s richest and most ad-vanced country had fallen apart, butit was just a matter of time for it to riseagain, like a phoenix from the ashes.China’s communism changed its skinby opening to a market economy andadopting a dual-track system of gov-ernment and private enterprise. Aplan of reforms was undertaken witha low-key and gradualist agenda thateventually burst into a spectaculareconomic upswing.
The economic boom and the demand for energy resourcesIt was a bottom-up evolution thatstarted from the agricultural industry
Xi Jinping is one of the most prominentleaders in the history of China
A Great Leader
and moved up the industrial ladder,from light to heavy industries, fromlabor to capital-intensive produc-tion, from manufacturing to financialcapitalism, and from a high-savingstate to a consumeristic welfare state.Today China produces nearly 50percent of the world’s major indus-trial goods, including 50 percent ofcrude steel (800 percent of the U.S.level); 60 percent of cement, 50 per-cent of coal; more than 25 percent ofvehicles and industrial patent appli-cations (about 150 percent of the U.S.level). China is also the world’s largest pro-ducer of ships, high-speed trains,robots, tunnels, bridges, highways,chemical fibers, machine tools, com-puters, cell phones and all sorts of oth-er hi-tech products. Its road network comprises 2.6 mil-lion miles of public roads of whichmore than 70,000 miles of express
9
THE OVERTAKE
These are qualities that have
allowed Xi Jinping to become
one of the most consequential
leaders in Chinese history.
Since assuming office, he
wasted no time in getting a
firm hold on power and
outlining his vision. In that
same speech, he laid a new
course for his country aimed
to achieve “the rejuvenation of
the Chinese nation [that] has
been the greatest dream of the
Chinese people since the
advent of modern times.”
In saying so he declared the
end of Deng Xiaoping’s tiptoed
policy of “hiding your strength
and biding your time” which
underlaid China’s historical
shift to a market economy.
During Xi’s first term, China
has consolidated its role as a
global power able to lead the
world on economic, political
and environmental issues.
His anti-graft campaign has
freed China from thousands of
corrupt public servants and
politicians, while raising the
suspicion that he also used it
to purge his rivals and their
allies, even if there was no
evidence of political
antagonists able to challenge
his leadership. Under Xi
Jinping, China has extended
its role in international affairs,
establishing its first foreign
military base in Djibouti and
sponsoring the vast “One Belt
One Road” intercontinental
infrastructure project. The
decline of the American
ascendancy has come as a
bonus.
At the World Economic Forum
in Davos earlier this year, Xi
Jinping positioned himself as
the champion of globalization,
free trade and action on
climate change. He said that
“we should commit ourselves
to growing an open global
economy to share
opportunities and interests
through opening up and
achieve win-win outcomes.”
Ian Bremmer, president of
Eurasia Group—the world’s
largest organization concerned
with political risk and
security—suggested that the
reaction to Xi’s speech by the
Forum attendants was
“success on all counts—miles
away from any official Chinese
speech before.”
The next day Xi spoke in
Geneva and pledged China’s
active participation in global
governance and international
and multinational bodies to
build a “community of shared
future for mankind.” He added
that “we should build a world
of common security for all
through joint efforts” and “stay
committed to building a world
of lasting through dialogue and
consultation.”
At the recent 19th congress of
the Chinese Communist Party
(CCP), as expected, he was
confirmed in his role as party
secretary and president of the
nation. He gave a marathon
speech that laid out a program
so grand that it took over three
and a half hours to delineate.
Xi Jinping’s China is clearly
stepping in to fill the gap left
by the United States which,
under Trump and his policy of
“America first,” appears to
have abdicated its position at
the helm of the global order it
created after the Second
World War and has since
dominated.
As the son of Xi Zhongxun,
one of the Communist party's
first-generation leaders, Xi
Jinping seemed predestined to
a prominent political career,
but his ascent to power was
all but an easy one. When he
was a teenager his father was
persecuted for not complying
with party doctrine and lost
touch with his family.
During the Cultural Revolution
Xi Jinping was sent to a
remote country village where
he worked for six years as a
manual labourer on an
agricultural commune. In that
period, he developed an
especially good relationship
with the local peasantry, which
would sustain Xi’s eventual rise
through the ranks of the CCP.
An anecdote from a book
about the story of his family
recounts that when finally
reuniting with his two sons,
Xi’s father had been tortured
so badly that he could hardly
recognize them. Confused and
disoriented after years of
isolation and interrogation, the
old man wept, and when Xi
offered him a cigarette, he
asked him: “How come you
also smoke?'” Xi answered:
“I’m depressed. We’ve also
made it through tough times
over these years.” The father
went quiet for a moment and
said: “I grant you approval to
smoke.”
An episode like this explains
why being in a position of
enormous power has not
gone to his head.
Interviewed by the Chinese
Times long before becoming
China’s supreme leader, he
thus defined his approach to
politics: “I look past the
superficial things: the power
and the flowers and the glory
and the applause. I see the
detention houses, the
fickleness of human
relationships. I understand
politics on a deeper level.”
E.L.D.B.
highways (46 percent more than inthe U.S.). Twenty-eight provinces(out of 30) have high-speed trains(with total length exceeding 10,000miles, 50 percent more than the to-tal for the rest of the world).As the economy and exports boomed,the demand for energy resourceswent up, making China the world’slargest consumer of coal, and itselectricity sector the largest singlesource of coal consumption.As for oil, last July, demand rose by69,000 BPD over the previous year,reaching an annual total of 11.67 mil-lion BPD. Year-to-date data shows anaverage growth of 550,000 BPD,more than double the 210,000 BPDgrowth recorded during the same pe-riod in 2016. Petrol consumption was higher byaround 0.10 million BPD, driven byrobust sports utility vehicle (SUV)sales, which were around 17 percent
higher than one year ago. China’soverall vehicle sales in July rose by 4percent, with total sales reaching 1.7million units.These statistics seem to contradictChina’s adherence to the Paris Cli-mate Agreement. But while it is a longway from reining in its oil consump-tion growth, China is currently pur-suing a shift to the more environ-mentally friendly natural gas, de-mand for which swelled in the mid-dle of last summer. Imports in July jumped by 55 percentover the previous year and are up byalmost 21 percent for the entire year.That’s on top of a 8.8 percent increasein domestic output during the firstseven months of the year, accordingto the National Bureau of Statistics.A surge in LNG imports and pro-duction boosted global output to arecord high in July. New plants willensure there’s ample supply for Chi-
nese buyers, even as they are expect-ed to increase imports this winter by30 percent from last year.
Rebalancing exports and internal consumptionMeanwhile, private sector wages inChina have gone up almost 15 per-cent annually over the past decade,and, although productivity has im-proved, China’s unit labor costs haveincreased sharply. This factor to-gether with the decline of the work-ing-age population, is today pushingChina away from lower-end, labor-intensive exports to more sophisti-cated, higher-value goods.On the whole, the Chinese economyis also rebalancing exports and in-vestments towards domestic con-sumption and the tertiary industry asnew drivers of growth, a major struc-tural change that will affect what Chi-na imports from other countries.
After decades of large trade sur-pluses and surging foreign directinvestment, Beijing accumulated thelargest foreign exchange reserves inthe world (currently at USD 3.185trillion).If the 20th century was America’s cen-tury, the 21st is definitely shaping upas China’s. As the United States, af-ter World War II, presided over andfostered the rebuilding of the west-ern economy with benefits for all na-tions involved, China is pursuingwin-win development strategies too,through global business engagementand international infrastructure build-up regardless of religion, culture,political system and national bound-ary. How other nations can benefitfrom China’s economic ascendancydepends on their own adaptability, re-solve and foresight.
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Energy/Production, consumption and supply trend
China’s advances have worrisome implications: The use of coal has made it one of the world’s most polluting countries, and the new economy has created massive income disparities. A successful future will require determined approaches to these challenges
The Dark Side of Growth
o country has expanded its energyconsumption as rapidly, and as com-prehensively, as China since 1990. In order to appreciate the speed andthe extent of this progress it is nec-essary to understand some of thecountry’s history. Ancient China pioneered two key en-ergy conversions: it was the firstcountry (during the Han dynastytwo millennia ago) to use metallur-gical coal in producing liquid (cast)iron for plows and cooking pots,and the first to use natural gas (ex-tracted from wells drilled by percus-sion tools and transported in bamboopipes) to evaporate brines and pro-duce salt in land-locked Sichuan. China maintained its technical lead-ership until the 18th century, when itseconomy was still the world’s largest,and when its average per capita in-come and energy use were compara-ble to the richest countries of conti-nental Europe.
When China had a backwardeconomySubsequent economic stagnation andconflicts during the 19th century(wars with Britain and Japan, domesticuprisings), the collapse of the impe-rial power in 1911 and decades of war(civil and against Japan) left the newChina (PRC was established in Oc-tober 1949) a backward economywith very low energy use. In 1950, av-erage per capita availability of mod-ern energy was no more than 2.5 GJ(equivalent to just 100 kg of coal), andall but a small fraction of China’s pop-ulation relied on an inadequate sup-ply of wood and straw. Annual outputof coal was only about 40 million tons(Mt), oil production was just 200,000t and natural gas extraction and hy-droelectricity generation were neg-ligible. Maoist industrialization, basedon the Stalinist model, boosted coalmining and at the end of the first five-year plan in 1957, coal output hadnearly quadrupled. But the followingyears of profound economic mis-management (the famine of the GreatLeap Forward between 1958 and1961 followed by the Cultural Rev-olution of 1966-1976) did little to im-prove personal access to energy or topromote the transition from coal. Mao Zedong died in 1976, Deng Xi-aoping assumed power in December1979, and his bold economic re-forms slowly began in 1980. At thattime China was still an overwhelm-ingly rural economy with major en-ergy shortages. In 1980 wood, char-coal and straw supplied no less than25 percent of the country’s total pri-mary energy and 70 percent of the ru-ral household demand, and 500 mil-lion peasants (63 percent of the totalrural population) suffered from seri-ous, months-long fuel shortages.Coal (1980 output of about 600 Mt)supplied 72 percent of all primary en-ergy, crude oil production had justsurpassed 100 Mt and gas extractionremained negligible.Rural access to energy finally im-proved during the 1980s, when risingoutput from small local coal minesand the return of privately ownedwoodlots raised the supply, whilemass adoption of improved stoves re-duced combustion losses. Biomass usefell to 13 percent of all energy in 2000,but in absolute terms it peaked in2006, when it was equal to nearly 200Mt of oil equivalent. Only the sub-sequent surge in fossil fuel con-sumption cut the contribution oftraditional biofuels to less than 5 per-cent of the total by 2015, a figurecomparable to that of America.
The role of coal in the lastthirty yearsCoal has always dominated China’smodern energy supply, but the post-1990 surge in its extraction has no
precedent in history. During the1990s, output rose by nearly 30 per-cent, but during the first decade of the21st century, China added 2 billiontons (or Gigatons, Gt) to its annualoutput, reaching nearly 3.5 Gt andthen setting a new mining record,close to 4 Gt in 2013, when it ac-counted for 48 percent of the world’scoal output. Not surprisingly, coal-based generation has recently pro-duced nearly 60 percent of electricpower, and a large part of this historiccoal surge was energy embodied inChina’s impressive increased cropharvests and in unprecedented in-frastructure expansion. Coal and hy-drocarbons were used both as fuelsand feedstock to boost ammoniasynthesis. China has been the world’sleading user of nitrogenous fertiliz-ers since 1979, and thanks to inten-sive applications it can now feed its1.38 billion people and provide on av-erage a daily per capita food supplyhigher than that of Japan while beingless dependent on food imports (nowabout 20 percent of all grain, whileJapan imports about 60 percent of itsfood energy). Metallurgical coke hasdriven China’s rise to become by farthe world’s largest producer of steel(half of the world’s output of 1.6Gt/year), and China has also be-come the world’s dominant produc-er of cement (2.4 out of 4.2 Gt in2016). This mass-scale supply ofsteel and cement has made it possi-ble to carry on the largest urbaniza-tion program in history (the share ofurban population rose from 20 per-cent in 1980 to 56 percent in 2015)and to build the world’s most exten-sive multilane highway and high-speed rail systems. The intensity ofthis effort is best conveyed by the factthat recently China has been em-placing more concrete in its infras-tructures every three years than theU.S. did during the entire 20th cen-tury. China’s National Trunk High-way System reached 123,000 km in2015, 60 percent longer than the U.S.interstate network (the two countrieshave nearly identical area) while thehigh-speed rail links now surpass22,000 km.But there has been a price to pay forthese advances: coal resources haveprovided a rapidly rising and reliablesupply of energy, but environmentaland health consequences have beenpredictably negative. The dangers be-gin with mining that is mostly un-derground. During the first decade ofthe 21st century, accidental deaths inChina’s coal mines were nearly 40times the U.S. mean (U.S. coal is ex-tracted mostly in open-cast mines)and even after recent improvements,fatalities per ton of coal are stillmore than ten times the U.S. rate. Airpollution in large northern cities,where emissions from coal combus-
11
THE OVERTAKE
VACLAV SMIL
He is Distinguished Professor Emeritus atthe University of Manitoba in Winnipeg,Canada. He has published 37 books witha main focus on interdisciplinary studiesof energy and technical advances. He is aFellow of the Royal Society of Canada,and a Member of the Order of Canada. In2015, he received the OPEC Award forResearch.
N
tion have been augmented by emis-sions from millions of newly sold cars(record of 28 million in 2016, 10 mil-lion above U.S. sales), reached levelswithout precedent. An air quality index (AQI) of less than50 indicates clean air, and levels be-tween 151 and 200 are generally un-healthy. Since 2010, some Chinesecities have experienced days withAQI surpassing not just 300 buteven 500 and, exceptionally, as highas 700, compared to the mean AQI ofabout 30 for more than 600 moni-tored U.S. sites. And in 2006, muchsooner than expected, China hadalso become the world’s largest emit-ter of CO2 from fossil fuel combus-tion; by 2015, it produced twice asmuch as the second-place U.S., whoseemissions have been declining thanksto a massive shift from coal to natu-ral gas. Reducing China’s depen-dence on coal will take time. In1980, 72 percent of energy supply (ex-cluding biomass fuels) came fromcoal. In 2015, the share was still 64percent and domestic output de-clined a bit after having reached arecord level in 2013. But while theplans are to reduce coal extraction ca-pacity by 800 Mt by 2020 (mostly byclosing outdated mines), coal con-sumption is expected to rise by 2020to 4.1 Gt.
Following the American exampleGiven its minimal demand for refinedfuels (no private cars, chemical in-dustries based largely on coal, grow-ing, but still limited, crude oil ex-traction), demand rose from 106 Mtin 1980 to 162 Mt by the year 2000,making China a small net exporteruntil 1994. Rising demand necessi-tated higher imports; by 2004 theysurpassed 100 Mt, and in 2016 were,at about 380 Mt, just 3 percent low-er than U.S. imports. Higher de-pendence on imports led China to fol-low the U.S. example and set up anew large strategic oil reserve. Buteven the combination of rising pro-duction and higher imports could notprevent a slight decline in crude oil’sshare of primary energy supply, as itfell from a peak of 22 percent at thebeginning of the 21st century toabout 18 percent by 2015. Productionof natural gas had nearly quadrupledduring the 1990s (from a low base)but by 2015, the fuel’s share in pri-mary supply reached only 6 percent,double the 1980 level.Coal’s share in China’s primary energysupply should fall due to rising do-mestic oil output and plans to makenatural gas a major component ofoverall energy supply. A 2016 as-sessment of potential gas resourcesraised the previous total by nearly 160percent, the fuel’s share should reach10 percent of primary supply in
2020, and 2015 extraction shouldtriple by 2030. Starting in 2006,China joined other East Asian coun-tries as a major importer of LNG(from Australia, Indonesia and Qatar);three parallel pipelines already bringnatural gas from Turkmenistan,Uzbekistan, and Kazakhstan to Chi-na’s Xinjiang, and in 2014, a long-term deal was signed with Russia toimport natural gas from EasternSiberia (Chayanda field in Sakha) andKovykta (west of the Lake Baikal)starting in 2018.Besides pushing coal extraction, post-1980 China had also embarked onrecord-breaking development of itswater power (its generating potentialis the world’s largest). Hydrogener-ation had more than tripled between2000 and 2010, the decade that sawthe completion of the world’s largest
hydro project, the Three GorgesDam (22.5 GW) on the Yangzi con-nected to coastal load centers by ex-tra-high-voltage direct current (±500 kV) transmission. Othermegaprojects are underway or inplanning stages, insuring that hy-droelectricity will remain much moreimportant than nuclear generation (37reactors are now in operation, 20 un-der construction). Given its highlevels of air pollution and its positionas the world’s largest emitter ofgreenhouse gases (besides CO2 fromfuel combustion there is also CH4
from rice fields and N2O from ni-trogenous fertilizers) it is not sur-prising that China has promotedboth wind and PV generation, and in2016, their combined contributionsurpassed that of nuclear generationbut equaled only about a quarter of
more predictable hydro generation.Moreover, hasty, subsidized con-struction has resulted in some inferiorload capacity factors. In 2016, Chi-na’s PV generation had an overall loadfactor of just 10 percent.
A relatively rich countryAll of China’s post-1980 economic ag-gregates are stunning: since 2009, thecountry has been the world’s largestenergy consumer. When the com-parison is done in terms of purchas-ing power parity, it is now also theworld’s largest economy (ahead of theE.U. and the U.S.). But in relativeterms the country is still far from rich,clearly being a middle-income econ-omy, In per capita terms Chinaranked only 79th in 2016, just aheadof Brazil and behind Thailand, andItalian per capita GDP is 2.5 times
12
COAL OIL GAS
NUCLEAR RENEWABLES
INDUSTRY
RESIDENTIAL
TRANSPORT
OTHER
PRIMARY DEMAND BY FUEL FINAL CONSUMPTION BY SECTOR
20%
40%
60%
80%
100%
CHINA REST OF THE WORLD
20%
40%
60%
80%
100%
CHINA REST OF THE WORLD
COAL AND ENERGY USE IN INDUSTRY
Source: Eni processing on IEA data, annual variation
Coal now accounts for almost two-thirds of China’s primary energydemand, catering to much of the country’s huge industrial demand forenergy and providing the backbone of China’s immense power system,which has accommodated a quadrupling in electricity demand since 2000.Despite the recent changes in momentum and direction, the starting pointfor our energy outlook is still an energy economy that, compared with theglobal average, has an atypical mix of primary fuels and a structure ofconsumption that is very heavily weighted towards industry.
Energytrends
num
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ven
and Germany’s GDP more thanthree times higher. Increase in annualper capita primary energy use hasbeen impressive, from only about 25GJ in 1980 to almost 40 GJ/capita inthe year 2000 and then to 95 GJ(about 2.25 tons of oil equivalent) in2015, the latter rate comparable to theSpanish mean in 1990 or to theFrench average of the mid-1960s.But the allocation of China’s energyuse is very different from the normsin the E.U. and North America.Chinese energy consumption is high-ly skewed: according to China’s Sta-tistical Bureau in 2015, almost 70 per-cent of the total was claimed by in-dustrial production. This is hardlysurprising given China’s enormousoutput of infrastructural materials (theworld’s larger producer of basic met-als, cement, bricks, glass, synthetics)
and its post-1990 role as the work-shop of the world, exporting indus-trial and transportation machinery(from large ships to bicycles) and ahuge array of consumer products(from apparel and kitchenware to fur-niture and smart phones). In contrast,in 2015, only about 10 percent of allenergy went into transportation and12 percent is claimed by households(annual equivalent of only about 10GJ/capita). These rates should be kept in mindwhen seeing the images of China’smodern downtowns (the countryleads in the total number of skyscrap-ers) and when noting the ostentatiousconsumption of China’s newly rich,at home and abroad. Post-1980 de-velopments did lift about 500 millionpeople from poverty (as defined bythe World Bank), another unprece-
dented achievement. But a notable ru-ral-urban divide still persists (in 201544 percent of the population was stillrural), new economic opportunitieshave also brought very high levels ofcorruption, now a major concernfor the government. Transparency In-ternational puts China on par with In-dia at 79th place in the worldwide cor-ruption rankings, and the country hasexperienced increasing income in-equality. China’s rise could not havetaken place without the hundreds ofmillions of migrants who left theirfamilies in villages and now live in of-ten dismal conditions while buildingnew cities. By 2015, this floatingpopulation (this is an official Chineseterm) reached 250 million people, andnone of them is buying coastal prop-erties abroad and paying excessiveprices for cars or paintings.
As with any historical appraisal, a clos-er look reveals a mixture of com-mendable advances and worrisomedevelopments. Coal has energizedChina’s economic rise, but its use hasexacted a high environmental priceand made the country the world’slargest emitter of greenhouse gases.Surging energy use has created a neweconomy that has lifted hundreds ofmillions from the decades of Maoistmisery, but previously unthinkable in-come disparities and ubiquitous cor-ruption are affecting China’s socialfoundations. Given the country’s im-portance in the global economy, andnow also in geopolitics, the world’s fu-ture will be determined to no smalldegree by how successfully China willtackle these enormous challenges.
13
OTHER RENEWABLES
OIL GAS COAL
WIND SOLAR PV HYDRO NUCLEAR
2000 2005 2010 2016
20%
40%
60%
80%
100%
POWER GENERATION MIX
Source: Eni processing on IEA data, annual variation
OTHER RENEWABLES BIOMASS HYDRO NUCLEAR GAS OIL COAL
ANNUAL GROWTH (RIGHT AXIS)
3%
6%
9%
12%
15%
18%
500
1,000
1,500
2,000
2,500
3,000
2000 2005 2010 2016
Mto
e
PRIMARY ENERGY DEMAND BY FUEL
Source: Eni processing on IEA data, annual variation
In terms of renewables, China ranks first in the world in installedcapacity of hydropower, wind and solar photovoltaic (PV) power. Theswitch towards renewables in new power investment decisions hasboosted their share in China’s capacity to more than one-third from lessthan a quarter ten years ago. Wind power, which now accounts foralmost 10% of China’s total capacity, has edged past nuclear and naturalgas to become China’s third largest source of power supply (after coaland hydropower).
Over the last decade, some new features have emerged moreprominently in the primary energy mix, as China’s policies havesought to move away from the strong reliance on coal, bring morediversity to its energy mix and tackle some burgeoning environmental issues, notably the deterioration in air quality. Growth in energy demand has slowed, coal has peaked, developments suggest that China’s energy future may look quitedifferent from its past.
THE OVERTAKE
14numbe
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Analysis/China’s timetable for becoming more ecologically friendly
The plan to upgrade China’s energy mix announced by President Xi Jinping during the 19th National Congress of the CCP, which isexpected to contribute to reducing CO2 emissions, faces five politicaland economic challenges that could hinder its implementation
A New Energy Model
he year 2049 marks the 100th an-niversary of the founding of the Peo-ple’s Republic of China. It is also theyear when, according to President XiJinping, China would have become a“fully developed nation.” At leastthat is his goal. This enormously am-bitious goal has myriad implicationsand even more unknowns and unin-tended consequences. There is, how-ever, one clear implication for whichthere are no uncertainties: to attainsuch a lofty goal China needs bothmore energy and new ways of procur-ing, distributing and using it. President Xi obviously understandsthis. He has repeatedly stressed theimperative of becoming a more eco-logically-friendly nation, a purposethat requires drastic changes in thekinds of energy the nation uses to fuelits development.In October 2017, Xi gave an impor-
tant speech to the 19th NationalCongress of the Chinese CommunistParty. He said “The entire Partyand the whole country have becomemore purposeful and active in pur-suing green development… in takinga driving seat in international coop-eration to respond to climate change,China has become an important par-ticipant, contributor and torchbear-er in the global endeavor for ecolog-ical civilization.” Xi went on to outline a specifictimetable for reaching this goal. By2035, he said, the environment will besignificantly improved and by the midof the century “new heights [will be]reached in every dimension of…ecological advancement.” He alsopromised to “step up efforts to es-tablish a legal and policy frameworkthat promotes green production andconsumption, and promote a soundeconomic structure that facilitatesgreen, low-carbon development.. Fulfilling Xi’s energy and ecologicalpromises will not be easy given thecurrent situation of China’s energysector. Although the country hasbeen aggressively trying to upgradethe quality of its energy mix andchange its consumption patterns,significant obstacles remain in thepath of China’s desire to combine en-ergy self-sufficiency with a high qual-ity, less polluted, environment.There are at least five aspects ofChina’s current energy situation thatwill greatly influence the outcomes ofXi’s efforts in this area.
Adverse initialconditions Although China has madeimpressive strides on its roadto a lower carbon environ-ment, it still generates about29 percent of total global
warming emissions, twice as much asthe U.S. (14 percent) and almostthree times as much as the EuropeanUnion (10 percent). Projections bythe International Energy Agency,IEA, indicate that by 2035, Xi’s im-portant milestone, the country wouldstill be the world’s largest emitter ofgreenhouse gases. This frustratingoutcome will obtain despite a dra-matic increase in the utilization ofcleaner, renewable sources of energy,which, in 2035, are expected to pro-vide up to one quarter of Chinese en-ergy needs.
A wasteful energy situation Currently, China not onlyuses energy from the mostpolluting sources, but it isalso very inefficient andwasteful in its energy usage.
Each one percent of economic growthin China requires four times more en-ergy than the average of OECDcountries and three times as much asthe Latin American average. The reasons for this extreme energyinefficiency are varied, complex andnot easy to overcome. Perhaps themost important factor is that China’sindustrial plant and equipment still inuse are obsolete and extremely pol-luting. This is especially true in the case ofelectric power plants. Large scale in-dustries such as steel, aluminum, ce-ment, glass and chemicals are also ex-tremely inefficient in their energy use.Chinese buildings, both commer-cial and residential, are well known forhaving above average energy re-quirements for heating and air con-ditioning.
A lingering coal addictionA third factor is related toChina’s overdependenceon coal, the most pollutingof all fossil fuels. Not onlyis China the largest coal
consumer in the world, with almosthalf of global consumption, but alsothe largest coal importer. Low pricesfor coal stimulate its large scale use.Changing this is a politically explo-sive task everywhere and China is notan exception. Attempts by the gov-ernment to minimize this depen-dence by closing down coal mineshave met with fierce resistance fromcoal miners, who have taken to thestreets in protest against a govern-ment’s proposed cut of over one mil-lion jobs. Moreover, complex policy
15
MOISÉS NAÍM
He is a Distinguished Fellow at theCarnegie Endowment in Washington,D.C. and the author most recently ofThe End of Power. He is a foundingmember of WE editorial board.
T
POLITICS REVOLVES AROUNDTHE NATIONAL CONGRESSNurses in Huaibei, in the Anhuiprovince, wave the national flagto celebrate the latest ChineseCommunist Party congress, held on October 19, 2017. The National Congress is the meeting of all the country’s CCP delegates and is officially the party’shighest organ of power. It normally lasts for a week and is held at the Great Hall of the People in Beijing.
THE OVERTAKE
1
2
3
16numbe
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A LOT OF SHALE, BUT NO WATER Over 60 percent of China’s shale gas reserves, estimated at 1,200 trillioncubic feet (World Resources Institute), are located in regions affected bywater scarcity, and water is essential for developing these resources.
UNFAVORABLE INITIALCONDITIONS
Although renewables will cover aquarter of China’s energy
requirement by 2035, the countrywill remain the world’s largestcontributor to greenhouse gas
emissions.
DEPENDENCE ON COAL China accounts for almost half
of the world’s coal consumption.Despite the pollution and risks to human health, the country
is struggling to take tough politicaldecisions to drastically limit the
use of this energy source.
BOOMING POLLUTING ENERGY Beijing imports some 7.6 millionbarrels of oil per day, including Ural blend from Russia and heavy oil from Venezuela, both of which are highly polluting. Using thisenergy source could have a negative impact on China’s 2035environmental goals.
A Challenging Transition INEFFICIENT ENERGY USE
China’s obsolete industrial plant andequipment and the high energyrequirement for heating its buildingsgenerate inefficiencies that thecountry pays for by “devouring” fourtimes as much energy as theaverage in OECD countries.
FIVE FACTORS could work against
China’s plan for converting to “clean” energy
production by the second half of this century.
contradictions now bedevil the gov-ernment’s efforts. Perhaps the mostrevealing one is that at the same timethat Beijing is trying to close downcoal mines, it is also planning tobuild some 700 new coal-fueled pow-er plants. The current overdepen-dence on coal is exacting a highprice in human lives and overallquality of life. A 2016 World HealthOrganization report reveals that upto 1.3 million people will die prema-turely in China as a result of air pol-lution, as compared to second placeIndia, where 645,000 prematuredeaths are forecasted. A study by Ts-inghua University professor TengFei shows that over 70 percent of Chi-na’s population is exposed to levels ofpollution that are ten times higherthan those considered safe. Whilesuch a critical situation should ac-celerate China’s efforts to minimize
its dependence on coal it also posesthorny political decisions.
Booming imports of polluting energyA fourth factor is thatChina energy imports,mostly heavy oil and coal,are on the rise and pro-jected to increase from 16
percent of total consumption in 2015to 21 percent in 2020. The countryis now importing about 7.6 millionbarrels of oil per day, including overone million barrels per day of alargely heavy Ural blend from Rus-sia and some 300,000 barrels per dayof heavy Venezuelan oil, both ofwhich are highly contaminating. Un-less replaced by cleaner sources of en-ergy, these imports of contaminatingoil will impact negatively Xi’s 2035 en-vironmental goals.
It’s not shale, it’s waterAccording to the WorldResources Institute (WRI)China has about 1200 tril-lion cubic feet of shale gas,the world’s largest reserves.
The problem is that a large-scale de-velopment of these resources needsmassive volumes of water that Chinamay not have. Water is essential for hydrofracking,the technology used to extract hy-drocarbons from shale formations.The WRI report stresses that over 60percent of these shale gas resourcesare located in arid regions of Chinawhere water is critically scarce. The water used for hydrofracking isless available for agriculture or oth-er competing uses. This poses a dif-ficult tradeoff for any country. In fact,large scale hydrofracking in China
could conflict with another of Xi’s ob-jectives, which is to “ensure China’sfood security” by mid-century. Al-though data on water availability isstill inadequate, there is no doubt thatthe full exploitation of China’s giantshale oil and gas reserves could beconstrained by insufficient wateravailability. For the past several decades, Chinahas surprised the world with its con-tinued economic growth and its abil-ity to translate this growth into mas-sive poverty alleviation. Perhaps Chi-na will also surprise us by rapidlymoving from a polluting and ineffi-cient high carbon energy model intoa low carbon, ecologically friendlyone. Making this shift will be aschallenging as it is indispensable,for China and for the entire planet.
4 5
Any consideration of the international energy
markets, their dynamics and future prospects must include China. This was
emphasized by Fatih Birol, Executive Director of the International Energy Agency
during his presentation at the World Energy Outlook 2017 in Italy, hosted by Eni in Rome on December 1, 2017. Birol’s speech included
demand, energy mix, renewables, electricity, gas and LNG, and constantly cited China as the
linchpin of the global energy markets. There follows an account of the most important
aspects of Chinese energy policy to 2040, when China will change.
And so will everything else.
Sources: OECD/IEA 2017 data, texts and forecasts
IEA-New Policies Scenario *
WhenChina
changes
so does everything else
TOWARDS
17
BY EDITORIAL STAFF
*The New Policies Scenario is the centralscenario of the IEA’s World EnergyOutlook. It incorporates not just thepolicies and measures that governmentsaround the world have already put inplace, but also the likely effects ofannounced policies, as expressed inofficial targets or plans.
CENTRAL ANDSOUTH AMERICA
MIDDLEEAST480
UNITED STATES-30
EUROPE-200
AFRICA485
4
270
18num
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China is entering a new phase in itsdevelopment, with the emphasis in energy policy now firmly
on electricity, natural gas and cleaner,high-efficiency and digital technologies.The previous orientation towards heavyindustry, infrastructure development andthe export of manufactured goods liftedhundreds of millions out of poverty –including energy poverty – but left thecountry with an energy systemdominated by coal and a legacy ofserious environmental problems, givingrise to almost 2 million premature deathseach year from poor air quality. The president’s call for an “energyrevolution,” the “fight against pollution”and the transition towards a moreservices-based economic model is movingthe energy sector in a new direction.Demand growth slowed markedly froman average of 8 percent per year from2000 to 2012 to less than 2 percent peryear since 2012, and in the New PoliciesScenario it slows further to an average of 1 percent per year to 2040. Energyefficiency regulation explains a largepart of this slowdown, without newefficiency measures, end-useconsumption in 2040 would be 40percent higher. Nonetheless, by 2040, per-capita energy consumption in Chinaexceeds that of the European Union.
China’s choices will play a huge role in determining global trends, and couldspark a faster clean energy transition.The scale of China’s clean energydeployment, technology exports andoutward investment makes it a keydeterminant of momentum behind the low-carbon transition: one-third of the world’s new wind power and solarPV is installed in China in the NewPolicies Scenario, and China alsoaccounts for more than 40 percent of global investment in electric vehicles(EVs). China provides a quarter of theprojected rise in global gas demand, andits projected imports of 280 billion cubicmetres (bcm) in 2040 are second only to those of the European Union, makingChina a lynchpin of the global gas trade.China overtakes the United States as thelargest oil consumer around 2030, andits net imports reach 13 million barrelsper day (mb/d) in 2040. But stringentfuel-efficiency measures for cars andtrucks, and a shift which sees one-in-fourcars being electric by 2040, mean thatChina is no longer the main driving forcebehind global oil use – demand growth islarger in India post-2025. China remainsa towering presence in coal markets, but our projections suggest that coal usepeaked in 2013 and is set to decline byalmost 15 percent over the period to 2040.
EURASIA
JAPAN-50
SOUTHEASTASIA
CHINA790
INDIA1,005
420
135
2
19
THE OVERTAKE
INDIA TAKES THE LEAD, AS CHINA ENERGY GROWTH SLOWS
In the New Policies Scenario, global
energy needs rise more slowly than
in the past but still expand by 30%
between today and 2040. This is the
equivalent of adding another China and
India to today’s global demand. A global
economy growing at an average rate of
3.4% per year, a population that expands
from 7.4 billion today to more than
9 billion in 2040, and a process
of urbanization that adds a city the size
of Shanghai to the world’s urban
population every four months are key
forces that underpin our projections. The
largest contribution to demand growth –
almost 30% – comes from India, whose
share of global energy use rises to 11%
by 2040 (still well below its 18% share
in the anticipated global population).
Southeast Asia is another rising
heavyweight in global energy, with
demand growing at twice the pace
of China. Overall, developing countries
in Asia account for two-thirds of global
energy growth, with the rest coming
mainly from the Middle East, Africa
and Latin America.
[ ENERGY ]
[ OIL ]
OTHER
ELECTRICITY
GAS
OIL
COAL
PRODUCTION INDEX (RIGHT AXIS)
| | | | | | | | | | | |
Coal (Mtce)
Oil (Mb/d)
Gas (Bcm)
Low-carbon (Mtoe)
1990-2016 2016-2040
1990-2016 2016-2040
1990-2016 2016-2040
1990-2016 2016-2040
0
500
1,000
1,500
2,000
2,500
-500
6
0
0
0
12
18
24
30
400
800
1,200
1,600
2,000
400
800
1,200
1,600
2,000
A DIMINISHINGAPPETITEFOR COALAND OIL,
AND A GROWINGAPPETITE
FOR LOW-CARBONAND NATURAL GAS
20
num
ber
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ven
China has accounted for
more than 40% of growth
in global primary energy
demand since 1990, giving
it a defining role in global
energy markets. In the
New Policies Scenario,
China remains an
important driver of global
energy demand growth to
2040. But China’s policy
focus is now increasingly
on energy efficiency and
restructuring its economy,
and its share of energy
demand growth through
to 2040 is reduced to one-
fifth of the global total,
falling behind that of India.
Across fuels, the most
significant change in
the New Policies Scenario
is China’s contribution
to global coal demand
growth. Since 1990,
China’s coal demand has
risen by 2 000 million
tonnes of coal equivalent
(Mtce), accounting for
more than 90% of global
growth. With the projected
decline in industrial coal
use and the plateau in coal
consumption in the power
sector, China’s coal
demand is projected to fall
to 2040. Nonetheless,
by some distance, China
remains the largest coal
consumer in the world.
At more than 2,400 Mtce,
China accounts for nearly
45% of global coal
demand in 2040,
50% more than India,
the world’s second-largest
coal consumer by that time.
CHANGE IN WORLD PRIMARY ENERGY DEMAND BY FUEL IN THE NEW POLICIES SCENARIO
COMPARISON SCENARIOSEni hosted the World Energy Outlook2017, the main report of theInternational Energy Agency (IEA), apoint of reference for the development of governmental energy policies and business strategies of the sector. The event was attended by: Fatih Birol,Executive Director of the InternationalEnergy Agency, Carlo Calenda, ItalianMinister of Economic Development,Gian Luca Galletti, Italian Minister for the Environment, Claudio Descalzi,CEO of Eni and Mario Sechi, Director of WE World Energy.
Fatih Birol is Executive Director of the IEAand, according to the Financial Times,Energy Personality of the Year. Some of his key statements are offered here.
[ OIL ]
10
20
30
40
200
400
600
800
1990 2016 2040 1990 2016 2040 1990 2016 2040
Inde
x (1
990=
1)
Mto
e
CEMENT, IRON AND STEEL
CHEMICALS AND PETROCHEMICALS
OTHER INDUSTRIES
|
21
THE OVERTAKE
CHINA INDUSTRY ENERGY MIX AND RELATED OUTPUT BY SECTOR
In the New Policies Scenario, industrial
restructuring makes a big difference to
future energy demand. Today, four heavy
industry sectors (iron and steel,
chemicals and petrochemicals, cement
and aluminium) represent almost three-
quarters of industrial energy use, 80% of
industrial coal consumption, 70% of
industrial oil demand, and 55% of each
industrial gas demand and industrial
electricity demand. Over the Outlook
period, the weight of these sectors in
industrial energy use decreases to
around two-thirds by 2040, around ten
percentage points below its current level.
Energy demand from the steel and
cement industries decreases greatly, by a
combined 250 Mtoe, driven both by
efficiency improvements and by declining
production. Despite the importance of
chemicals and petrochemicals for energy
demand growth, the bulk of the growth
in gas and electricity demand comes
from less energy-intensive industries like
electronic equipment or machinery
manufacturing: these sectors tend to be
more reliant on natural gas and electricity
than traditional energy-intensive sectors,
and to have less need for high-
temperature heat or fossil fuels as
feedstocks or reducing agents.
Rebalancing industrial activity increases
energy efficiency and changes the fuel
mix. The chemical subsector becomes
the main industry source of energy
demand growth.
“No country is an energy island on its own. Many countries will be affected by what's happening in Africa, the United States, China and India.We are all affected by the energy decisions taken by other countries.”
“There are four main disruptions in the energy market. One of these is China, which is changing, so the energy markets are changing, too. In the last ten years, the development of the Chinese oil and coal energy markets has of course affected prices. China has now changed its economic policy, moving from amanufacturing-based industrial economy to other sectors. This will change andrebalance the economy.”
“Three weeks ago, at the Congress of the Communist Party of China, there was a historical speech by the Communist Party leader, inviting the government and its officials to make the skies of China blue again. China is now number one in terms of solar, wind, hydro and energy efficiency, as well as in electric cars. Given the importance of China in the energy market, it will definitely have a big impact.”
LNG IMPORTS AND CONTRACTED VOLUME BY SUPPLIER IN CHINA IN THE NEW POLICIES SCENARIO
ELECTRICITY GENERATION BY SELECTED REGION
2015 2025 2030 2035 2040
Bcm
20
40
60
80
100
120
140
ELECTRICITY GENERATION BY FUEL IN CHINA IN THE NEW POLICIES SCENARIO
2,000
4,000
6,000
8,000
10,000
12,000
TWh
Mill
ion
cars
WIND AND SOLAR PV
RENEWABLES
LOW CARBON
SHARE (RIGHT AXIS)
GENERAZIONE
HISTORICAL PROJECTIONS
ELECTRIC CAR FLEET
100
200
300
GAS
OIL
COAL
NUCLEAR
HYDRO
WIND
SOLAR PV
BIOENERGY
OTHER RENEWABLES
CHINA EUROPEAN UNION
2016
GROWTH TO 2040
INDIA
UNITED STATES OTHER COUNTRIES
2000 2010 2020 2030 2040
10%
20%
30%
40%
50%
60%
2016 2025 2040
MIDDLE EAST
2,000 4,000 6,000 8,000 10,000
AFRICA
SOUTHEAST ASIA
EUROPEAN UNION
INDIA
UNITED STATES
CHINA
TWh
[ LNG ]
[ RENEWABLES ]
[ SOLAR PV ]
22
num
ero
tr
enta
sett
e
THE FUTURE IS ELECTRIFYING
A KEY ROLE IN LNG
Electricity is the rising force among
worldwide end-uses of energy, making
up 40% of the rise in final consumption
to 2040 – the same share of growth that
oil took for the last twenty-five years.
India adds the equivalent of today’s
European Union to its electricity
generation by 2040, while China adds
the equivalent of today’s United States.
China accounts for more than 40%
of global investment in electric vehicles
(EVs).
China overtakes the United States as the largest
oil consumer around 2030, and its net imports
reach 13 million barrels per day (mb/d) in 2040.
But stringent fuel-efficiency measures for cars
and trucks, and a shift which sees one-in-four cars
being electric by 2040, means that China is no
longer the main driving force behind global oil use
– demand growth is larger in India post-2025.
Total electricity generation increases by
70% to 2040, an absolute increase that is
nearly equivalent to the current electricity
demand in the United States. Renewables
grow to about two-fifths of total generation,
of which slightly over half comes from wind
and solar PV. Wind generation in 2040
reaches about 1 350 TWh, more than a
five-fold increase from 2016, and almost
equivalent to today’s total annual electricity
generation in India. Solar PV generation
surpasses 1 000 TWh by 2040, a fifteen-
fold increase from today. Together, the
share of wind and solar PV in total
generation steadily climbs from 5% in 2016
to 23% in 2040. Nuclear electricity
generation increases five-fold to 11% of
total generation in 2040. Collectively, the
share of fossil fuels declines, falling below
half of electricity supply by 2040.
China plays a pivotal role in the
global LNG balance in the New
Policies Scenario. Based on a
detailed analysis of supply
contracts (concluded primarily by
China’s three large national oil and
gas companies), our projections
indicate that China is set to remain
over-contracted through the early
2020s. Chinese importers have
agreed to take more LNG than
they currently need, but by the
early 2020s, projected imports
of the New Policies Scenario are
exceeding contracted volumes.
This implies that Chinese importers
will play an important role in the
QATAR
RUSSIA
PORTFOLIO
PAPUA NEW GUINEA
MALAYSIA
INDONESIA
CANADA
AUSTRALIA
LNG IMPORTS
2030 2035 2040
B
[ WIND ]
INSTALLED POWERGENERATION CAPACITY
IN CHINA IN THE NEWPOLICIES SCENARIO
2016
2040
GAS
OIL
COAL
NUCLEAR
HYDRO
WIND
SOLAR PV
BIOENERGY
OTHER RENEWABLES
1,625 GW
3,188 GW
58%
1%
5%
9%
20%
2%
4%
1%
32%
1%1%
0,1%
7%
22%
18%
15%
4%
23
global LNG trade as they resell
their over-contracted volumes.
However, from the mid-2020s
onwards, our projections also
indicate that Chinese importers
are short of contracted gas,
which implies that they will need
to enter the market to buy more.
Higher than expected Chinese
shale output in the 2020s would
push back the point at which
they need substantial additional
volumes, potentially prolonging
today’s period of oversupply and
sparking another round of fierce
competition among exporters for
market opportunities.
THE LEADER IN SOLARAND RENEWABLES
China is the world’s largest
renewables market. It added net
electricity capacity of 68 GW in
2016 (more than 40% of global
renewable capacity additions)
and continued strong growth in
2017. Technology-specific feed-
in tariffs and national targets
drove the majority of this
increase. China saw higher levels
of growth than any other country
in all three major renewable
technologies – solar PV, onshore
wind and hydropower – and its
renewable electricity generation
output grew by an estimated
12% to reach 1,577 TWh in
2016, accounting for more than
a quarter of total generation.
Hydropower contributed most
to China’s overall renewable
generation output, but wind
and solar generation are growing
rapidly (by 30% and 45% year-
on-year in 2016, respectively).
In the New Policies Scenario,
the expansion of renewables is
largely concentrated in the power
sector, with their share of
capacity rising to almost 60%
of the total by 2040. While
the use of hydropower and
bioenergy increases over the
Outlook period, the growth of
wind and solar PV account for
the majority of this increase.
he One Belt One Road (OBOR) pro-ject is a massive undertaking drivenmostly by China. It involves gigan-tic investments in energy, transport,communications, water, and manyother infrastructural, industrial andother projects. OBOR is changingthe faces, economies and even poli-tics of many countries, and not justthroughout Asia (but especially SouthAsia, Southeast Asia and CentralAsia), but also in Latin America,Africa and Europe. It will also havesignificant effects in North America,Australia and in the Pacific Basin. In-deed, there could be very few areasof the world not affected by it if itgoes as planned, and the money is stillavailable to complete, maintain andbuild upon OBOR projects. That is,its influence will continue if the in-ternal politics of China and thecountries it is investing in, and, ac-cording to some, imposing itself on,do not go sour.OBOR can also be a flexible concept,and deciding whether a project is partof it or not can sometimes be an artform. There are already indications
that some projects have been sloweddown or even just plain stopped dueto anti-China sentiments in somecountries, or because the Chinesehave not been hiring enough localworkers. There have also been com-plaints in some countries of shoddywork on sometimes major infras-tructure and energy projects. Theseshoddy results have not helped rela-tions between the local governments,the local people and the Chinese gov-ernment and the companies the Chi-nese government contracts to executethe projects. Not all is happy inOBOR land, but there are massivechanges happening, and some arepositive, across the globe.
Turning the tables after the “Century of Humiliation”Why is China doing this? There arenumerous reasons, some of which arepublic and many, my guess, which re-main in the shadows – and may re-main there for some time. A psy-chological one is that China wants torecover from what they call the“century of humiliation,”when Chi-
24number
thirty-seven
PAUL SULLIVAN
He is professor of economics and onthe energy industry study team at theNational Defense University. He is alsoan adjunct professor of security studiesat Georgetown University. He has aPh.D. (with highest honors) from Yale aBA Summa Cum Laude from BrandeisUniversity and a certificate from theMIT Seminar XXI Program. He is GlobalExpert at the UN Alliance of Civilizationsand he is a contributor to manyprestigious international newspapers.
China’s aim in constructing a modern Silk Road stretching fromSoutheast Asia to Europe, as part of its One Belt One Road project, is to consolidate its global geopolitical and economic influence
A Globalized Version of Marco Polo
T
Over the borders/Energy as a means to gain international influence
na was controlled and exploited bythe western powers and Japan. Chi-na was at times in the deep past oneof the largest and richest economieson the planet, along with the area thatis now known as India. For many inChina, its recent return to the top ofmany world measures of economics,technology, energy and other realmsseems right, given their position inthe past. The Chinese name forChina is not China, but Zhoughgou,which means “Middle Kingdom.” Inthe past, the Chinese often sawthemselves as the center of the plan-et, surrounded by barbarian states.They ruled the center, and the restfollowed. History, of course, hasshown things to be a bit more com-plex; consider the Mongol conquestsof China, and the century of humil-iation, as well as in-fighting andother sources of weakness, includingthe civil war that lead to the creationof the People’s Republic of China.Nonetheless, the Chinese are look-ing to regain what they see as theirrightful place in the world. Othersmay see a difficult path. China’s
economy has been slowing down inthe last few years. Its trade balancehas not been as good as it has beensince the heady years after theyjoined the WTO in 2001. There isconsiderable overcapacity in theChinese trucking, steel wire andconstruction industries, as well as inother industries intended as a big partof OBOR, such as energy. Chineseconsulting and engineering compa-nies that built up during the eco-nomic race of the early 2000s nowneed to branch out even more so in-ternationally. Each year there areabout 13 million new Chinese born,so the Chinese need to create mil-lions of jobs each year. With a slow-ing economy that has become moredifficult than in the recent past.China has some restive regions, suchas the Xianjiang region to the north-west, where the Uyghurs can befound, and Yunnan Province in thesouth, one of the country’s poorest re-gions. China is hoping to developthese two areas and others they seeas vital for their economic and na-tional security by tying them to the
regions near them economically andthrough infrastructure. For Xianjiangit is through Central Asia, with itsvast mineral and energy reservesand wind and solar energy capacity,as well as its countries in need of eco-nomic development and wealth. ForInner Mongolia, Gansu, and Hei-longjiang, China wants to connectthem with the countries to the northand west in a cross-China, inter-re-gional economic plan to improve lifein these regions. For Yunnan it is afocus towards Southeast Asia, andmost particularly Myanmar and Laos.Vietnam is a tougher business to de-velop given the difficult history be-tween China and Vietnam, includingsome disputes about the South Chi-na Sea. One could even link devel-opments in the South China Sea andEast China Sea with OBOR, giventhat most of Chinese trade goesacross these seas.
An unprecedented plan inthe history of modern tradePart of the OBOR is by land. Part isby sea. Both parts expand well be-
yond the borders and lands and seasnear to China, but they also begin atthe edges of China, are developingfor China, and will change the geo-politics and geo-economics of theglobe for a long time to come. Asnoted above, few countries will beunaffected by this project that somedescribe, with some accuracy, as thebiggest infrastructure-trade-publicdiplomacy project ever conceived.The U.S. response to OBOR hasbeen tepid at best, and counter pro-ductive at worst. Tossing out theTrans-Pacific Partnership (TPP) wasa huge win for China, and a big lossof increased prestige and strategicleverage for the U.S. The TPPwould not have improved the U.S.trade balance or employment much,but the TPP was mainly a strategicdocument that would have allowedthe U.S. to have more say on manyaspects of trade across the PacificBasin. This would also have meantgreater leverage on other issues inthat vital region that holds over 40percent of global GDP, and includessome of the fastest growing regions
25
SAUDIARABIA
EGYPT
MAURITANIA
SENEGAL
IVORYCOAST
GHANA
TOGO
NIGERIA
GABON
ANGOLA
CAMEROON
M
KAZAKHSTAN
M
IRAN
TURKEYGREECE
ITALY
FRANCE
SPAIN
P
Gwadar
Anaklia
Suez
Pireas
Ambarli
D
Dire Dawa
Djibouti
Usan
Angren
Gorgan
Istanbul
Budapest
BelgradeVenice
Prague
Hamburg
Rotterdam
Madrid Ankara
OgadenJuba
Lobito
Kasese
Luau
Mombasa
Dar es Salaam
Mtwara
Njombe
SILK ROAD ECONOMIC BELT
NEW MARITIME SILK ROAD
AIIB FOUNDING STATES
GAS PIPELINES
OIL PIPELINES
( PLANNED OR UNDER CONTRUCTION)
( PLANNED OR UNDER CONTRUCTION)
RAILROAD
PROPOSED ECONOMIC CORRIDORS
PORT WITH CHINESE ENGAGEMENT EXISTING
PLANNED OR UNDER CONSTRUCTION
PROJECT SUBSUMED UNDER CHINA’S BELTAND ROAD INITIATIVE
( PLANNED OR UNDER CONTRUCTION)
Nouakchott
Dakar
Luanda
Lomé
São Toméand Príncipe
AbidjanKribi
Libreville
Tema
Bagamoyo
Lamu
Mogadishu
Aktau
Atyrau
Beyneu
26number
thirty-seven
in the world. The Chinese recentlydeveloped the Asian InfrastructureInvestment Bank (AIIB), which nowhas 80 countries signed up for it – andmany are not in Asia. The Chinesedeveloped the Silk Road Fund, theirmassive EXIM Bank, the China De-velopment Bank, and other truly gi-gantic banks that have helped themexpand internationally in the past, butnow are likely to be some of thebiggest enablers for OBOR. TheWorld Bank and IMF may be insti-tutions of the past as China emerges,and the world realizes that these twoorganizations are not keeping upwith the changes. The Chinese aredeveloping new international orga-nizations directed at trade, invest-ment, and even new security infras-tructures and agreements, such as theShanghai Cooperation Organiza-
tion, which grew out of the Shang-hai Five. Like the OBOR from pasttrade and investment ideas this groupgrew from a close regional organi-zation to one that cuts across manyareas, including into the MiddleEast, South Asia, West Asia, CentralAsia, and Russia. Combining China’squickly increasing defense and se-curity budgets, its expanding into,and development of, new interna-tional strategic and economic orga-nizations, and the OBOR and relat-ed projects, it is easy to conclude thatthe China juggernaut of power andinfluence building is far from ending.But it is changing directions and fo-cus and will be an even greater chal-lenge to the U.S., Japan, South Ko-rea, and Europe in the future, morethan ever before. China’s geo-strate-gic and geo-economic influence is
heading in many powerful direc-tions, whereas the U.S. is becomingmore insular. This should be a con-cern for all of us. It is time for theU.S., Japan, and many others towake up to what is happening andwhat the OBOR and other activitiescan bring their way. Japan is in com-petition with China in funding en-ergy and other infrastructure projectsin many parts of the world, but it isoften in a weaker position giventhat China has the massive advantageof its growing economy and devel-oping diplomatic and military influ-ence in many parts of the world,which Japan cannot match. This ishappening even in countries nearbyto Japan, such as Vietnam. The U.S.State Department is in some turmoilthese days, and staff is being cut, notincreased, as China builds global
power. U.S.A.I.D. is being cut back.Other U.S. development institu-tions seem in a state of depression,and not just in funding. As the U.S.weakens its diplomacy and aid insti-tutions, China powers forward withtheirs. China is developing resourceinfluence by tying itself, its economy,and its people to resource sourcesglobally. It is also developing ener-gy influence by connecting with en-ergy resources in many parts of theworld, and selling, constructing, andmanaging energy facilities, infras-tructure, and technologies globally.
A project with vast implicationsIn a short article it is not possible toeven list all the OBOR projects hap-pening now, in the pipeline of de-velopment or being considered. The
The “One Belt One Road” project, modeledon the ancient Silk Road, was illustrated forthe first time by Chinese President Xi Jinpingduring a visit to Kazakhstan in September2013. In a speech delivered at NazarbayevUniversity, Xi suggested that China and Asiashould cooperate in building a moderneconomic belt that could bolster a sharedand strategic development process. InOctober of the same year, President Xidelivered a speech to the Indonesianparliament, proposing the creation of acommunity of joint activities between Chinaand the Association of South East AsianNations (ASEAN), and offering guidance onhow to build an international route topromote maritime cooperation. In thatspeech, Xi proposed for the first time theestablishment of the Asian InfrastructureInvestment Bank (AIIB) to financeinfrastructure linked to the OBOR project and to promote regional interconnectivity and economic integration.
First Steps in a GlobalPlan
AIIB website has partial lists of suchprojects, but these just touch the tipof the iceberg. OBOR has a focus onCentral Asian energy for uraniumproduction, electricity production,transmission and even distribution(and that electricity will be pro-duced by oil, gas, coal, solar, wind,hydropower and more). Natural gasand oil are very important aspects ofthis, most particularly Kazakh oil, andTurkmen gas. Sometimes the ener-gy project flows are from Central Asiato China. Other times the flows arefrom China to Central Asia. Rail,road, and air networks being devel-oped with Central Asian states arealso energy-related given that the en-ergy equipment, people, and even theenergy itself must be transported viarail and road. Air networks improvenot only transport of vital expertise
and some energy technologies be-tween one and the other, they alsoimprove communications. Commu-nications networks in some parts ofCentral Asia are also being improvedby China, for example, cell towersand networks. Energy systems areembedded within other systems con-nected with other systems nested instill other systems—and the Chineseknow this very well. Energy devel-opments in Central Asia by Chinaalso affect other systems’ develop-ments, such as those related to wa-ter, transport, communications, fi-nance, governance, and so muchmore. With energy developments,many Central Asian countries canmove forward, but in the end, theywill owe China for this improvement.This debt may result in a loss of somenational freedom of movement in
some international and national pro-jects and policies. China is not doingall of this out of pure altruism, oreven just for the profit motive. Manyof its OBOR investments in CentralAsia result from cold strategic cal-culations across many realms, in-cluding military and diplomatic.China’s “march west” through Cen-tral Asia and beyond is an anti-ter-rorism project at the same time it isan economic and energy develop-ment project. Khorgos and Kashgarare not chosen for their great gov-ernance and infrastructure, but forthe leverage their development couldbring to lessening pressures causingextremism in China’s northwest andneighboring regions. The KarakoramHighway linking Pakistan to Chinaover massive mountains is certainlya fantastic feat of engineering, but the
infrastructure of roads, pipelines,hydropower facilities and other en-ergy facilities, the Port of Gwadhar,etc., are there to improve trade, in-vestments and relations betweenChina and its complex partner Pak-istan. The China-Pakistan EconomicCorridor is a very big deal in the re-gion, and will be a factor globally ifthis works out and changes some ofthe economic and political balancesand imbalances within Pakistan andsome of its neighbors. China is alsothere to help develop restive and po-tentially restive parts of southwestChina and dangerous and trulyrestive parts of Pakistan. China’senergy and related projects in Pak-istan are being done to increasePakistan’s connection to China andthereby counter India’s power inthe region. They are also a bit of asnub to the U.S. The port of Gwad-har is also there to link China moreto the rich oil and gas resources of theGCC, Iraq, and Oman. The portcould take in large LNG carriers andoil tankers, which will offload theircargoes to storage facilities built byChina and send these energy re-sources north to parts of Pakistan, butalso to China, so China could haveanother route to bypass the Malac-ca Straits, through which about 80percent of China’s energy importstravel. The relatively new oil and gaspipelines and energy ports in Myan-mar have also been set up for Chinato bypass the Malacca Straits. Hy-dropower and other energy facilitiesbeing built in Myanmar could also benominally tied to OBOR, eventhough some started, like Gwadharin Pakistan and the Kyaukphyu Portenergy connections in Maynamar, be-fore Mr. Xi even announced OBOR.But many of these past energy andenergy-related projects are part of thesame idea of a greater China via in-ternational expansions, which is thereal spirit of OBOR.
New developments for Southeast Asia’s interstate relationsCambodia is one of the most China-dependent countries in SoutheastAsia in regard to its energy devel-opments. China supported theKhmer Rouge, and now supports itsprogeny in the present governmentof Cambodia, as it builds many hy-dropower dams, transmission and dis-tribution facilities for electricity andmuch more. Laos is also becomingeven more dependent on China forenergy investments, especially inhydropower and related transportand communications networks.There have been tense times withthese developments in Laos as someLaotians see China as more of an im-perialist economic power. Vietnamsees China in a darker light than
INDIA
S
MYANMAR
MALAYSIA
PHILIPPINES
JAPAN
RUSSIA
K
MONGOLIA
I
PAKISTAN
SingaporeSRI
LANKA
INDONESIA
C H I N A
Irkutsk
DaqingHarbin
NachodkaVladivostokHunchun
Yiwu
Zengzhou
FuzhouQuanzhou
Jakarta
Colombo
MaléHambantota
Beijing
HaikouBeihai
Nanning
Kuala Lumpur
Shwe gas Field
Kolkata
KunmingNawabash
KarachiG Dhaka
D
Kashgar
Tayshet
PLANNED OR UNDER CONTRUCTION)
( PLANNED OR UNDER CONTRUCTION)
R
PLANNED OR UNDER CONTRUCTION)
Guangzhou
Chongjin
Rajin
27
Source: Mercator Institute for China Studies 2016
many others in the region because ofpast conflicts with China that go deepinto its history. OBOR is having amuch tougher time developing en-ergy, rail, and road networks in Viet-nam than in any other SoutheastAsian country. This difficulty is re-lated to the aforementioned histor-ical grievances, but also to tensionsrelated to oil and gas fields off Viet-nam that China covets. Sri Lanka hasalso invited China and OBOR to de-velop major port and energy facilities,amongst other things. HambantotaPort in Sri Lanka is one of the“String of Pearls” ports that will aidChina’s overall trade, energy tradeand development, and strategic bal-ance with India. Others in the “Stringof Pearls” include Gwadhar in Pak-istan, Marao in the Maldives, Kyauk-phyu Port, and the Coco Islands inMaynamar, as well as Lamu in Kenya,Port Sudan, Djibouti, Hong Kong,many islands in the South China Seaand other island and ports fromChina to Sudan and beyond likely tobe developed. This can be seen as anew “Great Game.” India seems tobe accepting the challenge. TheU.S., on the other hand, seems to bein the back seat watching, and thiswill prove to be a big mistake. TheBangladesh-China-India-MyanmarForum (BCIM) is also developinginto an enabler of energy, trade
transport and other infrastructure andeconomic developments and is yetanother subsidiary to OBOR.
Africa, the Middle East and elsewhereChina was involved with energyprojects in Africa well before the birthof the OBOR idea as it exists now,but, again, the development of Africaenergy, infrastructure, trade, andother projects has carried the spiritof OBOR for decades. Modern Chi-na’s influence in Africa started in the1960s with their modest help tonewly independent states to bringthem into the Chinese communistorbit. OBOR is a more sophisticat-ed update of that behavior, and Chi-na has more money, knowledge, andpower to pull it off now. China hasshown interest in the IPO for Aram-co. It has invested in developing oilfields in Iran. It has large investmentsin Egypt, and especially in the SuezCanal Zone. It is investing in LNGwith the Russians in the Arctic. It hasmore icebreaker ships than the U.S..One might expect China to developa new “String of Ice Pearls” across thenorthern routes in the Arctic in thefuture as climate change picks uppace. China is moving investmentsand influence into Latin America foroil, gas, food, agricultural goods,lithium, copper, and other minerals.
It’s also one of the largest tradingpartners or the largest trading part-ner of many countries in Asia, Africa,Latin America, Europe, North Amer-ica, and globally. The choice to be aglobally diverse trading partner wasnot entirely economically based. A di-versity of trading partners ties thosetrades to both sides, and makes Chi-na an especially diverse and power-ful geostrategic and geo-economicplayer. China is also a massive in-vestor in many developing coun-tries across the world. That givesthem further influence. It also givesthem more power in the internationalforums where important strategic andeconomic issues are discussed. Somewould call this economic imperialism.Others see it as political imperialism.Still others see this as smart chessmoves in a very long game to devel-op China and keep it safe from in-ternal and external threats. It seemsto be a combination of these insome way or another. Huge trade andinvestment accounts can buy a lot ofleverage. Massive energy and otherinvestments can eventually, possibly,weaponize capital. China wants to bea hub, the Middle Kingdom, forthe spoke of energy and other sourcesand investments. The spokes fromthe hub are developing globally.This is a complex sort of hegemony,but hegemony nonetheless. Howev-
er, there are some risks. China haswarmed up to certain dictators andautocrats. If they are tossed out ofpower, then China is out of luck inthose countries for some time. Thereis also a certain degree of corruptioninvolved in some of the projects. Thatmay also backfire eventually in someplaces. On the other hand, if Chinastarts to determine how the energyand other businesses are built inmany parts of the world, that couldproduce another sort of path de-pendence. The U.S., Japan and oth-ers need to wake up to OBOR. Be-ing a bystander or a minor playermeans that China builds more in-fluence and economic power in theworld with OBOR and other activ-ities. The results might be morestartling than some may think rightnow. Sleepwalking into the future isnot a policy. It is possible to workwith the Chinese and have a give andtake in the future, but one must be inthe game and understand what thegame is to do that.
28number
thirty-seven
AN ENERGY ALLIANCEIranian President HassanRouhani (L) and ChinesePresident Xi Jinping (R)review troops during a
welcoming ceremony onJanuary 23, 2016, in the
capital Tehran. In addition to being a major trading
partner for Beijing, Iran hasbeen an important source ofenergy supplies for China in
recent decades.
29
Iran has always been at the
center of East-West trade. For
this reason, and even more so in
the last ten years, Tehran has been
one of the leading energy suppliers
for the Chinese market. Moreover,
Beijing supplied military technology
to Iran during the war against Iraq
(1981-1989) and has often been
pointed to as one of the main
suppliers and consultants for Iran’s
nuclear program. A major
innovation was introduced in Iran in
the 1990s with the creation of free
trade areas known as “Special
Economic Zones” or “Free Trade
Zones,” which are actually based on
the Chinese model. Also, through
their control of the Foundation of
Martyrs and the Astan Quds Razavi
organization, the families of former
president Hashemi Rafsanjani and
Iran’s current Supreme Leader Ali
Khamenei have controlled Iran’s
extensive business with Asia since
the 1980s.
A trading hubTehran is set to become an even
more important hub for East-West
trade thanks to China’s One Belt
One Road (OBOR) project. Beijing
has pledged more than USD 1
trillion in infrastructure investments
for bridges, railway lines, ports and
energy links. In eastern Iran,
workers are already busy
modernizing old regional railway
lines and rebuilding roads and
bridges to improve connections
between Tehran, Turkmenistan and
Afghanistan. Work is also in full
swing in western Iran to improve the
lines of communication between
Tehran and Ankara in Turkey, and
from there through to Europe, while
projects are waiting to be approved
for connecting Tehran with the Shia
Muslim holy city of Mashhad on one
side, and with Iran’s southern cities
overlooking the Persian Gulf on the
other.
During the years when Iran’s local
economies were being hard hit by
international sanctions against its
nuclear program, Tehran looked to
China, Russia and India for
investments and trade. Yet Tehran
has always feared manipulation by
China, as it lacked trust in Russian
technology, which local officials
regarded as being of poor quality
and obsolete. The same could turn
out to be the case with China’s
ambitious projects. On one hand,
they could frustrate Russia’s
ambitious aims in the regions,
while, on the other hand, Beijing
could find alternative routes to
Europe by using Russia’s vast
territory at Iran’s expense. But,
noted Iran’s Deputy Minister for
Urban Development Asghar
Fakhrieh-Kashan, China will have
to choose Iran if it wants to have
the fastest route to Europe, one
that would save millions of dollars.
Yet within Iran’s conservative
establishment, there is still
considerable resistance to such
openings towards Beijing, and their
significance could grow if the
United States should unilaterally
withdraw from the nuclear deal
with Iran following Donald Trump’s
announcement that he will not
recertify Iran’s compliance with the
Vienna agreement and impose
fresh financial sanctions against
Tehran. Despite this ever more
imminent risk—which could bring a
return to the years of isolation as
millions of dollars worth of oil
revenues lie frozen in U.S. banks—
Iran’s Ayatollahs don’t want to
accept the consequences of a long
period of economic over-
dependence on China, already
Iran’s largest trading partner.
A key market for oil exportsChina has been a key market for
Iranian oil for decades. With
reference to this, Iranian economics
professor Mehdi Taghavi said
“China is dominating Iran,” echoing
a widespread view within the
moderate political establishment of
Hassan Rouhani, Iran’s current
President and Rafsanjani’s political
heir. Iran is a favorite destination for
Chinese entrepreneurs, whose
Iranian irfactories are busy
manufacturing a wide array of
goods. The number of Chinese
entrepreneurs visiting Iran has
grown by the dozens since China
launched the OBOR project in
2013, and many of them have
decided to start up their first
pioneering businesses and to invest
millions of dollars in the country.
Many investors expect to see a 50
percent growth in their profits due
to infrastructural improvements
linked to the OBOR project.
When completed, the new rail line
will stretch for 3,200 kilometers,
running from Iran to Xinjiang, and
connecting Kazakhstan,
Kyrgyzstan, Uzbekistan and
Turkmenistan. In 2016, China and
Iran performed the first general test
runs of the project. One train drove
non-stop for the first time from
Shanghai to Tehran in just 12 days.
This is less than half the time it
takes for the 30-day journey by sea.
In 2021, the new generation trains
expected to run on this new line will
be capable of running at a speed of
up to 200 kilometers an hour. But
Chinese and Iranian ambitions do
not stop here. As Deputy Minister
Fakhrieh-Kashan pointed out, the
OBOR project includes not only
infrastructure, but also commercial
agreements, investments and
tourism.
Trade relations between Iran and
China have grown exponentially
since 2007, particularly following
Iran’s economic isolation due to the
tightening of international sanctions
against Tehran. Beijing remains the
largest buyer of Iranian crude oil
despite the partial lifting of
sanctions against Iran since January
2016 and growing European
investments. China’s state-owned
companies are actively engaged
across the country in highway
construction, mining and steel
production. “The Chinese plan is
designed in such a way that it will
establish Chinese hegemony across
half of the world,” said Deputy
Minister Fakhrieh-Kashan. But he
added that Iran will be putting its
own economic and strategic
interests first, providing access to
new markets for Iranian
entrepreneurs and goods.
A growth opportunityThe OBOR initiative is providing
huge growth opportunities for the
Iranian economy and local
employment, which years of
economic stagnation had brought
to a standstill. Chinese investments
have already enabled the Iranian
economy to offset the effects of
international sanctions imposed by
the members of the United Nations
Security Council and Germany
(P5+1). The OBOR project could
also allow Tehran to overcome the
pressure of any fresh U.S. sanctions
advocated by President Trump. But
for the Ayatollahs, the danger of
economic dependence on Beijing is
lurking around the corner, in a
context of strong competition with
Russia and India.
GIUSEPPE ACCONCIA
Journalist and specialized researcherin the Middle East (Bocconi Universityof Milan and London).
Iran’s New Role
THE OVERTAKE
Tehran is set to become an even more importanttrading hub between East and West thanks toChina’s One Belt One Road project
30number
thirty-seven
Despite the leap forward in the production of green energy, which is expected to cover 15 percent of energy requirements by 2020, Beijing is struggling to define a clear regulatory framework,while investments in the sector have not always paid off
The Steep Road to Transition
Renewables/Breaking away from fossil fuels
31
THE OVERTAKE
he energy revolution is an importantsign of global industrial develop-ment and technological progress.Traditional fossil fuels have driven in-dustrial development while at thesame time exposing the world to thelimits of energy resources and theircontribution to the progressive de-terioration of the ecosystem. In the wake of the energy crisis, theglobal environmental and climatic cri-sis of the second half of the 20th cen-tury and the explosion of the eco-nomic crisis, humanity is makingtremendous efforts to move from thetraditional system based essentially onthe use of coal and oil, to a new en-ergy model based on clean and re-newable resources, including naturalgas, hydroelectricity, wind, nuclear,photovoltaic and biomass energy.This transformation is known as the
“new energy revolution” or “energyrevolution 4.0.” According to predictions contained inthe 2016 Annual “World EnergyOutlook” Report published by theIEA (International Energy Agency),by 2035, energy consumption inChina will account for 25 percent ofworld consumption, with a propor-tional net increase of 32 percentcompared to global energy con-sumption. This clearly shows howChina is destined to have even greaterrelevance in the global energy mar-ket and in energy policies.
New energy planning and expansion in ChinaChina may have started to developand use new energy sources later thanothers, but growth in the industry hasbeen quite fast and has attractedworldwide attention. Development inthe Chinese new energy sectors ismainly focused on sustainable ener-gy, wind, biomass and blue energy.The creation of sustainable energyindustrial facilities has many appli-cations. Thanks to greater publicawareness, an ever-increasing focuson new energy in national policiesand new market requirements, thenew energy sector’s developmenthas gradually accelerated and is at-tracting increasing attention from in-dustry. New energy parks have sprung up allover the country, allowing progressin the shift to renewable energy andenabling further expansion of themarket, which has led to giant stepsbeing taken. By the end of 2016, windfarms had an accumulated power of149 GW, increasing annually by13.2 percent, i.e., 9 percent of thecountry’s entire energy production;total photovoltaic energy productionhad reached 77.42 GW, increasingannually by 81.6 percent, corre-sponding to 4.7 percent of the coun-try’s energy production capacity;while data for blue and biomass en-ergy production, amongst others,also showed significant growth. To-day, China has overtaken other de-veloped countries, including Ger-many, the U.S. and Japan, reachingpole position in terms of new ener-gy consumption and the produc-tion capacity of its new energy plants.In 2015, non-fossil fuel energy con-sumption in China was around 12percent, higher than its consumptionin Japan, Belgium, the U.K. and theother leading developed countries. Inthe same year, the world’s total in-stalled wind energy capacity was 63GW, 48 percent of which was repre-sented by China. In the first half of2017, the distributed photovoltaic ca-pacity was 17.43 GW: 17 percent oftotal installed production capacity.Also in the first half of 2017, pro-duction capacity increased by 7.11
GW, around 3 times the amount pro-duced during the same period of theprevious year.
A rapid and unexpected developmentDevelopment in the photovoltaic in-dustry in China has two characteris-tic features: increasing speed of dis-tribution capacity and a very cleartrend toward development in thesector, which is moving toward theeastern regions of the country. The main aspects of the developmentof new energy in China are the fol-lowing:• First, a constant increase in the de-mand for new energy sources. Ac-cording to the “13th five-year ener-gy development plant,” China’s en-ergy requirement will continue to ex-pand quickly. It is expected to reach0.5 billion tons of coal equivalent (tce)by 2020. Among other things, theplan includes an objective for pho-tovoltaic energy, aiming for a distri-bution capacity of 60 GW, for whichit is crucial to expand distribution andconsumption in the eastern andsouthern regions of China, in theknowledge that the development ofenergy resources can improve effi-ciency in the use of the whole ener-gy system.• Second, the ratio between reservesand production of energy from tra-ditional fossil fuels is far lower thanthe global average, which is the veryreason why new energy sources havebecome such a significant part of thenational energy strategy. The “13thfive-year energy development plan”clearly illustrates how the percentageof renewable energy will accountfor an ever-increasing portion ofoverall energy consumption, risingfrom 8 percent in 2011 to 15 percentin 2020, with a total market value ofaround 2,000 billion RMB (including1,000 billion in new energy and1,000 billion in environmentally-friendly cars).According to data from the Nation-al Bureau of Statistics of China, in thefirst four months of 2017, clean en-ergy production—excluding blue en-ergy, which is influenced by season-ality—peaked, with solar power, forexample, having risen by 31 percentcompared to the same period of thesame year.Based on the “China Energy Outlook2030,” published by the China En-ergy Research Society (CERS), by2030, new energy plants will havegrown to 14.4 TW, with a total in-stalled capacity of 60 percent, whichwill contribute to covering 90 percentof the increase in energy consumptionin 2020-2030.• Third, national policies will supportexpansion in the new energy sector.The government will support thisstrategic sector to make it profitable,
TLIFAN LI
He is Associate Research Professor at the Shanghai Academy of SocialSciences and Secretary General of the Center for Shanghai CooperationOrganization Studies.
GW
12
10
6
8
4
2
0
Total world hydropower capacity31.5 GW total capacity added in 2016 by region (including 6.4 GW pumped storage)
CHINA
11.7(3.7)
SOUTH AMERICA
9.7
AFRICA
3.4(1.3)
EAST ASIAAND PACIFIC(EXL. CHINA)
2.4
32number
thirty-seven
attracting big investments, while alsodealing with issues relating to the uni-form production surplus. In future,industrial policies will be aimed atpromoting innovative efforts andmaking demand grow in the new en-ergy sector.
Constantly evolving legislationIn terms of organic legislation, Chi-na has consistently innovated itsregulatory framework and policies tostimulate new energy productionand eliminate traditional energysources. This framework includes the“People’s Republic of China Law onRenewable Energy,” the “Mediumand Long-Term Plan for RenewableEnergy,” and the “Energy Conser-vation, Creation and DistributionCode (undergoing testing).” Thecountry has also supported windpower policies with great commit-ment through the “Provisions for theDevelopment of Decentralized Ac-cess to Wind Power of the Nation-al Energy Agency (NEA), the “Pro-visions for tax relief policies on newenergy vehicles for the period 2016-2020,” and the “Management andwarranty provisions for the full ac-quisition of wind and solar energy.”Furthermore, based on the infor-mation contained in the 2017 “Gov-ernment Activities Report,” the ob-jectives set to regulate the energyproduced from coal by eliminating,canceling or suspending plants witha production capacity of 50 GW up-wards will lead to a cascade analysisof these objectives in 2017, with aview to defining and implementingstricter legislation to guarantee thateach objective is actually met.Finally, continuous innovation inenergy storage and the use of IT toolsin the field of new energy sources.China is currently the world leaderin the CAES (Compressed Air andEnergy Storage) sector. Technolog-ical innovation introduced by thin-layer solar cells has gradually enteredthe energy distribution market and itsuse by companies is growing steadi-ly. Over the next 10 years or so, therequirement for energy storing solarpanels can be estimated to grow to8.5 TW, demand in the market forlithium ion batteries for next-gen-eration vehicles is expected to reach50 GW, while the value of the mar-ket for energy saving batteries is es-timated to grow to several thousandbillion.
Risk factors and adaptingthe development model ofenergy sector companiesAccording to the “13th five-yearplan for the development of renew-able resources,” by 2020, new windfarms will be able to deliver 80 GW,based on an investment of around 700
billion Yuan, while 100 billion Yuanwill be invested in different types ofphotovoltaic energy plants. Thisshows how China now has a historicdevelopment opportunity in the fieldof new energy sources. However,despite the rosy developmentprospects, the current data show un-even growth that will require the sec-tor to deal with a variety of risk fac-tors and problems: 1 | THE NUMBER OF PATENTS HAS FALLEN RAPIDLYBoth innovation by existing compa-nies in the new energy sector and thegrowth of new companies have de-creased. Between 2006 and 2008,China filed the highest number ofpatent applications in the wind, pho-tovoltaic and blue energy sectors(followed by Japan, the U.S. and theU.K). However, following the accel-eration of the industrialization and ur-banization process, along with an in-creased interest in traditional sectors,the innovative vigor of companies inthe new energy sector has decreasedin recent years, leading China to fallbehind Japan and other developedcountries.2 | THE FINANCIAL CAPACITY OF COMPANIES IN THE NEW ENERGYSECTOR IS INSUFFICIENT
Indirect financing has encounteredproblems. The origin and most im-portant channels for this kind of fi-nancing are commercial banks, whichprimarily concentrate their invest-ments in medium to large state-owned companies, given that thereare restrictions on granting credit andloans. The requirements that com-panies have to fulfill to be grantedloans are fairly stringent, whichmeans that most companies operat-ing in the new energy sector do notfulfill the minimum requirementsset by banks for credit financing. Onlyaround 10 percent of financial supportfor the sector comes from direct fi-nancing, a much lower percentagethan in other countries. There is lit-tle confidence in making venturecapital investments as there is littlespecialization in most risk capitalinvestment companies. Difficulty isoften encountered in understandingthe industrial model of projects andthe effectiveness of investing in newenergy sources, leading to a cau-tious approach to investments in thesector. 3 | A DEVELOPMENT MODEL THAT DEPENDS ON POLITICAL RIGORThe new energy sector is currently atan initial stage in many respects.The industrial model and financialvaluations are difficult to interpretand, in many circumstances, there isa need for preferential policies thatprovide for State contributions, with-out which it is difficult to achieve a fi-nancial balance and continue with theventure.
The development of renewables inChina starts with water. Well beforeBeijing decided to enthusiasticallyengage the path of solar and windenergy, its dominant focus was onhydropower, largely due to the vastnetwork of rivers spanning thelength and breadth of the country.China has over 1,500 rivers withdrainage basins exceeding 1,000square kilometers; of these, 64percent of the country’s surfacearea is drained by rivers flowinginto the sea, while the remaining36 percent is drained by rivers thatflow into continental lakes orevaporate in deserts or salinesands. It is perhaps partly due tothese vast water resources thatChina is the world’s largestconstructor of dams. According tothe latest data released by theInternational Commission on LargeDams, there are roughly 23,820large dams in China. Large damsare usually defined as those with aheight of at least 15 meters, fromlowest foundation to crest, or adam between 5 meters and 15meters with a reservoir capacity ofmore than 3 million cubic meters ofwater. China’s large dams accountfor just under half of the total
number of large dams found in theworld, which according to ICOLDestimates is approximately 58,519(2016). The goal of the Chinesegovernment’s 13th Energy FiveYear Plan is to increase totalinstalled hydropower capacity to380 GW by 2020, of which 40 GWwould be pumped hydro, a type ofhydropower that works like abattery, pumping water from alower reservoir to an upperreservoir for storage and latergeneration. This new hydropowercapacity could generateapproximately 1.25 TWh of power,which is equivalent to around 42percent of national non-fossilenergy consumption.According to rankings compiled bythe International Commission onLarge Dams, five out of the world’sten tallest dams are in China. Thetallest is the Jimping 1 dam, at 305meters, situated on the JinpingBend of the Yalong River, in theSichuan region. Construction workon the dam began in 2005 andwas completed in 2014. Its powerstation has a 3,600 MW capacityand produces between 16 and 18TWh annually. One of the largesthydro power stations in China in
A River of Energy
ROGUN (C)TAJIKISTAN
BAKHTIYARI (C)IRAN
JINPING 1 (C)CHINA
NUREKTAJIKISTAN
LIANGHEKOU (C)CHINA
XIAOWANCHINA
XILUODU (C)CHINA
GRANDE DIXENCESWITZERLAND
BAIHETAN (C)CHINA
DIAMER-BHASHA (C)PAKISTAN
335 m
315 m
305 m
300 m
295 m
294 m
286 m
285 m
277 m
272 m
World’sHighestDams
EUROPE
1.8(1.2)
SOUTH ANDCENTRAL ASIA
1.3
NORTH AMERICA
1.1
World installed hydropower capacity at the end of 20161,246 GW (including 150 GW pumped storage)
1,246GW
China 331
Brazil 98
UnitedStates102
Canada 79 Russia 48India 52
Norway 32Turkey 26
France 25
Sweden 16
Venezuela 15Vietnam 16
Austria 13
Italy 22
Switzerland 17Spain 20
Mexico 12Colombia 12Germany 11
Iran 11
Rest of World 246
Japan 50
33
THE OVERTAKE
terms of installed capacity, is theThree Gorges Dam on the YangtzeRiver, in the Hubei province. Thefacility, completed in May 2006, hasa current capacity of 22.5 GW. Thedam is 185 meters tall and stretchesacross more than 2.3 kilometers. Itsreservoir, with a surface area of over1,000 square kilometers andextending for more than 600kilometers, moves turbines thatgenerated 87 billion kilowatt-hours in2016. Less well-known than theThree Gorges Dam is the Xiluodudam, located between the Yunnanand Sichuan provinces, on theJinsha River, the upper course of theYangtze. Construction on the facilitybegan in 2005 and the dam openedin 2013. It has an installed capacityof roughly 13.8 GW. It is one of theworld’s tallest stations, standing at285.5 meters (and is 700 meterslong). Construction of several otherdams is underway, notable amongthem the Baihetan and theShuangjiankou dams. The Baihetandam is on the Jinsha River, atributary of the Yangtze, and issituated between the Sichuan andYunnan provinces, in southwestChina. It is a 277 meter tall double-curvature arch dam with a crestelevation of 827 meters. The dam isdue to be completed in 2022, and interms of total installed capacity, it will
be the world’s second largest afterthe Three Gorges Dam. Accordingto the China Three Gorges Corp, thebuilders of the dam, it will have anaverage annual output of more than62 billion kilowatt-hours. The facilitywill generate power utilizing 16turbines, each with a generatingcapacity of 1,000 MW, taking thegenerating capacity to 16 GW. Oncecompleted, it will be China’s thirdlargest dam and the fourth in theworld in terms of dam volume. TheShuangjiankou dam, set on a
tributary of the Yangtze River, is alsoexpected to be completed in 2022.The facility, with a projected cost ofCNY 36 billion, will be 314 meterstall. But China’s dam building effortsare not confined to its nationalterritory. In response to a saturateddomestic market, Chineseinvestments in the construction ofnew facilities are moving abroad.There are currently over 330 damsbuilt by Chinese firms worldwide, 40percent of which are located inSouth Asia and a third in Africa.
Installed Cap. (Mw) Energy (GWh/year)
INGA III - DEM. REP. OF CONGO
SANXIA - CHINA
ITAIPU - BRAZIL
ITAIPU - PARAGUAY
BAIHHETAN (C) - CHINA
XILUODU (C) - CHINA
BELO MONTE - BRAZIL
GURI - VENEZUELA
TUCURUI - BRAZIL
TA SANG (C) - MYANMAR
40,000
14,000
22,500 84,900
14,000
14,000
13,860
90,000
51,500
57,120
11,234
8,370
10,000 52,000
7,100 35,446
Global classification of dams by installed capacity with energy
Sources: International hydropower association - International Commission on large dams
4 | THE CREDIBILITY OF COMPANIESIS WEAK AND LEGAL DISPUTESARE INCREASING
Between 2007 and 2014—a period of7 years—legal disputes due to thecredibility of companies increasedfrom 6 to 640. Some Chinese com-panies are facing big challenges re-lated, for example, to international in-tellectual property and to an inabil-ity to sell their products effectively.5 | DEVELOPMENT TRENDS IN THE ENERGY SECTOR AND RESULTING PRESSURE ON THETRANSFORMATION OF ITS MODEL
Development trends in the energysector are putting a lot of pressure onthe new energy sector. There are twoaspects to consider: first, the difficultyof maintaining the traditional ener-gy model, which does however havean advantage in price terms, andsecond, the fact that development inthe new energy sector is struggling tokeep pace with the development ofdemand.6 | THE NEW ENERGY SECTOR IS HAMPERED BY A LACK OF FAIR MARKET-DRIVEN COMPETITIVENESS
China’s lack of vision regarding thenew energy development processand the lack of scientific and rationaltechnological innovation have so farprevented it from implementing a fartax policy that will allow the new en-ergy sector to serve the country’s en-ergy security.
New development prospectsin the sector1 | IMPROVING ENERGY SECTOR REGULATION AND PROMOTINGSTRONG AND HEALTHY DEVELOPMENT OF THE NEW ENERGY REVOLUTION
The government must devise policiesand measures aimed at supporting theenergy sector, enticing companies inall sectors to undertake an energy rev-olution and encouraging them toreplace technologies which use tra-ditional forms of energy with greenproduction. Beijing should also fur-ther improve protection for intellec-tual property rights and introduce asystem that rewards innovation,, sup-porting the creation of new energyproducts with the help of grants forenvironmentally sustainable tech-nologies, green taxes and other mea-sures. Environmental protectionlegislation will have to be further im-proved. Technical standards need tobe set for industrial energy storageand for cutting emissions, establish-ing a threshold for carbon emis-sions, encouraging companies in dif-ferent sectors to implement measuresfor innovation and improvement inthe field of energy, while also im-proving the exit mechanism for com-panies, establishing a plan for theelimination, within the established pe-
riod of time, of uncompetitive com-panies that have a high environmen-tal impact, low productivity and highlevels of pollution.2 | ADAPTING THE INDUSTRIALSTRUCTURE AND THE ENERGYCONSUMPTION STRUCTURE, PROMOTING THE GREEN TRANSFORMATION OF INDUSTRY
The Chinese industrial fabric, whichis dominated by heavy industry, haslong maintained a structure based onthe use of fossil fuels. A green trans-formation of the Chinese industrialsector is needed, involving adaptingthe production structure and forcinga structural reform of energy con-sumption. The adaptation of theproduction structure should aim to re-duce environmental costs for greaterenergy efficiency. For these reasons,it is necessary, first of all, to redirectdrilling and mining activities relatingto coal, oil, natural gas, ferrous met-als and other heavy industries toward
the healthy development of key in-dustries in fields of energy conserva-tion and emission reduction. Fur-thermore, the lever of the high-techindustry must be used to focus on thedevelopment of modern services andmanufacturing, using the develop-ment of production to transformand redirect the industrial structure,optimizing and improving the ener-gy structure, thus creating a mecha-nism that will encourage the greentransformation of industry. Finally,more in-depth work needs to bedone on factors that can reform themarket and play a fundamental rolein reconfiguring the energy product,focusing on investments driven byeconomic efficiency rather than be-ing government-led, further definingthe endogenous strength of green in-dustrial transformation.3 | THE NEW ENERGY SECTOR NEEDSA MASSIVE INJECTION OFVENTURE CAPITAL FUNDS, STATE
INVESTMENTS, SHARE CAPITALAND FINANCIAL SUPPORT INEVERY RESPECT, SO THATDIVERSIFIED CAPITAL CAN FLOWINTO THE INDUSTRIALDEVELOPMENT OF NEW ENERGYSOURCES
This involves intensifying the use ofshare capital, replacing the tech-nologies commonly used in the sec-tor with recently patented technolo-gies and continuing to plow the tech-nological revolution and innovationfurrow.4 | INCREASING INVESTMENTS INTECHNOLOGICAL INNOVATION,GROWING THE GREEN ECONOMYOF COMPANIES IN THE ENERGYSECTOR
The margin for improvement ofChinese green technology companiesis enormous, but investments inR&D and the plan to expand thegreen technological transformationare still hampered by the lack of sup-
34number
thirty-seven
China will install:
36%of all global
hydro electricity
40%of all global wind energy
36%of all global solar energy
The Green Revolution
port for the production structure ofcompanies. The technological re-form of traditional technologies musttherefore be boosted, promotingnew energy technologies and ex-panding the use of new manufactur-ing processes, improving the effi-ciency of energy recycling, constantlymoving the frontier for industrial pro-duction further and improving thecompetitive strength of companies,stimulating and promoting a greeneconomic approach by companies.5 | IMPROVING THE PATH TOWARDINTERNATIONALIZATION ANDINTERNATIONAL COOPERATION
The New Silk Road (One Belt OneRoad Initiative) is a national strategicinitiative promoted at a high level toensure that countries along the sameline focus on common needs. The ini-tiative has created new and better op-portunities for development, liberal-ization and complementarity. Allalong the New Silk Road there are
many countries with a wealth of tra-ditional and innovative energy re-sources, which are developing coal re-sources destined for Chinese com-panies, for which the expansion in thecoal trade has been beneficial. Chinais a world leader in coal extraction andprocessing technology, coal miningmachinery, engineering services andother aspects, with a considerablecompetitive advantage internationally.The countries along the New SilkRoad are, for the most part, emerg-ing and developing economies witha high demand for infrastructure, abig market for coal and a great dealof room for investments. By the endof 2012, China had 65 coal miningprojects abroad, involving invest-ments of over USD 7 billion, andcontrolled 40 million tons of coal re-sources.6 | THE INTERNET AS A MEANS OFINVOLVEMENT
With increasingly in-depth research
being done into e-distribution (energydistribution via the Internet), re-newable energy could supplant fossilfuels on a large scale, thus creatingample space for the development ofe-distribution, giving new impetus toa reform of the energy system.In general, between 2017 and 2022,renewable energy could grow glob-ally by a margin of more than 40 per-cent, increasing in total by around 8.6TW, with photovoltaic energy in-creasing by around 3.8 TW, over-taking wind power for the first time.China remains the global leader in themarket for renewable energy, makinga 36 percent contribution to futurephotovoltaic energy production. It istherefore reasonable to assume thatthe content of the Chinese “13th five-year plan” for renewable energycould give rise to a new definition andenvironment for development.
35
China alone is responsible for over
40%of global renewable capacity growth
Chinese companies produce about
60%of the total annual productioncapacity of solar cells globally
Solar photovoltaics in China could reach a total of
320 GWby 2022
A 100% GREEN HOTELThe Chinese governmentpromotes new policies aimedat replacing traditional energyfor the benefits of a “green”production. An example is the Solar Valley Micor-EHotel, in Dezhou, the most eco-sustainable hotel structurein the world.
Source: IEA_Renewables 2017
TOTAL PRODUCTION
SINOPEC
CNPC
OTHERS
2014
2015
2013
2012
0.2
1.3
4.47
0.025
he year 2017 marks another milestonefor China’s unconventional resourcedevelopment, and we have Chinabecoming the world’s third largestshale gas producer, after the U.S. andCanada. During the current industrydownturn, economic feasibility hasbecome the main concern about thefull-scale development of China’sshale gas, a reflection of the energysector’s common dilemma. To many,it may seem that importing crude oiland LNG is better than the short-term option economically, makingshale gas less attractive to the do-mestic industry. However, in order tomeet the nation’s energy security, Chi-na has declared shale gas the country’snew strategic energy source and dras-tically increased investments in shaleexploration and production. Theshale revolution resembles a mirror,reflecting China’s growing and flour-ishing energy industry. The firstround of China’s shale gas explorationrights concluded in 2011, and Ener-gy China Forum (ECF) has observedChina’s scale of shale gas commercialdevelopment expand at an unprece-dented rate within the brief period ofsix years. As we at ECF became Chi-na’s largest international shale gas
think tank, we have both witnessedthe growth and development of Chi-na’s shale resources and grown along-side it ourselves.
Economic globalization,cross-boarder and multidisciplinary energy cooperation Global energy crises have been a ma-jor headache for countries worldwideearly in the 21st Century, and this iswhat inspired and encouraged theshale revolution in the United States.Other countries are now striving tofollow that lead,in order to addressrising demand for domestic energy se-curity and to collaborate to solve en-ergy supply challenges. As the largestenergy consumer in the world, Chi-na itself is experiencing an ongoingincrease in foreign energy depen-dence, and urgently needs a cross-boarder, muti-disciplinary energycooperation platform, and that needcatalyzed the birth of the Energy Chi-na Forum. In the year 2011, whenChina had just started exploring andutilizing its shale gas resources, ECForganized its first annual summit inShanghai. Other countries, includingthe U.S., Great Britain, Poland and
Russia were paying close attention toChina’s shale progress. Governmentagencies, energy companies, equip-ment manufacturing corporations,think tanks, as well as legal and fi-nancial firms were collaborating toprepare for the policy, technology, fi-nance, laws and regulations requiredfor China’s shale revolution. Theentire world was watching China’s en-ergy sector and was expecting massivebusiness opportunities and significantimpacts on the global energy andeconomy resulting from China’s shaledevelopment plans. ECF has grownrapidly from an emerging forum tobecome China’s leading shale gasplatform within the past 7 years, andit is steadily gaining a reputation onthe global stage. This is exactly a mi-crocosm of China’s booming devel-opment against a background ofglobalization. Having benefitted fromthe development of China’s energysector, especially the shale industry,as well as from progress in econom-ic globalization, China and Asia’sgrowth is inseparable from global de-velopment as a whole.Looking back on ECF’s past confer-ence agendas, it’s easy to identify someof the conference “keywords,” in-
36number
thirty-seven
XIAOLAI ZHOU
She is the President and founder ofEnergy China Forum (ECF), Presidentand founder of Shanghai UnitedInstitute for Unconventional Resources,and Executive Deputy Director, EnergyEconomy Committee of ShanghaiEconomist Association. Ms. Zhouspearheaded the establishment ofEnergy China Forum as a leading andindependent China Energy Think Tank& cross-boarder, muti-disciplinaryenergy cooperation platform.
THE SHALE BOOMChina’s shale gas productionvolume in bcm. Over the past 5 years, China’s shale gas production has risen from 25 million cubic meters (mcm) in 2012 to 7.88 bcm in 2016. Total production for 2017 is expected to reach 10 bcm.
Shale gas/Forecasts for an unconventional recources
China has become the world’s third largest producer of shale gas, surpassed only by the U.S and Canada.
Beijing considers shale the country’s new strategic energy source and has increased its investment in exploration and production
The Future is the Shale
T
2016
2017 (FORECAST)
0
7.8810
cluding “China’s opening energymarket,” “international cooperation,”“multidisciplinary approach,” “tech-nical development,” “innovative tech-nology,” “environmental protection”and “sustainable development.” During the early days of ECF, ECF’ssummit participants focused on NorthAmerica and other regions’ advancedtechnologies, equipment and servicesto learn from them. By 2017, Chinahad developed its initial and uniquetechnical system to explore and de-velop its shale gas resources, cus-tomized to China’s geological condi-tions. Since 2014, an increasing num-
ber of East and Southeast Asia coun-tries have come to China to study Chi-na’s shale development history and ex-periences, as well as the lessons learnedduring field applications. This is arather fast transition and is a perfectindication of China’s “soft skills” as anemerging economic superpower. Chi-na is now exporting energy technol-ogy, equipment, services, capital andprofessionals to the world, and it is get-ting more confident about activelypromoting global common develop-ment in the energy industry. Its Belt-and-Road initiative drove energy co-operation between China and the
Belt-and-Road countries, paving Chi-na’s road to become the world’s ma-jor energy technology exporter.The Belt-and-Road initiative is adevelopment strategy focusing oninternational connectivity and coop-eration. China’s domestic energytechnology providers also embracethe global tide of technical diffusionfor shale gas and shale oil. Backed bythe largest shale gas reserve in theworld and a proven history of rapidtechnical development, China eyes amassive development potential inthe area of international energy co-operation for mutual benefit.
A coming period of strategicopportunityDue to the rising demand for envi-ronmentally-friendly growth, China’senergy structure has been shifting to-wards lower pollution, instead oflower costs, during recent years.Natural gas represents the cleanestfossil fuel available for commercialuses. Analysts predict that the 21stcentury is the century of natural gas,and that natural gas will surpasscrude oil after two decades. By theyear 2040, China’s shale gas is ex-pected to contribute over 50 percentof China’s total domestic gas pro-
37
THE OVERTAKE
duction, making China the world’slargest shale gas producer. It iswidely believed that China’s shale gasindustry has massive industrial po-tential. Shale gas was confirmed as China’snew mineral variety, independentfrom natural gas, in 2011, and in or-der to promote and encourage do-mestic shale development, China haspromulgated a series of policies sup-porting the domestic shale industry.Some local governments also con-firmed their own regulations andeconomic development plans forshale gas, making it a new point ofgrowth for the local economy, and nu-merous emerging shale gas companieshave been registered across China. InSeptember 2016, China’s EnergyAdministration declared shale gas asan important clean energy baseline in-dustry, pushing shale gas towards anunprecedented strategic position. In December 2016, China publishedits 13th Five-Year Plans for EnergyDevelopment, and the 13th Five-YearPlan for Energy Technology Inno-vation, establishing a bottom-linethinking strategy, enhancing do-mestic energy supply capability, pro-moting the reserve evaluation forshale gas and other unconventionalresources, and developing these re-sources commercially to meet Chi-na’s demand for energy indepen-
dence and security. In January 2017,China’s State Council published theNotice on Several Measures for Pro-moting the Growth of Foreign In-vestment and the Active Use of For-eign Investment to further relax re-strictions on foreign capital enteringthe areas of shale gas and other un-conventional resources. In May 2017,the Central Committee of the Com-munist Party of China, as well as Chi-na’s State Council, published Sever-al Opinions on Deepening Oil andGas Sector Reform. In July 2017,Opinions on Accelerating the Use ofNatural Gas announced support forthe construction of shale gas com-plementary pipelines and the nearbyconnection of shale gas sources withmajor pipeline systems. The policiesencouraged shale gas pipeline and in-frastructure construction operations,and opened up the market ofpetroleum pipelines to social orga-nizations from the political side.China’s Ministry of Finance andNational Energy Administrationhave reiterated that domestic shalegas development will continue to re-ceive policy subsidies from 2016 to2020, and the subsidies have beenmodified to 0.3 CNY/cubic meterduring the first 3 years, and 0.2CNY/cubic meter for the rest. Chi-na continues to subsidize shale gasdevelopment with the backdrop of in-
creasingly strict subsidies for re-newable energies.
E&P for shale gas: pros and consAt current technical and market con-ditions, China’s shale gas E&P appearsto have characteristics that includehigh capital investment, high risk, longproject cycles, slow payback and loweconomic returns. According to statis-tics, cumulative domestic investmentreached 36.5 billion CNY by 2015.The central and local governments in-vested approximately one billionCNY, bid-wining companies invest-ed approximately two billion CNY,and the rest of the pool came fromChina’s national oil and gas giants. Sinopec is planning to invest 50.5 bil-lion CNY in the upstream E&P sec-tor, representing a 5.4 increase com-pared with last year. CNPC, on theother hand, will invest 143.6 billionCNY, an increase of approximately 10percent. So far, domestic investmentfor shale gas comes mainly fromSinopec, CNPC and the govern-ment. The scope of investment is lim-ited, however, mainly due to uncer-tainties of economic return, and thatcould negatively impact shale devel-opment in China. Sound businessmodels need to be developed that willattract social involvement. By 2020, Sinopec plans to achieveshale gas production of over 12 bcm,and that requires an annual averageincrease greater than 40 percent. Inthe long term, PetroChina SouthwestOil and Gasfield Company aims toachieve annual production of 30bcm of shale gas, and this number isexpected to reach 50 bcm by 2030.China is also accelerating explo-ration in other shale gas areas, andplans to complete exploration andsurveying work in Xuanhan-Wuxi,Jingmen, Chuannan, Chuandong,Meigu-Wuzhishan, and Yanan areasbefore 2020. Total geological re-serves in these areas are approxi-mately 3624 bcm.China has a fair command of thetechnologies related to geophysics,drilling, completion, fracturing andtesting techniques for shale gas de-velopment. These technologies cansolve many of the challenges en-countered during operations, butthey are still deemed uneconomic bymany. The very high costs of projectlife cycle has retarded the develop-ment pace of China’s shale gas re-sources. The next focus for China’sshale technology is to transformtechnical recoverable reserves intoeconomic recoverable reserves. As aresult, major technical breakthroughsare necessary to lower operationalcosts. Currently, China is establish-ing major national science and tech-nology programs across the shale in-dustry chain. Critical tasks include
“sweet spot” identification, deephorizontal well drilling and comple-tion, shale development environ-mental evaluation and protection, andshallow horizontal well staged frac-turing technologies for shale wells.CNPC is planning to utilize shallowshale sectors, reduce average platformcycles by 70 days, and reduce aver-age costs per well to 40 millionCNY, thereby fulfilling the targetproduction of 12 bcm of shale gasproduction.
38number
thirty-seven
Urumqi
Junggar
T
Tar im
KAZAKHSTAN
R
INDIA
NEPALB
PAKISTAN
KYRGYZISTAN
TAJIKISTAN
AFGHANISTAN
B
Operator Geological Area Reserve (0.1 bcm)
Fulin Sinopec Eastern Chongqing 4,767Changning CNPC Sichuan Yungui Boundary 19,000Weiyuan CNPC Sichuan & Chongqing 39,000Zhaotong CNPC Sichuan Yunnan Boundary 55,000Fushun-Yongchuan CNPC Sichuan 5,000Total 122,767
MAJOR SHALE GAS PRODUCING AREAS
China’s major shale gas producing areas concentrate around theSichuan Basin, critical zones include the Fulin, Changning, Weiyuan,Zhaotong, Fushun-Yongchuan areas. Sinopec operates the FulinShale Gas area, while the rest were operated by CNPC.
China is accelerating exploration tasks in other shale gas areas, and plans to achieve the exploration and surveying work in theXuanhan-Wuxi, Jingmen, Chuannan, Chuandong, Meigu-Wuzhishan,and Yanan areas before 2020. Total geological reserves in theseabove areas are approximately 3,624 bcm.
Geological Area Geological reserve (0.1 bcm)
Xuanhan-Wuxi Chongqing 2,000Jingmen Western Hubei 3,240Chuannan Southern Sichuan 2,386Chuandong Southeastern Sichuan 9,485Meigu-Wuzhishan Southwestern Sichuan 13,500Yanan Ordos Basin 5,630Total 36,241
GEOLOGICAL RESERVES OF INTEREST
Source: China Geological Survey (CGS)
Source: China Geological Survey (CGS)
Environmental protection system is imminentChairman Xi has pointed out that theenvironment has to be treated withthe same respect as human lives, anda strict system to monitor and con-trol environmental impact must bedeveloped. However, China’s envi-ronmental protection mechanisms forshale gas development are still underconstruction, especially those re-garding ground water, fracturingfluids and induced seismic activities.
Meanwhile, China’s existingpetroleum regulating systems areinsufficient to solve potential chal-lenges brought by the rapid devel-opment of shale gas. China’s increasingly strict environ-mental protection policies conflictwith the still-developing shale gasregulation systems. Currently the in-dustry does not have a clear guideline,or answer, regarding environmentalmonitoring and regulating stan-dards. As a result, there is obvious in-
conformity between environmentalregulations across cities andprovinces, and this has apparently re-stricted the effective development ofChina’s shale reserves. Energy Chi-na Forum’s achievements and pro-gresses can be viewed as a perfect re-flection of China’s energy and tech-nology sector. I believe China will be ready to wel-come a prosperous new era for shalegas full-scale commercial develop-ment, technical innovation and glob-
al cooperation. China’s energy for-eign dependency will be further ad-dressed, and a balanced develop-ment for the environment and econ-omy is only steps away. Technicalbreakthroughs brought the worldmany uncertainties regarding ener-gy sources and will certainly re-shape the global energy structure. Ibelieve China will become increas-ingly influential during this process.
39
THE OVERTAKE
Beijing
ShanghaiSichuan
Yunnan
OrdosBohai Bay
HunanGuizhou
Jiangsu
Chongqing
Hubei
Songl iaoTu-Ha
MYANMAR VIETNAM
LAOS
THAILAND
TAIWAN
PHILIPPINES
SOUTHKOREA
JAPAN
NORTHKOREA
C H I N A
MONGOLIA
K
RUSSIA
I
BHUTAN
BANGLADESH
B a y o fB e n g a l S o u t h C h i n a S
e a
MARINE SHALE GAS BASIN/REGION
LACUSTRINE SHALE GAS BASIN/REGION
OIL PIPELINES
GAS PIPELINES
50%of national gas production by 2040 could come from Chinese shale gas
12 Bcmof shale gas Sinopec is expected to produce
by 2020
7.6 Billionsof dollars is Sinopec’s
planned investment in shale’s upstream E&P activities
21.6 Billionsof dollars is the investment that CNPCexpects for the activities of exploration
and shale production
MAJOR SHALE GAS FIELDS AND PRODUCING REGIONS
Source: Eni
hina and the U.S. aren’t going to war,but great power rivalries play out inmany other ways. Beijing sees the ex-pansion of its economic influence asthe key to its future, and it’s in thisarena that the U.S. and China aremost likely to find themselves atodds. A year into the Donald Trumpadministration, the biggest surpriseis that the U.S. has (so far) ceded theground on which Beijing can assertitself. That won’t last. When Trumpfirst announced his opposition to theTranspacific Partnership (TPP) tradedeal—governing the trade rules of 12countries that together comprise 40percent of the world economy—hewas in the middle of a bruising cam-paign for the U.S. presidency. Andsince TPP would have given BarackObama a signature accomplishmentfor his legacy, Trump presented him-self to anti-Obama voters as theman to kill the deal. Given the po-litical appeal of an anti-trade messagein a country that has lost so manymanufacturing jobs over the past 25years, even Hillary Clinton, whohad once praised the deal, began tooppose it. Donald Trump withdrew the U.S.from TPP just three days after tak-ing office. Trump ignored theprotests of those who said TPPwould provide Asian countries aU.S.-led alternative to China’s ex-panding web of trade and investmentprojects—and the risks of too-deepa dependence on Beijing’s good willthat might come with it. For Trump
the business mogul, leverage is ev-erything, and the U.S. sacrifices itsleverage as the world’s sole super-power every time it signs a multilat-eral deal. But China’s leaders un-derstand that the largest and mostimportant country in a multi-coun-try agreement gets to set the termsof trade, as well as the rules, regula-tions, and technical standards that willgovern future agreements. As theU.S. relinquishes that role, Beijingwill make the most of the opportu-nity.
An alternative to the U.S. fortrade and global investments While the U.S. remains the world’slargest economy, it is state capitalistChina that has the more promisingtrajectory. Beijing channels its eco-nomic power through its state-runcorporations to magnify its politicalinfluence—China spends, lends, andinvests in many countries with gov-ernments that don’t want to pursuepainful political and economic re-forms in exchange for Western aid.This is especially true at a time of po-litical dysfunction in Washington.China’s investment comes with farfewer conditions. That’s why, despitean economy that’s still 40 percentsmaller in terms of GDP than theU.S. economy, China has become theworld’s single most influential actor.In addition, China, unlike the Unit-ed States, is pursuing a coherentglobal strategy. It has established the Asian Infra -
40number
thirty-seven
IAN BREMMER
He is the President and founder of Eurasia Group, a global political riskresearch and consulting firm. Bremmercreated Wall Street’s first global politicalrisk index, and has authored severalbooks, including the bestseller The Endof the Free Market: Who Wins the WarBetween States and Corporations?
China vs. United States/The evolving competition betweenthe two global powers
While both sides know it’s in their interest toavoid a military conflict or an all-out tradewar, 2018 is likely to see greater tensionbetween Washington and Beijing, particularlyon trade and technology issues
The Race forthe Future
C
41
THE OVERTAKE
U.S./CHINA
THE FIGURES
478.9 Billion
169.
3 Bi
llion
309.
6 Bi
llion
601,000 JOBSFROM EXPORTS
OF GOODS
309,000 JOBSFROM EXPORTS OF
SERVICES
FDI* FROM THE U.S.
TO CHINA
IN 2015
14.8 Billion[+50.6% on 2014]
74.6 Billion[+10.5% on 2014]
U.S. GOODS
AND SERVICES
TRADE DEFICIT
WITH CHINA
IMPORTS
EXPORTS
FDI* FROM CHINA TO THE U.S.
IN 2015
United States jobscreated by exports of goods and services
from the U.S. to China(Source: U.S. Department of Commerce)
I
EMPLOYMENT
911,000 648.2 Billion
structure Investment Bank (AIIB) asa direct competitor to the U.S.-ledWorld Bank and Asian Develop-ment Bank. Its ambitious One Belt,One Road infrastructure plan unitesChina and neighboring regionsthrough a network of roads, tracks,ports and pipelines that spans 60-pluscountries. While Trump is focused onrenegotiating better deals to prove toU.S. voters that he’s a tougher ne-gotiator than his predecessors, Chi-na is building an alternative trade andinvestment architecture. China is also working hard to pro-mote and protect domestic companiesand industries. Chinese firms areexpanding their global presence inhigh-tech areas such as cloud com-puting while Beijing sharply limits theability of foreign firms to do the sameinside China. It provides subsidies and
political pressure to advance the in-terests of its champions. As Chinamoves up the value chain, the U.S.goods and services trade deficit withChina—totaling USD 309.6 billionin 2016—will become wider still. During the first year of his presi-dency, Trump has adopted a lessconfrontational approach to com-mercial conflict with China than hiscampaign speeches would suggest.That is mainly because he hopes thatChina will play a lead role in con-taining threats from North Korea.But it is already becoming evidentthat China will not apply the level ofpressure on North Korea that Trumphas hoped for, and we’re alreadyseeing early signs that Washingtonwill adopt a tougher approach towhat Trump still insists are unfairChinese trade practices.
The battle over new technologies China is also building a long-term ad-vantage through significant invest-ment in artificial intelligence (A.I.).A breakthrough in A.I. will be trans-formative because its implicationstouch every aspect of our lives andour economies. As a maker of new rules and stan-dards, those responsible for thosebreakthroughs will hold the pre-dominant influence in tomorrow’sglobal economy. If there is an eco-nomic title fight looming between theU.S. and China, A.I. will provide thearena in which it is fought. Victory in this competition will de-pend on the type of research that pro-duces the critical breakthroughs.We must first recognize that the bat-tle will be waged not between Beijing
42number
thirty-seven
* Foreign Direct Investment
43
+504%
MAIN EXPORT PRODUCT GROUPSFROM THE U.S. TO CHINA
MAIN IMPORT PRODUCT GROUPSTO THE U.S. FROM CHINA
Cereals, seeds, fruit 15 billionAircraft 15 billionElectrical machinery 12 billionMachinery 11 billionVehicles 11 billion
Footwear 15 billionToys, sports equipment 24 billionFurniture 29 billionMachinery 97 billionElectrical machinery 129 billion
TOTAL U.S. TRADE IN GOODS AND SERVICESTO AND FROM CHINA (IMPORTS + EXPORTS)
F
In 2016, China was the third largest export market for U.S. goods and services. U.S. exports to China have grown by 504 percent since 2001, i.e. since China officially became a member of the World Trade Organization (WTO).
E
and Washington but between Beijingand Silicon Valley. If A.I. develop-ment is like the space race, andbreakthroughs flow from a singlelarge-scale effort to assemble the bestminds and provide them with thegreatest resources, China and itsstate-directed model will have aclear advantage. The determined Soviets put the firstman in orbit, but the deeper-pocketAmericans won the race to the moon.But if the race to develop A.I. is morelike the battle to combat climatechange, one in which a variety oftechnologies are developed in com-petition with one another, then weshould bet on Silicon Valley and itsdecentralized culture of innovation.The companies on which this successwould depend are “American,” buttheir primary responsibility is not ad-
vance U.S. national interests but toprofit shareholders around the world.Conflict between the U.S. and Chi-na is inevitable, and we will likely seea significant escalation in 2018. For-tunately for all of us, neither militaryconfrontation nor an all-out tradewar is in the interest of either coun-try, and both sides know it. Thatwon’t prevent a spike in tensions thatleads to much greater trade frictionbetween the world’s two largest na-tional economies. And it won’ t promote the coopera-tion in technological developmentthat might benefit both sides—andeveryone else.
Source: Office of the United States Trade Representative
In recent months, the fight against
climate change has undergone a
process of reorganization at the top.
President Trump’s decision to disengage
from the Paris agreements has effectively
placed Europe and, most notably, China
in pole position. This is an extremely
attractive opportunity for Beijing, which
now finds itself leading, somewhat
reluctantly, and with all the associated
responsibilities and privileges, the group
of countries that have confirmed their
commitment to the goals set out at the
COP21 conference in 2015. The official
adoption of the stance embraced by
the White House was not unexpected.
Trump had made his skepticism about
the problems associated with global
warming one of the key issues of his
presidential campaign, and once
in the White House, he lost no time
in reiterating his opposition to the
restrictions imposed by the Paris
accords, doing all he could to thwart any
attempt to strengthen the global climate
cooperation that his predecessor, Barack
Obama, had so keenly pursued. Trump’s
positions on climate change had already
caused divisions among the G7 leaders
who gathered in Taormina, Italy, at the
end of May 2017. The heads of state
and government leaders of Canada,
France, Germany, Japan, Italy and the
United Kingdom had hoped to the very
end that the U.S. would reconsider its
position. Not even the appointment
of Scott Pruitt, whose climate change
denial was unambiguous, as head
of the U.S. Environmental Protection
Agency (EPA)—and the agency’s
consequent loss of powers—had
convinced the conference participants
of President Trump’s determination and
readiness for a clash on climate change
issues. Even Pope Francis, the author
of the encyclical “Laudato si,” had tried
to soften Trump’s stance by publicly
presenting him with a volume on climate
change. He, too, obviously, without
success.
A path already chartedThe rest of the world, however, seems
to have no intention of backtracking on
the pledges made, and is proceeding
along the path of decarbonization. The
new development, if it can be seen that
way, is the change in leadership of the
‘eco-friendly’ group, with China now
standing at the helm alongside the
group of European countries. The latter
have in fact long been engaged in
an all-out battle for an environmentally
sustainable future, with the goal of
reducing greenhouse gas emissions by
80-95 percent compared to 1990 levels
by 2050. The two Asian giants have
already started to move on this front,
too, with China (the world’s leading
emitter, accounting for 29 percent
of global emissions) strongly engaged
in a decarbonization path that is as
necessary on the domestic front as it is
welcome globally. It is important to note
that China’s commitment, in partnership
with the United States, was one of the
key drivers of success for the Paris
Accord. And while on the Atlantic coast,
the Trump Administration has decided
to rip up the Clean Power Plan for
energy transition, the government of the
Celestial Empire, in 2015 alone, invested
USD 103 billion in renewable energy
sources (twice as much as the United
States), and aims to allocate a further
USD 360 billion from now through 2020.
As one country leaves, manyothers grow strongerDuring the 19th Congress of the
Chinese Communist Party held in late
October 2017, President Xi Jinping
solemnly pledged that his country would
take “a driving seat in international
cooperation to respond to climate
change.” Beijing has made this goal one
of its priorities for the future. The impact
of China’s lead over the United States
on the path towards decarbonization
will also be felt outside its national
borders. In 2016, while Trump was
planning to dismantle the EPA, Beijing
invested USD 32 billion in renewables
outside China, both in industrialized
countries such as Australia and
Germany, and in emerging economies
like Brazil, Chile, Indonesia, Egypt,
Pakistan and Vietnam. Like it or not,
climate change is also a business
opportunity.
As mentioned earlier, a significant
development is the convergence
between China and the European Union
in the fight against climate change,
confirmed simultaneously—as it
happens—with the announcement of
Washington’s withdrawal from the Paris
Accord during the E.U.-China Business
Summit. References to the rules
and the mechanisms of international
cooperation signal Beijing’s
acknowledgment of its responsibilities
and global role. And while the U.S. is
positioning itself in the rearguard with
respect to one of the global issues that
will have the greatest impact in the
coming decades, neglecting its
economic and industrial implications as
well as its geostrategic consequences
for Washington, the Chinese response
to America’s isolationism looks almost
like a case of passing on the baton.
NICOLÒ SARTORI
THE OVERTAKE
Climate Change speaksChinese
llies and rivals, China and Russia areincreasingly converging in the realmof policy. The two countries aremembers of the group of emergingeconomies known as the BRICS(Brazil, Russia, India, China, andSouth Africa), and are following a pathof rapprochement mainly due toWestern actions against Moscow as aresult of the 2014 Ukrainian crisis. Atthe same time, Russia and China re-main competitors, above all becausethey are competing for supremacy inthe same geographical area, known asCentral Asia during the communistera and today as Eurasia. A prime ex-ample of this competition is Beijing’sOne Belt One Road initiative, aimedat securing dominance over Eurasiaand relegating Moscow to the statusof second-rate power within thismacro-region. It is no coincidence thatthe large-scale New Silk Road projectinvolves Russia only marginally, some-times choosing alternative routes toones already present, an approach es-pecially notable in the exclusion of theTrans-Siberian route.
Historical rivals growingcloserChina and Russia share a land borderof over 4,000 kilometers, a borderseparating the Russian Far EasternDistrict and Manchuria that has onlybeen clearly defined within the pastten years. Prior to the current phasein China-Russia relations, there wereperiods of considerable tension, mostnotably in the 1960s when, as a resultof the friction between their twoleaders, Mao Tse-tung and NikitaKhrushchev, the two countries de-ployed about a hundred military di-
visions facing each other along thisvery boundary line as a display ofstrength that contributed to furtherdeterioration in their relationship.Furthermore, there are few other re-gions where the Russian central stateis as weak as it is in the Far East,weakness mainly due to geographicaland demographic factors. Moscow isseparated from Vladivostok, the re-gion’s main urban center, by a distanceof 9,000 kilometers and the ethnicRussian population in the area num-bers approximately six million in-habitants. A further significant factoris the Chinese northward migrationinto the Siberian hinterland, whichbegan after the Second World War.China is also, at least in part, per-forming well in Central Asia at the ex-pense of its Russian neighbor. Thanksto the China National PetroleumCorporation (CNPC), controlled bythe Chinese government via SASAC(State-owned Assets Supervision andAdministration Commission of theState Council), the Commission thatoversees Chinese state-owned com-panies - Beijing dominates the region’senergy routes. China also controlssome strategic oil pipelines in Kaza-khstan and Turkmenistan, and hasmade considerable investments inthe construction of electricity gridsand transport infrastructures, an im-portant part of the backbone of theOne Belt One Road Initiative. TheNew Silk Road would allow Beijingto achieve some strategically impor-tant goals, turning China into a defacto superpower. In recent yearsRussia has not just stood by andwatched. In 2014, the Eurasian Eco-nomic Union (EAEU), which also in-
cludes Armenia, Belarus, Kazakhstanand Kyrgyzstan, was formally creat-ed under Moscow’s aegis. As atransnational economic organiza-tion, as its name suggests, the EAEUwas specifically designed with ananti-Chinese function in mind, as anattempt to contain Beijing’s influencein the Eurasian region. At the sametime, China has consolidated its pres-ence in Eastern Europe, setting footin all the countries formerly under theSoviet sphere—Bulgaria, Romania,the Czech Republic and Poland—with major investments, especially inthe energy sector. Beijing, more-over, also has a presence in Greece,which became an easy target afteryears of strained relations with theEuropean Union due to the debt re-view program, and it is ideally placedwith the port of Piraeus as one of thearrival points on the New Silk Road.
The Power of Siberia to overcome distancesIn this dynamic relationship betweenChina and Russia, profoundly markedby historical legacy and current strate-gic objectives, the convergence pointis the Arctic, a region where the twocountries are working closely to-
44number
thirty-seven
LELLO STELLETTI AND LIVIO CIPRIANO
For more than five years Lello Stellettiworked for Agenzia Nova, where hedeals with energy, defense and EasternEurope. On these topics he also focusedhis university studies.
Livio Cipriano works for the newswebsite Agenzia Nova, where he isresponsible for the Far East desk. In thepast he also worked on the Balkansregion, with a particular focus on issuesrelated to energy, defense andinternational politics.
China vs. Russia/Dialogue returns
After years of sometimes bitter confrontation,Beijing and Moscow have re-established arelationship based on their mutual interest instrengthening cooperation in the field of energy andin more effectively managing the North Korean crisis
An IncreasinglySolid Axis
A
gether. The planned route for thePower of Siberia, the over three-kilo-meter long pipeline, will transport gasfrom the Irkutsk and Yakutia de-posits to Russia’s Far Eastern District,and to China. The gas will cross theRussian-Chinese border via a pipelinesection passing under the Amur Riv-er. In order to build the connectionbetween the Russian and Chinese net-works, a special checkpoint has beenopened to allow the free movementof personnel and equipment throughthe same border, which 50 years agowas close to becoming a battle-ground. The Power of Siberia projectis the result of an agreement signedin 2014 between the RussianGazprom and the Chinese CNPC forthe supply of 38 billion cubic metersof gas per year to China for a periodof thirty years. According toGazprom’s forecast, the longest sec-tion of the pipeline, measuring about2,200 kilometers and linking Chayan-da, in Yakutia, with Blagoveshchen-sk on the Russian-Chinese border, isexpected to be completed by theend of 2018. Still within this deadline,the Russian energy giant claims it willcreate a section connecting Chayan-da with the Kovykta deposit in the
Irkutsk Region (about 800 kilometersin length) and another from Svo-bodny, in the Amur region, toKhabarovsk (about 1,000 kilometersin length), in the Russian Far East.With this final stretch, the Power ofSiberia pipeline will be connected tothe Sakhalin-Khabarovsk-Vladivos-tok gas transmission system. Thebenefits of a project with such astro-nomical costs—in excess of EUR 11billion for the construction of thepipeline, and a further EUR 6 billionfor gas production—lie in the ap-parent solidity of the agreement be-tween Gazprom and CNPC, anagreement supported by the govern-ments of the two countries. It is clear that, with the EuropeanUnion placing restrictions on projectslike the South Stream first (now fi-nalized) and the Nord Stream IInext, Russia is turning its gaze to morereliable allies, and China fits this roleperfectly. A reasonable amount ofcertainty has been reached by Beijingand Moscow regarding the solidity ofeach other’s government, and there isconfidence that even if there were tobe governmental changes, thosechanges would not jeopardize theagreements reached. Moreover, the
possibility of any such changes seemsunlikely at the moment since Xi Jin-ping’s leadership was confirmed dur-ing the last Chinese Communist Par-ty congress held in October, andwhile Vladimir Putin has not formallystated that he will run in the March2018 presidential election, there areas yet no serious rivals who could chal-lenge his leadership. In addition, forRussia, the scope of this large-scaleproject extends well beyond China in-sofar as, with the Power of Siberia pro-ject, Moscow will connect all itsSiberian deposits to the Vladivostokliquefaction terminal, its own truegateway to international markets,first and foremost those of South Ko-rea and Japan.
The Yamal Peninsula, thenew frontier of cooperationIn addition to the gas pipeline, how-ever, China and Russia have furthercooperation opportunities in the Arc-tic, an area estimated to hold 30 per-cent of the world’s as-yet-undiscoveredgas and oil reserves. Far-reachingchanges in the international energymarket have led Russia to step up itsactivities in the region, in particular inthe Yamal Peninsula. However, with
regard to gas, the expansion strategydefined by Moscow has been de-layed by several factors, including theEuropean Union’s effort to diversifyits energy sources, the American“shale gas revolution," which has re-duced Russia’s potential to enter newmarkets, and the crisis with Ukraine,which remains the third largest con-sumer of Russian methane. With re-gard to oil, it has become clear that,due to the fall in oil prices in recentyears, investments in Arctic depositsare not particularly profitable, and, dueto the region’s difficult climatic and en-vironmental conditions, developingthese sites poses far greater chal-lenges than for those located in oth-er areas of the world. However, thecurrent geopolitical context obligesMoscow to seek partners it can relyon. After the 2014 crisis followingRussia’s annexation of Crimea, theUnited States and the EuropeanUnion imposed sanctions againstMoscow. These involve measureslaid down in July 2014 prohibiting thetransfer of technologies to carry outdrilling below 150 meters, the explo-ration and exploitation of shale oil re-serves, and strict financial restric-tions on loans with maturity exceed-
45
Chi
na
Rus
sia
USD 38,086,969,000
Russia
IMPORTS FROM CHINA
MACHINERY 1,201,374WOOD 2,593,279
MINERAL FUELS 17,862,379
FISH 1,032,561P
RUSSIA / CHINA BILATERAL TRADE STATISTICS
2016VALUE: USD THOUSAND
Merchandise exports, f.o.b.
Merchandise imports, f.o.b.
2,098,161
1,587,431
281,825
191,406
IMPORTSEXPORTS IMPORTSEXPORTS
MERCHANDISE TRADE 2016 (Million US$)
SHARE IN WORLD EXPORTS/IMPORTS 2016
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
RUSSIAN FEDERATIONGDP (million current US$, 2016) 1,280,731GDP per capita (US$, 2014-2016) 10,946Current account balance (% GDP, 2016) 1.7Trade per capita (US$, 2014-2016) 2,622Trade (% GDP, 2014-2016) 24.0
RANK IN WORLD TRADE, 2016 EXPORTS IMPORTS
Merchandise 17 24 excluding intra-EU trade 11 17Commercial services 25 18 excluding intra-EU trade 14 12
IMPORTS
M 1 excluding intra-EU trade 1
excluding intra-EU trade 3
1.77% 1.18% 13.15% 9.78%
Agricultural products 8 Manifactures 22.3
Fuels & mining products 67.4 Other 2.3
EU (28) 45.8 China 9.8
Belarus 4.9 Turkey 4.8
Korea, Republic of 3.5 Other 31.2
Agricultural products 14.2 Manifactures 75.5
Fuels & mining products 3.9 Other 6.4
EU (28) 38.2 China 20.9
USA 6.1 Belarus 5.2
Japan 3.7 Other 26
BREAKDOWNIN ECONOMY’STOTAL EXPORTS
BREAKDOWNIN ECONOMY’STOTAL IMPORTS C
hina
Rus
sia
USD 38,086,969,000
Russia
IMPORTS FROM CHINA
MACHINERY 1,201,374WOOD 2,593,279
MINERAL FUELS 17,862,379
FISH 1,032,561P
RUSSIA / CHINA BILATERAL TRADE STATISTICS
2016VALUE: USD THOUSAND
Merchandise exports
Merchandise imports
2,098,161
1,587,431
281,825
191,406
IMPORTSEXPORTS IMPORTSEXPORTS
MERCHANDISE TRADE 2016 (Million US$)
BY MAIN COMMODITY GROUP, % (2015)
RUSSIAN FEDERATIONGDP (million current US$, 2016) 1,280,731GDP per capita (US$, 2014-2016) 10,946Current account balance (% GDP, 2016) 1.7Trade per capita (US$, 2014-2016) 2,622Trade (% GDP, 2014-2016) 24.0
RANK IN WORLD TRADE, 2016 EXPORTS IMPORTS
Merchandise 17 24 excluding intra-EU trade 11 17Commercial services 25 18 excluding intra-EU trade 14 12
IMPORTS
M 1 excluding intra-EU trade 1
excluding intra-EU trade 3
1.77% 1.18% 13.15% 9.78%
BREAKDOWNIN ECONOMY’STOTAL EXPORTS
BREAKDOWNIN ECONOMY’STOTAL IMPORTS
(USD THOUSAND)
(
SHARE IN WORLD EXPORTS/IMPORTS 2016
Agricultural products 8 Manifactures 22.3
Fuels & mining products 67.4 Other 2.3
BY MAIN DESTINATION, % (2016)
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
EU (28) 45.8 China 9.8
Belarus 4.9 Turkey 4.8
Korea, Republic of 3.5 Other 31.2
Agricultural products 14.2 Manifactures 75.5
Fuels & mining products 3.9 Other 6.4
EU (28) 38.2 China 20.9
U.S. 6.1 Belarus 5.2
Japan 3.7 Other 26
B
46
ing 30 days. These restrictive measureshave forced major companies from theAmerican company ExxonMobil toNorway’s Statoil, to suspend cooper-ation with their Russian counter-parts in the Arctic. In addition, lead-ing Russian energy companies such asRosneft, Gazprom Novatek andLukoil remain subject to sanctions,and this restricts their ability to obtainfunding. This is the context in whichChina comes into play. Beijing seesRussia as a partner it has to work within order to consolidate its position inthe Arctic, an area that China needsin order to meet its requirements forraw materials. Despite the slowdownin China’s rate of economic growthcompared to a few years ago, domes-tic energy demand continues to rise,driving companies such as CNPC tolook for new markets and areas towork in and for which to obtain ex-ploration and drilling licenses. Siberiaand the Arctic, but also the RussianFar Eastern District, fit this descrip-tion as they have great potential interms of resources and, with respectto Vladivostok, they are access pointsfor export markets. In addition, theChinese could invest in major infras-tructure through projects related tothe One Belt One Road initiative andthereby also secure greater Russian in-volvement. Currently, in fact, Moscowis only marginally involved in thelarge-scale Chinese project with the“New Eurasian Land Bridge,” whichshould reach western Russia from the
west of China through Kazakhstan,and with the China-Mongolia-Russiacorridor.
A deal based on mutual energy interestsAgainst this background, China’spresence in the Arctic has been in-tensifying for some years. In 2013, anagreement was signed between theRussian company Novatek and Chi-na’s CNPC for the sale of 20 percentof the Yamal LNG liquefaction plant(located in Sabetta, in the north-western area of the Yamal Peninsula).The agreement provides for a long-term contract for the supply of ap-proximately 3 million tons of LNGper year to China, about 18 percentof the total system capacity. TheUkrainian crisis and internationalsanctions have forced Novatek toseek more foreign partners and, inview of the situation, the Chinese be-
gan with a clear advantage. For thisreason, in 2015, the Russian compa-ny sold a further share equal to 9.9percent of the liquefaction plant to theSilk Road Fund (a Chinese state-owned investment fund) for aboutEUR 1.09 billion, also receiving in ex-change a loan of EUR 730 million fora period of 15 years in order to fundthe project. Last year, however, Ex-imbank and the Chinese DevelopmentBank in turn opened two 15-yearcredit lines in favor of Yamal LNG fora total value of EUR 9.3 billion. Bei-jing will thus provide approximately60 percent of the capital necessary toimplement a project which never-theless still carries risk since, due to theeconomic challenges caused by sanc-tions, Novatek has had great difficultyproviding adequate safeguards forthe Chinese loans. Beijing, however,maintains a position of advantagesince about 80 percent of the equip-
ment necessary for completing the de-velopment of the liquefaction plantwill be produced by Chinese ship-builders. China’s strategy is clear:there is a broad desire to cooperatewith Russia and to strengthen its po-sition in an area of strategic impor-tance for China’s energy needs, butonly under economically acceptableconditions. Moscow will thus be“forced” to provide an advantageousbusiness environment to its Chinesepartners, while still trying to safeguardits own position. On one hand Rus-sian companies need the funds of Chi-nese companies, and, on the other,they fear that the latter’s role in energyprojects, such as Yamal, could becometoo dominant. Companies like CNPCenjoy such a strong position thatthey could hardly accept a role thatdoes not involve significant controland management functions. Factorssuch as these, the fruit of the afore-
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Source: World Trade Organization
ChinaRUSSIA EXPORT TO
I
USD 28,021,250,000
PLASTICS 1,312,571ELECTRONICS 9,070,868
MACHINERY 11,098,182
TEXTILES 1,190,186
B
Merchandise exports, f.o.b.
Merchandise imports, c.i.f.
M
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
IMPORTS
M 17 excluding intra-EU trade 11
excluding intra-EU trade 14
CHINAGDP (million current US$, 2016) 11,218,281GDP per capita (US$, 2014-2016) 7,995Current account balance (% GDP, 2016) 1.8Trade per capita (US$, 2014-2016) 1,601Trade (% GDP, 2014-2016) 20.0
RANK IN WORLD TRADE, 2016 EXPORTS IMPORTS
Merchandise 1 2 excluding intra-EU trade 1 3Commercial services 5 2 excluding intra-EU trade 3 3
Agricultural products 3.2 Manifactures 94.3
Fuels & mining products 2.4 Other 0.1
USA 18.3 EU (28) 16.1
Hong Kong, China 13.8 Japan 6.1
Korea, Republic of 4.5 Other 41.2
Agricultural products 9.5 Manifactures 64.4
Fuels & mining products 21.3 Other 4.8
EU (28) 13.1 Korea, Republic of 10
Japan 9.2 Chinese Taipei 8.8
USA 8.5 Other 50.4
ChinaRUSSIA EXPORT TO
I
USD 28,021,250,000
PLASTICS 1,312,571ELECTRONICS 9,070,868
MACHINERY 11,098,182
TEXTILES 1,190,186
B
Merchandise exports
Merchandise imports
IMPORTS
M 17 excluding intra-EU trade 11
excluding intra-EU trade 14
CHINAGDP (million current US$, 2016) 11,218,281GDP per capita (US$, 2014-2016) 7,995Current account balance (% GDP, 2016) 1.8Trade per capita (US$, 2014-2016) 1,601Trade (% GDP, 2014-2016) 20.0
RANK IN WORLD TRADE, 2016 EXPORTS IMPORTS
Merchandise 1 2 excluding intra-EU trade 1 3Commercial services 5 2 excluding intra-EU trade 3 3
(USD THOUSAND)
5
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
BY MAIN COMMODITY GROUP, % (2015) BY MAIN DESTINATION, % (2016)
Agricultural products 3.2 Manifactures 94.3
Fuels & mining products 2.4 Other 0.1
U.S. 18.3 EU (28) 16.1
Hong Kong, China 13.8 Japan 6.1
Korea, Republic of 4.5 Other 41.2
Agricultural products 9.5 Manifactures 64.4
Fuels & mining products 21.3 Other 4.8
EU (28) 13.1 Korea, Republic of 10
Japan 9.2 Chinese Taipei 8.8
U.S. 8.5 Other 50.4
47
THE OVERTAKE
mentioned historical mistrust be-tween the two countries and differ-ences in their respective currentstrategic objectives, could constitutea serious obstacle to cooperation be-tween the two powers in the energysector.
Working towards agreementon North Korea Russia and China show several simi-larities with regards to their approachto resolving a number of regionalcrises, as demonstrated by the proposalshared by the two countries con-cerning the presence of nuclear fa-cilities in the Korean peninsula.Moscow welcomed the idea present-ed in June by Beijing calling for a “dualsuspension,” namely suspending theNorth Korean nuclear program in ex-change for suspending large-scaleU.S.-South Korean joint military ex-ercises in the area. The initiative was
supported by Russia, but rejected bythe United States. The closeness be-tween China and Russia on the issuewas also illustrated by China’s supportfor the Russian proposal to increasediplomatic efforts to solve the Kore-an crisis. The Chinese government ex-pressed its support for the RussianForeign Ministry’s initiative to focuson consultations and negotiations, adesire shared by the internationalcommunity. The crisis in the Koreanpeninsula epitomizes the utilitarian na-ture of this new Russia-China axis.Both countries believe that if theNorth Korean regime were to col-lapse, this would lead to a strongerAmerican military presence alongtheir eastern borders, an expansion ofthe U.S. nuclear umbrella and a con-sequent weakening of their strategicdeterrents. China and Russia alsoshare some key factors of internal vul-nerability linked to the multi-ethnic
and multi-confessional nature of theirpopulations and the porous and, insome sections, unstable nature oftheir national borders. Containingthese domestic vulnerability factors isa priority for both China and Russia,and at the same time is a root cause ofthe rivalry between the two countries,which today seems to be mostlymarginalized in the face of the com-mon recognition of a useful junctureto weaken the global supremacy of theUnited States under Donald Trump.Russia and China both aim to extendtheir influence in the Central AsianRepublics, in a region where both facethe destabilizing effects of Islamic na-tionalism such as that of the Uighur.As for North Korea, Beijing is main-ly interested in preventing the Unit-ed States from moving northwards inthe Korean peninsula. China, how-ever, does not seem to exclude, and haseven openly discussed, the possibili-ty of pre-empting the U.S. in the eventof a conflict in the peninsula, occu-pying North Korean territory first.The scenario of a Chinese occupationof North Korea, which could eventake place with the consent of theUnited States, would enable Beijingto prevent the spread of Americanforces in the area and at the same timeeliminate the Pyongyang regimewhich is becoming increasingly diffi-cult and unreliable for the Chineseleadership. Russia, by contrast, has ev-ery interest in preserving Kim Jong-un’s regime, and any other scenariowould in fact be disastrous forMoscow as it could involve the open-ing of an “eastern front” with theUnited States or the extension andstrengthening of the presence of Chi-na, whose historical appetites for thevast and unpopulated expanses of theRussian Far East are well known. Thisexplains the differing approaches ofChina and Russia with respect to theNorth Korean regime, despite the ap-parent harmony between the twocountries at the international level. Inrecent weeks China has drastically de-creased trade with Pyongyang, and formonths has been silently but effec-tively reducing North Korean com-mercial and financial activities athome. Russia, on the other hand, hasremained close to Pyongyang, notonly avoiding any punitive measureson an economic and commercial lev-el, but actually making efforts toavoid isolating the country, recentlyinaugurating a new Internet connec-tion through its state companyTransTeleCom. Until last October,North Korea was entirely dependenton the Chinese provider Unicom.Since then, however, thanks to Rus-sia, the North Korean regime has ben-efited from a second web link with theoutside world, which also makes anyattacks on its network infrastructureeven more complicated.
Continuing tensions causinginstabilityIn recent months the situation on theKorean peninsula has worsened as aresult of Pyongyang’s repeated bal-listic missile launches and of a nucleartest conducted on the night ofNovember 29th, all carried out inbreach of UN Security Council res-olutions. In September, the U.N.Security Council adopted stricterresolutions against North Korea,limiting exports of oil and the coun-try’s access to gas, and banning im-ports of its textile products. Thegrowing tensions have led to an ex-change of threats between Washing-ton and Pyongyang, with Trumpsaying he is ready to carry out a “dev-astating” military option to “destroy”North Korea if the United Stateswere to be threatened. China andRussia, however, seem unwilling tobreak the international sanctionsfront against the regime, despite thefact that both countries have ques-tioned the additional sanctions im-posed unilaterally against Pyongyangby the U.S. and other countries.North Korea seems to have movedincreasingly apart from its historicalChinese ally after Pyongyang’s crit-icism of the support expressed by Chi-nese President Xi Jinping for theU.N. Security Council sanctionsagainst the North Korean regime.The cooling of relations betweenthe two countries was also illustrat-ed by North Korean leader KimJong-un’s decision not to meet withPresident Xi’s representative SongTao during his official visit to Py-ongyang. China, however, remainsNorth Korea’s main trading partner,and Beijing has stated that it will notagree to stop oil supplies to Py-ongyang as requested by the TrumpAdministration after the last ballisticmissile test. In Beijing’s view, the routeof unilateral sanctions threatens totrigger a serious humanitarian crisisin North Korea and would onlystrengthen the intransigence of KimJong-un’s regime. Although Chinaagreed to impose only partial sanc-tions against Pyongyang, North Ko-rean exports to Beijing fell by 62 per-cent in October compared to thesame month last year, with a value ofjust USD 90 million. This figure alsoshows a 38 percent drop compared tothe month of September, when NorthKorean exports amounted to USD145.8 million. Official figures fromBeijing show that last month Chinadid not import any iron ore, lead orcoal from North Korea, and that theworld’s second largest economy hasalso blocked exports of diesel, gaso-line and corn to its historical ally.
Source: Export Genius Association_Report 2016
48
China’s investment in many African countries is reshaping both the economic world map and global diplomatic equilibrium, inevitably involving the U.S. and Europe
China vs. Africa/The Atlantic Council’s J. Peter Pham weighs in
A Strategic Continent
J. Peter Pham Vice-President for Research and RegionalInitiatives at the Atlantic Council, where he is alsoDirector of the Council’s Africa Center. Has taughtlaw, political science and African studies atJames Madison University. Among other roles, heis former Vice-President of the Association for theStudy of the Middle East and Africa (ASMEA).
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n recent years, the perception of Chinese investment in Africahas undergone a transformation. In the late 1990s and ear-ly 2000s, the countries and peoples at which China’s finan-cial commitments were aimed often considered them as a toolto increase Beijing’s power in the region. Currently, however,China’s presence is increasingly seen as an opportunity fordevelopment. Africa has become the stage for the growingcompetition between overseas powers in terms of direct in-vestment and development programs. The most important players are China, the U.S. and Euro-pean countries, but also India and Japan, with other coun-tries eyeing the region. How should we assess the current U.S.strategy in Africa? Has the previous U.S. administration’s“Power Africa” plan been replaced by another public/privateaction plan? And how does Washington perceive China’sgrowing influence there? In addition, how does energy playinto China’s Africa strategy? We put these other questionsto J. Peter Pham, Vice-President of the Atlantic Council andDirector of its Africa Center.
In the last few years, the perception of Chinese
investments in Africa has changed. During the late 1990s
and early 2000s, recipient countries and populations
viewed these investments as a tool to increase China’s
influence in the region and exploit its natural resources.
More recently, Chinese presence is increasingly seen as a
development opportunity. What is your assessment?
I would argue that it is not only the external perception ofChinese investments in Africa that has changed, but that theinternal strategic motivation behind them has evolved overtime. Under Jiang Zemin (president, 1993-2003), the Peo-ple’s Republic of China launched a national strategy of “go-ing out” (zouchuqu zhanlue), which encouraged investmentsabroad to secure access to stable supplies of natural resourcesfor which the increasing demand could no longer be met bydomestic production. Under Jiang’s successor, President HuJintao (president, 2003-2013), the policy concept became thatof China’s “peaceful rise” (heping jueqi) to political and eco-nomic “great power” status which, of course, required notonly natural resources, but also diplomatic and commercialaccess—the latter to export the goods which Chinese factories,using the imported energy and primary resources from Africaand elsewhere, turned out at ever-increasing volumes andspeed. China’s demand for resources—it is the world’s sec-ond-largest consumer of petroleum (after the United States)and accounts for over 40 percent of the global demand forbase metals—is reflected in the country’s investment port-folio in Africa. While Chinese companies have investmentsin virtually every corner of Africa, nearly 75 percent of thattotal is concentrated in just ten countries: Nigeria, Algeria,South Africa, Ethiopia, the Democratic Republic of the Con-go, Chad, Angola, Niger, Sierra Leone, and Cameroon. More-over, just under half of these investments are in either the en-ergy or mining sectors. Since Xi Jinping took over as gen-eral secretary of the Chinese Communist Party in 2012 andpresident in the following year, Chinese grand strategy hasbeen animated by the idea of the “China dream” (Zhongguomeng) of recovering what many Chinese believe to be theircountry’s rightful place in the world. In Africa, this has meant interests that go beyond access tonatural resources and markets to what Chinese representa-tives will describe as a “new type” of relations, by which theymean they will engage across the continent on a wider spec-trum of areas—on an equal footing with what Africa’s tra-ditional partners, including the United States and Europeancountries, have been doing for decades. This approach in-cludes burgeoning developmental and military links: in ad-dition to more than 2,500 development, public works, andother construction projects in all but a handful of Africa’s fifty-four countries, China’s first-ever overseas military base wasopened last year in Djibouti. In short, China’s engagementwith Africa has evolved as the country’s global strategy hasshifted and one can say that it is an important element in thatlarger plan. For Africans, this presents a great opportunity—as well as some risks.
Africa is experiencing growing competition from external
powers in terms of foreign direct investments and
development programs. China, the United States and
European countries are the most important players, but
other countries (India and Japan, in particular) are looking
to increase their presence. Do you consider this new
“Scramble for Africa” will have a positive impact for the
continent?
Increased trade and along with it, potentially greater diplo-matic leverage can be good news for Africans if African statesmake the most of the opportunity. In theory, greater demandgenerates more attention and the latter can be exploited bystatesmen with competence and vision to advance the interestsof their countries. The question, however, is whetherAfrican leaders will rise to the occasion or whether they willsettle for deals which may deliver short-term gains, but at sig-nificant long-term cost. For example, particularly concern-ing to many analysts is the trend among some of Africa’s new-er partners, including China, to offer much-needed major in-frastructure, but under terms that are not necessarily trans-
49
CLARASANNA
She works in Eni as PublicationsManager for ExternalCommunication Department, Media Production.
I
THE OVERTAKE
50num
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parent, including mortgaging of natural resources, sometimesyears, if not decades, into the future.
What is your view about the current U.S. strategy in Africa
and, in particular, what is the U.S. perception of China’s
growing influence in the African continent? Will the “Power
Africa” plan supported by the previous U.S. administration
be replaced by any new public/private investment plan in
the continent?
U.S. Secretary of State Rex Tillerson—whom, it should benoted, having come from his prior role in the private sectoras chairman and chief executive officer of ExxonMobil, ar-guably has had more operational knowledge of doing busi-ness in Africa than any of his predecessors—recently artic-ulated America’s strategy towards Africa in an address to aconference of ministers from across the continent which hehosted in Washington in November 2017. The strategy is built around three pillars: promoting tradeand investment, encouraging good governance, and coun-tering terrorism. The secretary rightly noted that each of thosethree pillars requires the other two in order to thrive. Thus,while the U.S. administration intends to refocus the economicrelationship with African countries squarely on trade and in-
vestment, encouraging policies that increase openness andcompetition, economic growth will only occur where thereis good governance and accountability—the presence of theselast two, moreover, improves security. I do not think that pol-icymakers in the administration have the view that there isor should be a zero-sum competition between the UnitedStates and China in Africa—and I am certain that Africancountries would not welcome such an approach in any case—that does not mean that there are not some legitimate ques-tions about Chinese actions across the continent and theirimpact not only on America’s interests, but also the long-termsocial, economic and political development of our Africanfriends. Since 2009, China has surpassed the United States asAfrica’s largest trading partner. Since more than 80 percentof China’s imports from Africa are in the form of crude oilor other raw natural resources, part of the relative declineAmerica’s trading position vis-à-vis Africa is attributable tothe decline in demand for energy imports with the growthof domestic production, including the rapid growth ofshale oil production. But there also is no denying that Amer-ican firms—and those from other Western countries with ro-bust anti-corruption laws—are at a comparative disadvantage
40% Global demand for base metals
China is the second largestconsumer of oil in the world(after the United States),accounting for over 40% ofglobal demand for base metals.President Hu Jintao (2003-2013)established the politicalconcept of the “Peaceful Rise”(heping jueqi) of China to thestatus of a “great power”,politically and economically.This required great availabilityof natural resources. Photo: Addis Ababa railwaystation, built by China.
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when competing with players, including Chinese companies,who do not face similar constraints, a point underscored bythe recent indictment by a court in New York of a formerAfrican minister and a former member of the Hong Konggovernment of bribery in connection with energy deals in twoAfrican countries. So, a level playing field for American (andother) firms is one concern. Another concern is the poten-tial for China’s “no-strings-attached” approach to making dealsin Africa propping up undemocratic or otherwise unac-countable regimes, to say nothing of undermining good gov-ernance. Beyond economic concerns, the United States shouldalso be watchful of China’s pursuit of a more multipolar po-litical and economic global order under the guise of its ver-sion of “democracy in international relations” (guoji guanziminzhuhua) as well as the burgeoning military footprint thatthe Chinese have on the African continent, not only with thebase in Djibouti, but with their participation in United Na-tions peacekeeping operations as well as their bilateral securityties with a number of African countries. The expansion of the Chinese Communist Party’s direct linkswith ruling political parties in several African countries andthe impact these relations will have on good governanceshould also be monitored. The Obama administration’s “Pow-er Africa” initiative focused attention on an extraordinarilyimportant issue, the cost and reliability of electricity in Africa,which is one of the top barriers to business growth on thecontinent. Moreover, the United States has some major tech-nological, commercial, and commercial capabilities that couldbe leveraged in the effort to increase Africa’s installed gen-eration capacity by one-third by 2030, bringing online 30,000megawatts of new power, the goal announced by the formerU.S. president when he unveiled the program in 2013. Thatsaid, however, what has been delivered so far has been onlya fraction of this target and it is fair to question whether someof the private-sector and non-U.S. public-sector commitmentsto the scheme truly represent new mobilization or were al-ready in the pipeline when “Power Africa” was announced.Part of the difficulty with the program so far is that it is anad hoc cooperation between a dozen different U.S. govern-ment agencies and more than one hundred partners of var-ious kinds outside the U.S. government, making it somewhatunwieldy. One could see very easily where the Trump ad-ministration, as part of its overall reform of government ingeneral and its reorganization of diplomatic and developmentefforts in particular, might want to revisit how to structurethis effort.
What are the priorities of China’s strategy in Africa with
regard to energy, and what is its contribution to addressing
the key challenge of access to energy in the continent?
Even as Africa is increasingly important to China in termsof that country’s energy security, accounting for a little lessthan one-fourth of oil supply, China is also growing in im-portance to the energy needs and infrastructure of Africancountries. This is a radical shift from just a little more thana decade and a half: before 2000, the three Chinese state-owned petroleum companies were active in just one Africannation, Sudan, where CNPC held a major stake in GreaterNile Oil Project. Nowadays, CNPC, Sinopec, and CNOOCare active upstream in close to twenty countries. In addition,Chinese firms are increasingly active in downstream oper-ations. They also account for roughly one-third of the new powercapacity built in Sub-Saharan Africa in the last five years. Forexample, in July 2017, the South African state-owned util-ity, Eskom, secured a $1.5 billion loan from the China De-velopment Bank for the Medupi power station that, whencompleted, will be the fourth-largest coal-fired plant in thesouthern hemisphere and the biggest dry-cooled power sta-tion in the world.
In light of China’s growing role in Africa, could you assess
China’s contribution to countering piracy, in particular in
East Africa?
In January 2009, two destroyers and a supply ship from theChina’s People’s Liberation Army Navy (PLAN) begancounter-piracy operations off the coast of Somalia. The mis-sion of this modest task force was to offer protection to Chi-nese merchant vessels passing through what was, at the time,the pirate-infested waters of the Gulf of Aden. The unprecedented deployment also had the strategic effectsof burnishing the international image of mainland China asa contributor to international security and giving the PLANa platform to hone its expeditionary capacity, especially inAfrica, where, as we have noted, the country has consider-able political and economic interests. Since then, the Chi-nese have rotated nearly two dozen task forces as part of on-going patrols.
THE OVERTAKE
Xi Jinping has set in motion the massiveChinese strategy through the idea of the“China Dream”, to regain its leadershipin the world, rightfully Beijing’s in theminds of many. This approach combinesnew development projects with militarypresence. Photo: the opening of the firstoverseas Chinese military base inDjibouti, East Africa last year.
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The broader strategic nature of the operation off the east-ern coast of Africa was underscored when a warship takingpart in the anti-piracy operations, the frigate Xuzhou, was sub-sequently sent through the Suez Canal during the Libyan cri-sis of early 2011 in what was the China’s first-ever wartimeoperational deployment in the Mediterranean Sea, when itwas stationed off Tripoli to coordinate the evacuation of Chi-nese nationals working in the country. Thus, the PLAN’s counter-piracy operations can be inter-preted as proof of China’s increasing willingness to bear itsshare of the burden for the maintenance of the freedom ofthe seas and other global commons. Of course, it is in China’s interest to do so, considering thatalmost three-quarters of its petroleum imports, along withsimilarly prodigious quantities of other raw materials and nat-ural resources which country gets from Africa to sustain itsindustries—together with some 40 percent of all goods boundfor China—had to pass through the pirate-infested watersof the Gulf of Aden and the western Indian Ocean. At the same time, the accelerated modernization of the PLAN,the resulting enhancement of its capabilities for operationsin waters distant from its former coastal focus and the po-litical willingness to project power abroad may also be in-dicative of a significant shift in regional and, indeed, glob-al balances of power.
A significant proportion of the investments planned by
China to boost its economy through the “Belt and Road”
initiative will go to Africa. If African raw materials remain a
strategic resource for Beijing, the Chinese presence in
Africa has diversified and African leaders, worried by the
increase in debt with their Asian partner, are pushing more
and more for a real partnership. How do you view this
situation?
I have always held that the more suitors African countries have,the more opportunities they have to strike the best deal forthemselves and their peoples. So, China’s increased engagement with Africa—along withthe renewed interest of the continent’s traditional partnerslike the United States and Europe, as well as attention froma host of emerging powers like Japan, India, Turkey, and oth-ers—can be a good thing, if African leaders manage it well.On the other hand, the Chinese preference for a “no-strings-attached” approach to doing business in Africa, in contrastto Western countries’ linkages to governance, human rights,and other criteria, may find favor in precisely the sorts of poor-ly-governed or conflict-plagued places where such condi-tionalities may be most needed for long-term sustainable de-velopment. In fact, it is an African leader, former Nigerian Central BankGovernor (and now Emir of Kano) Lamido Sanusi, whosefather served as ambassador to China, who has labeled thatChina’s dealings with African countries a “new form of im-perialism” because primary resources are extracted and man-ufactured goods sold back without much by way of technologyand skills. One does not have to agree entirely with Sanusi’s dire anal-ysis to realize that, if “win-win” is to be more than a clichédslogan, it is incumbent on Africans themselves to ensure thatit is so.
75% 25%
About 75% of total Chineseinvestment in Africa isconcentrated in no more than10 countries: Nigeria, Algeria,South Africa, Ethiopia,Democratic Republic of Congo,Chad, Angola, Niger, SierraLeone and Cameroon. Photo: Chinese Premier LiKeqiang meeting the Presidentof Djibouti Ismail Omar Guellehin Beijing (November 24, 2017).
53
n China’s heavily promoted “Belt andRoad Initiative (BRI),” the Africancontinent is strategically positionedas a major destination of China’s mas-sive infrastructure building, invest-ment and trade. From the sea routesof the Indian Ocean to the Africancoast, Beijing has proposed an un-precedented vision linking much ofthe developing world together acrosscontinents, a project that far ex-ceeds the scale of the U.S. MarshalPlan for Europe after the SecondWorld War. China is well prepared for playingsuch a role given the fact that it hasbeen the largest trading partner ofAfrica since 2009, now doing twiceas much trade with African countriesas its trade with the United States. AsChina-Africa economic ties intensi-fy, so is Africa’s increasing role in Chi-na’s global search for energy securi-ty, especially in terms of oil supply.Unlike the United States, which hasincreased its domestic oil and gas pro-duction dramatically in recent yearsdue to the shale revolution, China’sdependency on imported oil andgas has increased substantially, withtwo thirds of oil and one third of gasnow coming from abroad. Africanow ranks second to the MiddleEast as the major source of China’soil imports. Thus, investing in Africaenergy sources and importing themto China have been central to Bei-
WENRAN JIANG
He is the President of Canada-ChinaEnergy & Environment Forum and itsannual conference since 2004, a SeniorFellow at the Institute of Asian Researchat the University of British Columbia, aGlobal Fellow at the Woodrow WilsonInternational Centre for Scholars, andSpecial Advisor to the U.S. and Canada-based Energy Council.
I
THE OVERTAKE
Oil and gas from sub-Saharancountries, a historic destination for Chinese investments abroad, have for years been a fundamentalsupport to the growing growth of the Dragon’s economy, in exchange for infrastructuralinterventions essential for the growth of the Continent
China vs. Africa 2/A relationship that produces mutual benefits
Double Stroke Tie
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jing’s strategic planner and to its na-tional oil companies.
Keeping up energyinvestment in AfricaAfrica is one of the earliest destina-tions of Chinese overseas energyinvestment. China NationalPetroleum Corp. (CNPC), the topChinese national oil company(NOC), entered the Sudan oil fieldsas early as the 1990s. Despite the con-troversies over the Darfur conflict,the separation of South Sudan andthe civil war between the Northand the South, Chinese NOCs sur-vived, adjusted and consolidatedtheir positions in the country, with astrong equity oil production presencein both Sudan and South Sudan, con-
trolling as much as 75 percent of Su-danese oil production, according toone estimate. Prior to South Sudan’ssuccession in 2011, China had in-vested more than USD 20 billion inSudan’s energy sector. While CNPCreduced its worldwide investment dueto the declining oil prices in recentyears, Sudan was an exception, andthe Chinese Ambassador to Sudan LiLian promised more investment in2015 in an effort to boost Sudaneseoil output. While Sudan opened thedoor to Chinese oil companies, it istoday a relatively small player interms of both oil production and ex-port to China. Chinese NOCs andprivate energy companies have ex-panded in the continent, currentlyoperating in Angola, Nigeria, Chad,Uganda, Gabon and other African oilproducing countries. The originalChinese energy investment model inSudan, by focusing on upstreamproduction, has been modified withmany investment forms, and one ofthem is the well-known “infrastruc-ture in exchange for resources” for-mula. In Angola, which has occupiedthe top three spots in China’s oil im-port (together with Russia and Sau-di Arabia), China provided integrat-ed energy investment focusing notonly on upstream but midstream
and downstream as well, such as theUSD 2 billion loan for refinery con-struction. The Chinese governmentalso provided USD 14.5 billion loancredit to build road, airport, port andother infrastructure projects. From2010-2016, China gave Angolaaround USD 25 billion under their“infrastructure-in-exchange-for-oil”arrangement. In Nigeria, the largestoil and natural gas producer in Africa,China had to play catch-up as mostof the country’s oil and gas develop-ment blocks have long been mo-nopolized by Western IOCs. Andhere again Beijing plays a long-termgame. While Nigeria was hit hard bythe sustained low oil and gas pricesafter 2014 and domestic turmoil andviolence, China extended its financialsupport to the country by pledginga USD 6 billion infrastructure loan,followed by a massive USD 80 billionenergy specific MOU to upgradeNigeria’s oil and gas infrastructure,both in 2016, a year in which theNigerian economy was hit by its firstcontraction in 25 years. These agree-ments will take time to implement,but some of the provisions may havebeen implemented in the spring of2017 and there is no doubt thatthese are life saving measures to agovernment that depends more than
90 percent on petrodollar income tosustain itself. Overall, China’s foreignaid and investment in Africa arenow rivaling that of Western coun-tries. In 2016 alone, China pouredUSD 36.1 billion into Africa, whichaccounted for 39 percent of the con-tinent’s total foreign investment. In a continent where Western in-ternational oil companies (IOCs)have dominated the energy sector fordecades, Chinese oil companies havemanaged the challenge of being thenewest kid on the block with inex-perience in host countries and alack of advanced technology andmanagement knowhow. They caughtup by providing large-scale local in-vestment in areas traditionally ne-glected by Western countries, thustaking a strong foothold in manyAfrican oil-producing countries.
An important source of oil for ChinaWith the deepening of Chinese in-vestment in Africa in general and en-ergy related investment in particular,the continent has become an im-portant source of oil for China. An-gola, Nigeria, Libya and Algeria areamong the top oil exporting countriesto China, but Angola has taken aneven more significant spot in recent
STRATEGIC RELATIONSChinese President Xi Jinping andthe president of Djibouti IsmailOmar Guelleh preside at theceremony at the Great Hall of thePeople in Beijing on November23rd 2017. There is a realpossibility that growing interestscan promote development localeconomy.
55
years. During September to October2017, Angola topped Russia as thelargest supplier of oil to China, andthe Top Ten list of China’s oil ex-porters also includes Congo andGabon. Some reports attributed the surgingdemand of China’s growing region-al refineries and the reduced U.S. im-ports from Africa and the MiddleEast as causes of the growing exportsfrom Angola and Saudi Arabia toChina. However, a key factor in An-gola’s case is that the structure of its“loan for oil” arrangement with Chi-na requires using oil as the repaymentindex of the loans. So the higher theoil price, the less oil it requires forprocessing the scheduled payment.But when the oil price declines, as hasbeen the case over the past severalyears, Angola needs to allocate a lotmore oil to repay the debt. The samelogic applies to Angola’s arrangementto pay the services IOCs perform inits oil fields. This arrangement hasleft Angola with much less oil to sellin the open market to earn incomeand to finance its own governmentprograms. Other countries with sim-ilar agreements with China, such asNigeria and Venezuela, are facing thesame problem, and they may face in-creasing debt repayment pressure un-der the sustained low oil prices sce-nario. On the other hand, one recent studyreveals that while the total volumeand value of Chinese oil imports fromAfrica have increased substantially inthe past 15 years, both the share ofAfrican oil on China’s fuel importsand China’s share on African fuel ex-ports have in fact decreased from thepeak period of 2007-2009. Thispoints to China’s accelerated effortsto diversify its oil import sources aswell as Africa’s rapid expansion in oilexports to the rest of the world.The data also demonstrate that Chi-na’s overseas investments in the en-ergy sector do not necessarily trans-late into its moving equity energyproduction abroad back to China. Infact, most of China’s overseas equi-ty oil and gas production, be they inCanada or in Nigeria, are sold to theopen market rather than shippedhome. Such a shift in strategic think-ing is very different from China’s ini-tial rationale for its energy “go-out”strategy over a decade ago, whenChinese policy makers felt overseasacquisition of upstream assets andmoving the products home would bethe best way to secure China’s in-creasing dependence on imported oil. In terms of supply and demand dy-namics, the growing downstreamcapacities of China’s refineries, bothNOCs and private, lead it to buy cer-tain crude products that maximizetheir profit margin. For example,China is reluctant to import high
quality light oil from Nigeria due toits higher price tag. Chinese oilcompanies prefer to import lowerquality but cheaper crude oil to fur-ther refine back home—this despitethe fact that China has invested ex-tensively in Nigeria’s energy sector.
Navigating new challengesand opportunitiesWhile China continues to strength-en its traditional energy investmentand trading relations with Africa, itis also confronted with many diffi-culties. In the host state, there are po-litical risks of instability, unrest andcivil war; there are the lack of estab-lished legal frameworks and consis-tent policies to sustain stable opera-tions; there is rampant corruptionand “rent seeking” behavior for im-plementing projects; and there areplaces where local resistance to Chi-na’s presence is strong. Internation-ally, there is competition from oth-er NOCs and IOCs for energy re-sources; there is consistent criticism
of China’s behavior in Africa from theWestern press, and there are accu-sations of China’s “new colonial-ism.” At the enterprise level, Chinesecompanies face unfamiliar cultural,language and social environments.Thus the learning curve is deep.These challenges, coupled with pro-longed low energy prices, may havebeen behind Sinopec’s recent decisionto sell its assets in Nigeria andGabon, something unthinkable onlya few years ago. With Sinopec alsoselling its energy assets in Argentina,China’s overseas energy engagementmay enter a more complex era. Onthe positive side, Chinese PresidentXi Jinping’s Belt and Road Initiativehas injected new developments withChina’s energy engagement with thecontinent in recent years. One de-velopment is that more non-NOCinvestors and enterprises from Chi-na have entered the energy sectors inAfrican countries. These new actorsfollow similar developments in Chi-na where some reforms have al-
lowed other state owned enterpris-es, local investors and the private sec-tor to complete with NOCs in energyrelated sectors. Another emergingtrend of China’s energy investmentin Africa is going beyond tradition-al oil and gas sectors to include oth-er forms of energy investment, suchas the close to USD 6 billion massivehydro project in oil and gas richNigeria. The focus on new energysectors mirrors China’s rapid growthas the world leader in renewable andalternative energy sources. Chineseenterprises have quickly enteredAfrica in these new energy sectorssince 2010. They have noted that twothirds of the population in sub-Sa-haran Africa still have no electricity,making the potential for hydro, so-lar and wind energy sources very at-tractive. For example, five of every sixsolar production firms in the worldare Chinese, and these Chinese com-panies have expanded their opera-tions in African countries in recentyears. As documented by China-Africa Trade Research Centre, Chi-nese solar, wind and nuclear powercompanies have successfully bid onrenewable and alternative energyprojects in South Africa, Kenya,Namibia, Ethiopia and other sub-Sa-hara African countries. In the sum-mer of 2017, the China-Africa Re-newable Energy Cooperation and In-novation Alliance (CARECIA) wasestablished in Beijing under thebroader framework of the BRI.Therefore, Africa to China is nowmore than a key supply source of en-ergy and other resources. It is also agrowing energy market with a pop-ulation almost as big as that of Chi-na. Just like the penetration of Chi-nese manufactured commodities,electronics and mobile services in thecontinent, we can expect large scaleChinese energy products and servicesto enter into the African market aseconomic development and urban-ization pick up pace in many Africancountries. If managed well fromboth sides, there is a distinct possi-bility that fast growing Chinese in-terests in Africa’s new energy sectorsmay promote local economic devel-opment by facilitating many coun-tries to leap frog over the current fos-sil dependency situation and help thecontinent’s one billion population at-tain more renewable and alternativeenergy sources, thus accomplishingthe goals of the Paris Climate Accordboth in China and in Africa. But tosuch an end, Beijing may need tothink carefully about how its new en-ergy investment activities are in-deed beneficial to the local economyand local jobs, and not predatoryplans designed to seize the emerginglucrative market.
THE OVERTAKE
AFRICAN SHARE ON CHINESEFUEL IMPORTSUSD
16 0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
18
20
22
24
26
28
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20148
10
12
14
16
18
20
10,000,000
0
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000CHINESE SHARE ON AFRICAN EXPORTSUSD
CHINESE FUEL IMPORTS FROM AFRICA 2000-2014
AFRICAN FUEL EXPORTS TO CHINA 2000-2014
A recent study revealed that while the total volume and value ofChinese oil imports from Africa have increased substantially in thelast 15 years, both the share of African oil on Chinese fuel importsand the Chinese share on African fuel exports have decreasedcompared at the peak of 2007-2009. This is due to the attempt ofChina to diversify its sources of oil imports as well to the rapidexpansion of African oil exports to the rest of the world.
Source: Canadian Energy Research Institute
Source: Canadian Energy Research Institute
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hina’s re-engagement in Africa overthe last decade resulted in manycountries reassessing their own Africastrategies. The China-Africa Summit(FOCAC) in particular was a water-shed for Africa’s international relationsin the 21st century. China’s Africa en-gagement has since evolved and itsOne Belt One Road (OBOR) initia-tive marks a new phase for China-Africa cooperation. The OBOR isalso mirrored by India and Japan inparticular, who are also increasingtheir engagement in Africa. More in-ternational engagement in Africa isnot necessarily unwelcome; the keyquestion is how this can be managedto be mutually beneficial and provideprosperity for all.
Summits and top-levelmeetings to understandmutual needs and objectivesIn August 2014, President Obamahosted America’s first summit inWashington, D.C.; that April, theE.U. hosted its fourth E.U.-AfricaSummit in Brussels; the BRICS Sum-mit was held in South Africa inMarch 2013; and in June 2013, Japanhosted their 5-yearly Tokyo Inter-national Conference on InternationalDevelopment (TICAD) in Yoko-hama. In 2015, the 6th China-AfricaSummit (FOCAC) was held in Africa,
and South America, South Koreaand Turkey, who have all held sum-mits with African leaders in recentyears, have pledged return matches inAfrica in coming years. Israel hadplanned its Africa summit in Togo in2017, but this has been postponed.Such summits have become a key fea-ture of demonstrating engagementwith Africa. The first was Japan,who held the inaugural TICAD in1993, though only four Heads of Stateattended. The conference has al-ways focussed as much on businesspartnership as on traditional devel-opment and has always, until now,been held in Japan. Africa remains animportant export market for cars,electronics and machinery and asource of raw materials—thoughtwo-thirds of the latter come toJapan from a single country, SouthAfrica. China adapted TICAD andin October 2000 launched its FirstMinisterial Forum on China-Africa
Cooperation (FOCAC). PresidentJiang Zemin delivered a speech at thefirst ministerial conference of FO-CAC in Beijing. President JiangZemin, Premier Zhu Rongji of theState Council and Vice PresidentHu Jintao of the People’s Republic ofChina, President Gnasinbe Eyademaof the Republic of Togo, PresidentAbdelaziz Bouteflika of the Demo-cratic People’s Republic of Algeria,President Frederic Chiluba of the Re-public of Zambia, President BenjaminWilliam Mkapa of the United Re-public of Tanzania, and Secretary-General of the Organization ofAfrican Unity Dr Salim Ahmed Sal-im attended the opening and closingceremonies and delivered speeches.More than 80 ministers from Chinaand 44 African countries, represen-tatives of 17 regional and internationalorganizations and people from thebusiness communities of China andAfrica were invited to the conference.
ALEX VINES
He is Head of the Africa Programme atChatham House and a senior lecturerat Coventry University. A version of thispaper was presented at the 2018Beijing Forum.
The recent proliferation of international summit meetingsindicates a willingness to investigate and rethinkrelations between the twocontinents, with considerablepotential to lead global growth in the coming years
In Search of a New Role
C
Asia vs. Africa/Two worlds seeking a mutual understanding
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THE OVERTAKE
The conference charted the directionfor the development of a new, stableand long-term partnership featuringequality and “mutual benefit” be-tween China and African countries.China has held such summits regu-larly every three years since then, al-ternately in Beijing and Africa. Itsown trade with Africa has growndramatically in the past decade: fromabout USD 5 billion each way in2001, to over USD 110 billion im-ports (almost all raw materials) andUSD 85 billion exports (predomi-nantly transport, clothing and ma-chinery) by 2012. In 2017, China isa destination for 15 to 16 percent ofsub-Saharan Africa’s exports and is thesource of 14 to 21 percent of the re-gion’s imports.
An unprecedented militarycommitment for Beijing By 2018, more than 2,500 Chinesetroops, police, and military experts
had been deployed to six U.N. peace-keeping missions in Africa, four ofwhich are in Darfur, DRC, Mali, andSouth Sudan; there are smaller con-tingents in the Côte d’Ivoire andWestern Sahara. President Xi Jinpingpledged USD 100 million in militaryaid to the African Union in 2015, andChina supports African countries’capacity building in areas like defenceand counterterrorism. Since 2008,China has supported counter piracyoperations in the Gulf of Aden andsignificantly in August 2017, Chinaopened in Djibouti its first militarybase overseas (to support its naval ef-forts). The watershed for Sino-Africarelations was the FOCAC Summit ofNovember 2006, themed “friend-ship, peace, cooperation and devel-opment.” Over 5,000 people, in-cluding heads of government or theirrepresentatives from over 48 Africancountries, and representatives from 24international and regional organiza-
tions, such as the United Nations andthe African Union, attended the fo-rum. Chinese and African leaders ex-changed views on how to deepen Chi-na-Africa cooperation and jointlypublished the Declaration of theBeijing Summit of the Forum on Chi-na-Africa Cooperation, and the Bei-jing Action Plan (2007-2009). TheChinese government announcedeight measures for China-Africa co-operation. The next FOCAC summitis in Beijing in 2018. The size of thisFOCAC summit and the scale of Chi-na’s ambitions toward Africa forcedAfrica’s traditional partners to reassesstheir own African engagement Al-though the E.U. had held its firstAfrica summit in Cairo in April 2000,it had failed to hold a subsequentsummit; the FOCAC Summit ofNovember 2006 jolted Europeanpolicy makers into organizing a newand more ambitious E.U.-Africasummit in Lisbon in 2007. Other
Africa summits by emerging and re-emerging powers quickly followed,resulting today with such profusionthat African leaders themselves are re-viewing whether they can reallyspend so much of their time cruisingthe world from summit to summitgiven their domestic priorities, the bi-annual African Union Summits andthe regular regional summits ofSADC, ECOWAS, IGAD, ICGLR,ECCAS, and the EAC, not to men-tion U.N. meetings, that demandtheir attendance.
Human rights come beforecommercial relationsA question to ask is whether this wasa signal of Africa rising and that therest of the world should take it seri-ously as a partner? Or is it simply areflection that Africa has what the restof the world wants: a rapidly growingpopulation of consumers and anabundant (for now) stock of natural
resources— markets to which every-one wants access? Is there substancebehind these summits? They are a re-flection of growing economic en-gagement with Africa and an at-tempt to redress the balance for a con-tinent hitherto hitched too closely toformer colonial powers and westernmultinationals. As China’s engage-ment with Africa grows, its interestsgrow closer to those of the rest of theworld. It was even one of the first toprovide medical help to tackle theEbola crisis in West Africa. The Eu-ropean Union and its member statesstill have the closest, deepest, broad-est and most complex relations withAfrica. The shadows of history lielong and sometimes dark over the re-lationship, though there have formany years been regular E.U. meet-ings with the African, Caribbean andPacific (ACP) nations under theLomé Convention. As mentionedabove, the first E.U.-Africa Summittook place in Cairo in 2000. It thentook seven years before the secondSummit, in Lisbon, could agree on aJoint E.U.-Africa Strategy to guidethe relationship for the future. TheE.U.’s 2014 Summit was the largestSummit yet held, with 40 African and20 European heads of state or gov-ernment present. The November2017 Africa-EU summit in Abidjanwas also underpinned by a sharpenedstrategic focus on Africa by Europe,triggered by anxiety about migrationand African demographic trajectories.The economic relationship betweenEurope and Africa continues to grow– not as fast as that with emergingeconomies like China, but the E.U.remains Africa’s largest economicpartner. A significant proportion ofEuropean imports from Africa(around 35 percent) were value-added food, drink or manufacturedgoods, indicating that Europe is
moving away from the traditionalview of Africa as merely a source ofraw materials. Both trade and in-vestment therefore combine withmore traditional E.U. developmentcooperation, worth around 3-4 billion(5 billion) per annum, plus E.U.member states bilateral programscontribute materially to the conti-nent’s economic transformation. TheE.U. has always emphasized thatgood governance, including the ruleof law and the respect of humanrights, is essential to achieve the po-litical stability necessary for eco-nomic development. A significantpart of E.U. aid goes to promotethose goals, shared by the A.U. TheE.U. is the largest funder of Africa’sown peace support operations, aswell as the provider of training mis-sions and protective deployments ina number of countries. In Somalia(through AMISOM), in Mali and theSahel, and now in the CAR, theE.U. and African Union are workinghand-in-hand with the U.N. to com-bat terror and disorder and to deliv-er lasting African solutions. Differ-ent countries have different interests.The U.S. clearly was playing catch upwhen it held its first U.S.-Africaleader’s summit in August 2014.Business and counter-terrorism in-creasingly drive the partnership thathad previously been focused on hu-manitarianism. For the others—Brazil, India, South Korea, andTurkey—the interest in Africa re-mains fundamentally economic butalso about U.N. Security Council re-form. Competition for markets isgrowing, but from Africa’s point ofview, the potential access to increasedinvestment and trade from whateversource is welcome. For each partner,the growing economic links will in-crease their interest in the continent’sstability, likely to be reflected in
continued support for an active U.N.role alongside the A.U., E.U., U.S.and niche engagements by China, In-dia, Gulf States and Turkey and oth-ers to build that peace and stability.
The Asia-Africa Growth CorridorThe announcement of the Asia-Africa Growth Corridor in partner-ship with Japan at the annual meet-ing of the African Development Bankat Gandinager by Indian Prime Min-ister Narendra Modi is a more recentexample of a mirrored response toChina’s deepened engagement inAfrica – and in this case the One BeltOne Road (OBOR) initiative. LikeChina, India’s trade has seen a sig-nificant increase from USD 11.9 bil-lion in 2005-2006 to USD 56.7 bil-lion in 2015-16. Multilateral en-gagement was also launched withthe first India Africa Forum Summit(IAFS) in 2008. Three such summitshave been hosted by the Indian gov-ernment (the last was in 2015). Whatis new is that the Asia-Africa GrowthCorridor initiative is a trilateral ini-tiative, between India, Japan andAfrica. Japan has a longstanding re-lationship with Africa. The most im-portant initiative is the Tokyo Inter-national Conference on African De-velopment (TICAD) which has beenmeeting since 1993, and the latest wasthe Sixth Tokyo International Con-ference on African Development(TICAD VI) which was held inNairobi in August 2016. This was thefirst time that TICAD was held inAfrica, and it brought together 32Heads of State and Governmentfrom Africa, the Prime Minister ofJapan, co-organisers and over 18,000accredited participants. As alreadymentioned, TICAD predates all oth-er summit initiatives on Africa, andfollowing the end of the Cold War,
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The role ofFOCACAt the beginning of the newmillennium, China consolidatedand formalized its strong interestin Africa. Indeed, in October2000, the first “Forum on China-Africa Cooperation” (FOCAC) washeld in Beijing. This was a veryimportant event for theconsolidation of commercialrelations between the twocountries. To emphasize thestrategic importance of themeeting, the attendees includedthe Chinese President JiangZemin and Premier Zhu Rongjiand the Presidents of Togo,Algeria, Tanzania and the AfricanUnion, along with over 80Chinese ministers and 44 fromvarious African countries. Sincethen, FOCAC has become anopportunity for China toannounce massive funding plans,and to confirm its significant rolein Africa. The financialcommitments announced at eachconference (held every threeyears, alternately in China and inAfrica) have grown steadily. The$5 billion earmarked in 2006increased to $10 billion in 2009,$20 billion in 2013 (with another$10 billion added on one yearlater), and reached $60 billion atthe latest FOCAC, the 6th, held inJohannesburg, South Africa inDecember 2015.
2002
2
2003
2
2004
2
2005
2006
2
2007
2
2008
2
2009
2
2010
2
2011
2
2012
2
2013
2
2014
2
2015
2
2016
2
050100150200250
US$ bn
CHINA-AFRICA TRADE
CHINESE EXPORTS TO AFRICA
CHINESE IMPORTS FROM AFRICA
Source: Johns Hopkins China-Africa Research Initiative
59
it helped refocus attention on Africandevelopment in a period of decliningwestern strategic and economic in-terest. TICAD meets every five yearsand is in collaboration with the U.N.Office of the Special Adviser onAfrica, the United Nations Devel-opment Program, the World Bankand the African Union Commission.This distinguishes TICAD fromDelhi’s IAF process as it is much morea bilateral effort although India hasbeen examining triangular coopera-tion with African partners in specif-ic areas, for example with the Unit-ed States on promoting African agri-cultural growth, security and healthand women’s empowerment.
The Africa-India-Japan triangleDialogue between India and Japan onAfrica began in 2010. It was, howev-er, during Indian Prime MinisterNarendra Modi’s visit to Japan inNovember 2016 that the idea ofpromoting a growth corridor be-tween Asia and Africa first emerged.In their joint statement: “The twoPrime Ministers underscored theimportance of India-Japan dialogueto promote cooperation and collab-oration in Africa, with the objectiveof synergizing their efforts and ex-ploring specific joint projects in-cluding the areas of training and ca-pacity building, health, infrastructureand connectivity. In this regard, theyalso expressed their intention to workjointly and cooperatively with the in-ternational community to promotethe development of industrial corri-dors and industrial networks in Asiaand Africa.” At the African Devel-opment Bank meeting in India in June2017, India unveiled a vision docu-ment for an Asian-Africa GrowthCorridor (AAGC). Indian andJapanese officials stated that the
prime objective of the corridor is toenhance connectivity between Asiaand Africa and that the corridor hasfour key areas:•Development Cooperation Projects• Quality Infrastructure and Institu-tional Connectivity• Enhancing Skills• People-to-People PartnershipPriority areas for development co-operation are agriculture, health,technology, and disaster manage-ment. The AAGC is a statement byboth India and Japan that they are notinterested in collaborating in China’sBelt and Road initiative. Indian think-tanker Ruchita Beri wrote that: “Itsrefusal to participate in the Chineseinitiative is due to sovereignty con-cerns given that the China PakistanEconomic Corridor (CPEC), a partof the Belt and Road, passes throughIndian territory under Pakistan’s con-trol. There is no doubt that com-parisons will be made regarding themerits of the Indo-Japanese and Chi-nese initiatives. Be that as it may, theAAGC marries India’s brand of hu-man resources development and ca-pacity building with Japan’s objectiveof delivering quality infrastructure inthe region.” India and Japan haveshared strategic maritime goals butthis initiative is probably more aboutan effort to counter-balance China’sambitions. Japan has signalled that itis ready to commit USD 30 billion to-wards the AAGC, and India has sig-nalled it will allocate some USD 10billion but this is small compared withChina’s OBOR. Some Indian andJapanese think tank analysis is anxiousabout OBOR and China’s ambitionsin the Indian Ocean. One speechclaims that: “India sits at the centreof this vast and populous regionwhere China is aggressively expand-ing its presence. China, under Pres-ident Xi Jinping, has abandoned
Deng Xiaoping’s (1978-1989) “hideand bide” policy, which sought to puta conciliatory, non-threatening faceon its rapid economic rise, for an ag-gressive, money-fuelled drive forglobal influence.” Indian officialsworry about the speed and scale atwhich the Chinese economy grew,had both a regional and global grow-ing impact and especially the OBORinitiative. In all, 64 countries arepartners in the OBOR, 57 of whichparticipated in the Belt and Road Fo-rum, held in Beijing on 14-15 May2017. Of the 36 countries located inthe Indian Ocean Rim (India’s pri-mary focus), 15 are among the des-ignated partners and were repre-sented at a high level. Of the re-maining IOR countries, all except In-dia and Oman participated. Anxietyabout China has made India expandits own activities and influence withthe countries of the Indian OceanRim. India has converted its ‘LookEast’ policy into ‘Act East’ vis-a-visSouth East Asia. It has also focused onthe Security and Growth for All in theRegion (SAGAR) strategy towards thewestern Indian Ocean countries, andthe AAGC is another response. TheAAGC aims to create a ‘free and openIndo-Pacific region’ through re-opening ‘ancient maritime networks’and new sea corridors that will inte-grate African and Asian economies.Both initiatives emphasize their focuson development and infrastructurebut the AAGC focus on the com-parative strengths of Indian andJapanese engagement in Africa-health, pharmaceuticals and agro-pro-cessing for example. Unlike theOBOR initiative, AAGC has noland corridor, and unlike the OBOR,does not have a core focus on Eura-sia. Africa seems to have become abolt-on for OBOR (and in 2018OBOR is likely to be written into the
next FOCAC summit agenda).AAGC claims to be more inclusive al-though this may be more on paperthan reality, and it lacks the depth offunding that China is prepared tocommit to OBOR. East Africa andthe Western Indian Ocean seem to bethe primary region of competition forChina, India and Japan. It has the po-tential to be a geo-strategic gatewayfor Africa-Asia trade and has en-joyed some of the fastest growthrates in Africa. The OBOR initiativehas prioritized Kenya, Tanzania,Egypt and Djibouti – while AAGCplanners talk of the whole coast fromSomalia to South Africa being a fo-cus. Although there will be somecompetition, these initiatives couldcomplement each other. The OBORinitiative is mostly focused on trade-related infrastructure projects andcommodities for infrastructure de-velopment, while on paper AAGCemphasizes the training of humancapital. Japan in particular is also look-ing for new infrastructure deals butis finding China a tough competitoron price. India and China have col-laborated. They worked together atglobal forums on issues such as tradeand climate change and combatingSomali piracy. India and China alsoconduct rudimentary joint militaryand naval exercises, and India coop-erated in the creation of financial in-stitutions, such as the Asian Infras-tructure Investment Bank (AIIB),and the BRICS bank. China’s in-creased engagement in Africa since2000 has capitalized on learningfrom past initiatives such as those byJapan (TICAD especially). It hasalso forced other nations to thinkmore deeply about Africa and itsstrategic value to their interests. Thisis a positive development and is partof a normalisation of international re-lations in a world where Africademonstrates greater agency. The re-ality is that Africa has more freedomand choice than ever before. Moneyis available—if African countries canguarantee their own stability andeconomic openness. Far from tryingto control it, the world wants Africato control itself. The answer lies inAfrica’s own hands but there is also in-creased competition, and Africanleadership will need to be morestrategic and focused on what itwants from these relationships. Thereare clear lessons for Africa on how tonavigate the competing offers in thischanging world such as China’sOBOR initiative and Indian andJapan’s AAGC equivalent. Poten-tially they could both provide a win-win for Africa’s longer term devel-opmental needs.
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
U
0 505 1001 1501 2002 2502
US$ bn
U.S. EXPORTS TO AFRICA
U.S. IMPORTS FROM AFRICA
U.S.-AFRICA TRADE
THE OVERTAKE
n light of U.S. President DonaldTrump’s peculiar positions on the im-plementation of the Paris Agreement,a remarkable new global allianceseems to have taken shape. The Eu-ropean Union, a first mover in glob-al policies to combat climate change,has never been so close to China onthe issues of decarbonization and sus-tainability, and is focusing stronglyon cooperation with Beijing in a bidto achieve the two-degree targetneeded to secure the continued liv-ability of planet Earth. With only 8percent of global CO2 emissions, Eu-rope has embarked on what is cer-tainly one of the most solid and cred-ible trajectories, compared to theworld’s leading powers, to reduce itsenvironmental impact. Europe hasalready reduced its emissions by 22percent compared to 1990 levelsand is thus fully in line with the tar-
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NICOLÒ SARTORI
He is Senior Fellow and Head of theEnergy Program of the IAI, where he coordinates projects on the issues ofenergy security, with a focus on theexternal dimension of Italian andEuropean energy policy.
A vacuum in leadership caused by the Trump Administration’sdisavowal of the Paris Agreementhas led to a new alliance betweenBeijing and Brussels, with broadimplications for their internationalstanding as well as efforts to promote sustainabledevelopment around the world
So Far, yet so Close
I
China vs E.U./Quiet environment in the wake of the low carbon
gets of its 2020 Package. It is nowaiming for a 40 percent reduction by2030. Over the long term, Brusselsseeks to reach near zero emissions(80-95 percent reductions by 2050),although the target is still not fullyconsistent with the EuropeanUnion’s climate policies and with Eu-rope’s current trajectories. In spite of its commitment to de-carbonization and sustainability, Chi-na is currently in a diametricallyopposite situation from the E.U.With over 10 million tons of green-house gas emissions (overtaking theU.S. in 2006), it accounts for almostone third of total global CO2 emis-sions. The rise in China’s emissionshas been huge—doubling over a pe-riod of 10 years—and to some extentis still unpredictable. In recent years,a succession of projections for Chi-na’s emission peaks has produced
grossly inaccurate or contradictoryresults. After an extremely modest de-cline in the two previous years, Chi-na’s emissions have grown once againin 2017 by a significant 3.2 percent(pushing global CO2 up by 2 per-cent), fueling the dissatisfaction, butmost of all the concern of those mon-itoring the fight against climatechange. This growth shows no signsof slowing down, despite China’songoing efforts to reduce its carbonfootprint and its new role as a glob-al player in decarbonization policiesand in the fight against climatechange.At the international level, China’scommitment and its partnershipwith the United States under Presi-dent Obama in 2015 made a signif-icant contribution to the success ofCOP21 and the signing of the ParisAgreement. And despite the subse-
quent decision by Washington (un-der the Trump Administration) notto adhere to its international pledgeson climate change, Beijing seemscommitted as never before to main-taining—and even bolstering—itsleadership role. Trump’s decisioneffectively cemented the global cli-mate partnership between the E.U.and China, which reaffirmed theirjoint commitment to the Paris Agree-ment immediately after the WhiteHouse announcement. During aconcurrent bilateral summit held inBrussels on June 1, they had the op-portunity to discuss and reaffirmtheir intent to forge ahead on thepath set out at COP21 despite Amer-ica’s withdrawal. Although a series ofdisagreements on trade issues pre-vented their adoption of a joint dec-laration formalizing their full ad-herence to the 29 articles enshrined
61
A PACT FOR THE PLANETRelations between China and the E.U. on energy policies date back to 1994, since whenorganizes the Energy biennialCooperation Conference. On the sidelines then of the E.U.-China 2005 Summit Brussels e Beijing have signed a joint Declarationon Climate Change.
TRADE IS CENTRAL TO THE EU–CHINA RELATIONSHIP
BUT WHILE TRADE IN GOODS IS WELL DEVELOPED, TRADE IN SERVICES LAGS BEHIND
THE EU AND CHINA ARE EACH OTHER’S LARGEST SOURCE OF IMPORTS
AND ONE ANOTHER’S SECOND LARGEST EXPORT DESTINATIONS
2016
FROM 2005 TO 2015, CHINA’S SHARE OF THE EU’S
TOTAL TRADE ROSE, WHILE THE EU’SPROPORTION OF CHINA’S TRADE
VOLUME FELL
+5.3%
-1%
The EU’s shareof China’stotal trade
China’s shareof the EU’stotal trade
20.2%of imports are
from China
9.7%of exports goto China
13.1%of imports are
from the EU
16.1%of exports goto the EU
€2.4 TrillionUS FDI stock in the EU
€2.6 TrillionEU FDI stock
in the US
€515 Billiontrade in goods
€168 BillionEU FDI stock
in China
€168 BillionEU FDI stock
in China
€35 BillionChinese FDI stockin the EU
STOCKS OF FDI* BETWEEN THE EU AND CHINA
REMAIN MUCH LOWER THAN THE EQUIVALENTAMOUNTS BETWEEN THE EU AND THE U.S.
€65 Billiontrade in services
2016 trade between Chinaand the EU comprised
in the Agreement and their mutualcommitment to the irreversible en-ergy transition processes underway,China and the E.U. have never be-fore been in such close agreement onthe fight against climate change.
A shift from dialogue to joint leadership?Bilateral ties between the E.U. andChina actually date back to well be-fore Trump’s recent U-turn, specif-ically to the mid-1990s, when Eu-ropean emissions were 25 percenthigher than China’s (4 billion tons ofCO2 vs. 3 billion tons). The sectoraldialogue on energy policies launchedin 1994 (which gave rise to a biannualEnergy Cooperation Conference)and the dialogue on environmentalissues launched in 1996 laid thefoundations for the first interactionsbetween European and Chinese in-stitutions,. Then, on the sidelines ofthe 2005 E.U.-China Summit, Brus-sels and Beijing signed a Joint Dec-laration on Climate Change for-malizing their partnership in that re-gard. This was followed by a series ofinitiatives (Joint Statement on Dia-logue and Cooperation on Climate
Change and E.U.-China Environ-mental Governance Program, 2010;E.U.-China Environmental Sus-tainability Program, 2012; E.U.-China 2020 Strategic Agenda for Co-operation, 2013;.-China Joint State-ment on Climate Change, 2015)that gradually contributed tostrengthening bilateral ties, whilealso reflecting Europe’s need and in-tent to include Beijing as a credibleplayer in the international arena.For various reasons, first and fore-most China’s dramatic environmen-tal conditions, which are fuelinggrowing mass protests throughoutthe country, the Chinese governmenthas in recent years embarked on a se-rious review of its energy and climatepolicies in an attempt to find a com-promise model that can satisfy theneed to sustain its high economicgrowth rates while also limitingemissions. In this respect, the Euro-pean Union’s experience certainly of-fers a potential model. The E.U. hascreated the most sophisticated and ef-fective model of sustainable devel-opment thanks to which, as EuropeanClimate Action and Energy Com-missioner Miguel Arias Cañete point-
ed out, GDP has grown by over 50percent since 1990 while CO2 emis-sions have fallen by 22 percent. De-spite the challenges posed by carbonleakage and the delocalization of itsindustrial activities, Europe can makea significant contribution to Chineseefforts on this front. The E.U. is theundisputed global leader in low-carbon technologies, with over 44percent of all patents registered inEuropean territory, and is thereforea key actor for Beijing to look to if itseeks to scale up its decarbonizationtrajectory in a credible manner. At thesame time, a key objective of theE.U.'s export policies and of its in-dustrial actors is access to China’shuge market (it is estimated that therehave been 300,000 low-carbon tech-nology transfers from Europe toChina since 2009), especially in viewof Beijing’s further acceleration onthe green front. But the partnershipnow seems to have gone beyondthis purely bilateral dimension oflearning/transfer. As a result of Chi-na’s step change in preparation forCOP21, its key role in mobilizingand encouraging developing coun-tries to adopt a proactive and re-
sponsible approach, and its hugedomestic investments to tackle an un-sustainable environmental situation,the relationship between Brusselsand Beijing now seems to be morebalanced and solid. Their joint com-mitment is contributing to morecredible and effective global climategovernance. The E.U. and China canthus act as promoters of a broadNorth-South alliance between in-dustrialized and developing countries,without which any attempt to im-plement the Paris Agreement couldultimately fail. This role would boostthe international standing of both,helping Europe to reap the politicaldividends of its climate leadership,which it is still struggling to capital-ize on despite its large-scale invest-ments, and encourage China—as apillar of the energy transition—to fi-nally act as a key (and credible) play-er in the mechanisms of global gov-ernance. This joint leadership cancertainly provide an impetus fordriving global decarbonization poli-cies forward. But due to the majoreconomic and strategic implicationsof decarbonization, among otherthings, it could also trigger several
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Partners for over Forty Years Since 1975, i.e. since China and the European Union (the then
European Economic Community – E.E.C.) have had trade relations,
these major international players have both radically changed. China
has become the largest global economy in terms of purchasing power
parities, and the E.E.C. has changed its name and has grown to
become the world’s largest single market, with a single currency and
free movement of goods and services. In view of this process, it is
unsurprising that the E.U. has become Beijing’s leading trading
partner, and that China is now the E.U.’s largest export market.
*Foreign Direct Investments
CHINESE EXPORTS TO THE EU HAVE A GREATER IMPACT ON DOMESTIC EMPLOYMENT THAN EXPORTS IN THE OTHER DIRECTION
T
EU EXPORTS
SURPLUS
EU IMPORTS
2010
2016
2015
2014
2013
2012
2011
€ bn1.8 1.6 1.4 1.2 1.0 0.8 0.80.6 0.60.4 0.40.2 1.21.00.2
0.35
0.27
0.37
1.30
0.47
0.43
0.48
BILATERAL EU–CHINA TRADE IN TOTAL FINANCIAL SERVICES
generate
11.49 Millionperson-yearsof employmentin China
generate
2.64 Millionperson-yearsof employmentin the EU
CHINESE EXPORTS TO THE EU EU EXPORTS TO CHINA
competitive, and possibly even con-flictual, mechanisms between Brus-sels and Beijing.
A common enemy in coalCoal is certainly the greatest commonenemy of the E.U. and China. Theproblem in Europe can be simplysummed up by noting that while coalcontributes to just under 25 percentof Europe’s power generation, it ac-counts for 75 percent of E.U. emis-sions. And while Brussels is at theforefront of the fight against the mostpolluting of all combustible fuels,some E.U. member states are stillheavily reliant on coal for their elec-tricity sectors, accounting for 80percent of power generation inPoland and over 40 percent in theCzech Republic, Bulgaria, Greece,and Germany. The problem of coal,and its devastating effects on healthand the environment, is one withwhich the Chinese are very familiar.Coal still accounts for almost threequarters of China’s total electricityproduction, with a total installedcapacity of over 900 Gigawatts(GW), and is actually the main causeof death from air pollution in the
country: 86,000 deaths caused by coalburning at power generation plants,55,000 deaths from coal used in in-dustrial processes, and over 170,000deaths from coal and biomass com-bustion in households. In order totackle these staggering figures, theChinese government has announceda freeze on a hundred new coal-firedpower plants, these to be replacedwith additional generation capacityfrom renewables. Despite these ef-forts, if China is to limit the devas-tating impact of existing powerplants, it needs new technologies forthe capture and storage of CO2, aswell as efficient mechanisms for“pricing” emissions and incentivizingemissions reduction using market dy-namics. In this respect, joint initia-tives like the China-E.U. Near ZeroEmission Coal (NZEC) project andthe E.U.-China ETS Project in par-ticular, the latter a three-year projectsupporting the design and imple-mentation of emissions trading sys-tems in China, are important pillarsof cooperation. Cities are also play-ing a central role in the joint effortsby the E.U. and China to combat cli-mate change. Chinese cities led the
way in voicing the alarm that led theBeijing government to step up its lowcarbon trajectory. And their collab-oration with European cities—through the E.U.-China Low Car-bon City partnership—can bringsignificant benefits by bolsteringbottom-up dynamics that are still toodifficult to implement in the Chinesesocio-political system.
Focus on AfricaAlthough the many challenges asso-ciated with climate changes requirea joint (or at least a coordinated) re-sponse, the honeymoon betweenthe E.U. and China could face diffi-cult times ahead. This is becausewhile the energy transition process isinevitable in order to secure thecontinued viability of the planet, italso involves a strong economic andindustrial component that couldtrigger geopolitical competition.Given the potential value of the in-vestments required to implementthe Paris Agreement—USD 23 tril-lion between now and 2030, ac-cording to the World Bank—decar-bonization could be a highly attrac-tive game for Brussels and Beijing to
play. With some 170 countries (outof the 197 signatories) that havenow ratified the Agreement and areset to implement the mitigation andadaptation measures to comply withthe Nationally Determined Contri-butions (NDCs) agreed in Paris, thepotential for intervention is huge.Both China and the E.U. will there-fore want to be ready—the formerwith its financial leverage and the lat-ter with its technological leader-ship—to enter these vast marketswith their respective industries. Africais undoubtedly one of the areas in theworld where energy transition anddecarbonization processes will takehold most spectacularly. Data fromthe International Renewable EnergyAgency (IRENA) show very clearlythe African continent’s vast low car-bon potential, with 300,000 GW ofsolar power and 7,000 GW of windpower. In a region where 600 millionpeople still have no energy access, thispotential provides an excellent op-portunity for European and Chineselow carbon companies. Gaining priv-ileged access to these vast and rapid-ly expanding markets is an importantdriver for the export of technologies,know-how and services to countriesand regions that are building theirenergy sector virtually from scratch.Brussels and Beijing already have astrong presence on the continent,with diplomatic efforts (bilateral aswell as multilateral) overlapping withindustrial initiatives and develop-ment cooperation actions. But tech-nological-industrial penetration inthe low-carbon sector—in Africa aselsewhere—could also have cleargeopolitical and strategic implica-tions. Infrastructure, technologiesand processes designed to tackle theenergy transition and to make it in-creasingly efficient and sustainablewill actually become tools and factorsof political cooperation, with thepotential to determine the direc-tions, choices and tactical position-ing of several actors in the global are-na. In this context, the E.U. has ev-ery intention to maximize the efforts(economic as well as social) it hasmade over the last decade to secureits leadership role in the transition.China’s exponential growth in thisfield—in 2015, Beijing spent two anda half times more than the E.U. onclean energy, and over the last fiveyears its R&D investments havegrown by 73 percent compared to 17percent in the E.U.—threatens torapidly undo the advantage thatBrussels has built over recent years.This is certainly good news for theplanet’s sustainability, not quite sogood perhaps for Europe’s industri-al growth and strategic ambitions.
63
THE OVERTAKE
Source: European Union, Bruegel, Chatam House,China Center for international Economic Exchanges,
Chinese University of Hong Kong
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History/Events at the turn of the 21st century
A new race to control the Central Asian region is underway, repeating the great 19th century struggle detailed in Peter Hopkirk’smagisterial 1990 book. Only the players have changed
The Great Game Revisted
he publication of The Great Game:On Secret Service in High Asia bythe British journalist Peter Hop-kirk (1930-2014) was truly a greathistoric event. Published in 1990, itcast light on facts that should havebeen known for over a century, theignorance of which led to the Westlosing countless battles. The ex-pression “The Great Game” wascoined by Rudyard Kipling in Kim torefer to the events between the1830s and the late 19th century thatmarked the extraordinary race run byBritain and Tsarist Russia to controlas much of Central Asia as theycould, from the Caspian to the Hin-du Kush and the Punjab. Britain wasmoving north from India, with Rus-sia coming south from Siberia. TheMuslim Turco-Mongol nomads andthe Emirs and Khans of CentralAsia could expect little support fromtheir “Caliph,” the Sultan in Istanbul.He had been made to bow to the Eu-ropean powers and was never prop-erly recognized as Sultan by the Ot-toman rulers.
A theater of tensions and tremorsCentral Asia had long been the sceneof unsettled tensions and tremors thatheralded renewal. Escapees from adesperate yet valiant Europe weredrawn there like iron filings to a mag-net. One of these, Paolo Avitabile, born inAgerola, near Amalfi, Italy in 1791,was a Napoleonic soldier who ad-venturously ended up in the Punjaband became Governor of Peshawar,where he was known for hangings,cutting out tongues and running aharem. Avitabile retired to his nativeCampania, was decorated by KingFerdinand II and died in his home-town in 1850. What we call adven-turers were something else entirelyover there.Of course, the Russians and the Britswere not the only soldiers. A wholearmy of spies disguised as geogra-phers, ethnographers and merchantsspread out into the deserts and ruggedslopes of the roof of the world. Therewere great explorers and brilliantscientists among them, such as Niko-lai Mikhailovich Przhevalsky, a Rus-sian general and internationally-renowned naturalist. Another was Shoqan Walikhanov,the descendant of a Kazakh khan, whohad been a cadet at Orenburg andthen a Tsarist secret agent among theKazakhs and the Kyrgyz. He was abotanist, geographer, painter, friendof the exiled Dostoyevsky and a lib-eral democratic thinker. He died in1865 at the age of only 30.After the breakdown of the Empireof Timur, Central Asia became apatchwork of khanates and emirateswaging pitched battles, whose al-
liance was fought over by the Ot-toman, Persian and Chinese em-pires. Russia and Britain unscrupu-lously forced their way into these del-icate balances. Thwarted in their at-tempts to break through to theMediterranean in the Crimean War,the Russians threw themselves intothe region then generically known asTurkestan. In 1865, General MikhailGrigorievich Chernyayev conqueredTashkent against the Tsar’s orders. Hewas sent a diamond-studded swordand orders to resign, but the die wascast. In 1868, the city of Samarkandfell to General Konstantin von Kauf-man. In 1881, the conquest of Cen-tral Asia was completed by GeneralSkobelev, and the Russian railroadfrom Astrakhan reached the AmuDarya.The Turco-Mongol khans did at-tempt resistance. In 1863, the Khanof Kokand sent a Tajik official, YakubBeg, over the Tian Shan mountainsto Kashgar, where Uyghurs andDungans (Chinese Muslims) had re-belled against the Chinese Qing Dy-nasty government. He soon tookover modern-day Xinjiang, then,from 1867, ushered in a personal pol-icy of able maneuvers betweenTurkey, Britain and Russia. However, Yakub Beg’s ambitious planfoundered, due to the rivalry betweenthe Russians and the Brits, who werecontending for the friendship of theChinese Emperor, from whom Beghad taken Xinjiang. When he died in mysterious cir-cumstances in 1877, his kingdomdid not survive him. His only hopewas the Sultan in Istanbul, the ac-knowledged leader of the Turco-Mongol Sunnis. However, there wasplenty more to deal with on theBosphorus. Nevertheless, the Central Asian no-mads constantly looked to the Ot-tomans, given the close links of the re-ligious community through ethnicand linguistic affinity. The new buz-zword of the late 19th century wasNationalism, and with it, Pan-Turk-ism—based on Pan-Germanism—began to wend its way into Turkey, atleast among the urban bourgeoisieand the military.In India, the game seemed to be upon August 2, 1858, when the BritishParliament transferred the govern-ment of the subcontinent from theEast India Company to the crown.Meanwhile, in Central Asia, while itwas clear that the likewise-crum-bling Persian and Chinese empirescould not aspire to a hegemony sim-ilar to His Britannic Majesty’s towhich they had had to bow, or nowto the Tsar of all Russia’s, it seemedthat the divide between Britain andRussia had somehow been confirmedatop the ridges of Tian Shan andKarakoram. Not so.
Enver and the bolshevikFrunze’s “Pan-Turkic” dreamThe decisive chapter in this crazy, fas-cinating story was written between1918 and 1925, by two extraordinarycharacters, Enver Pasha and MikhailFrunze.Born in 1881, Enver, the star of the1908 Young Turk Revolution, a greatadmirer of Pan-Germanism, a vol-unteer in Libya against the Italians in1911, Turkish Minister of War from1914, exiled from 1917—first inBerlin, then in Moscow, had begun aclose collaboration with Lenin on theCentral Asia issue. When he was post-
65
THE OVERTAKE
TFRANCO CARDINI
He is a historian and essayist. He isProfessor of Medieval History at theUniversity of Florence, and he writes forthe cultural sections of severalnewspapers. Emeritus Professor of theItalian Institute of Human Sciences atthe Scuola Normale Superiore of Pisa,for the past fifty years he hasspecialized in the crusades,pilgrimages and relations betweenChristian Europe and Islam, spendinglong periods of study and teachingabroad.
The Silk Route. A thousand yearsof history between East andWest, written by Franco Cardiniand published this year, is a bookthat tells the story of the land andsea routes along which men,goods and knowledge traveledover the centuries from theeastern tip of Asia to theMediterranean and Europe.Known as the silk route, it wasthe scene of wars and conflictsbut was also animated by thefervor of commercial, cultural andpolitical exchanges. Spices,animals, ceramics, cobalt, paperand, of course silk, all traveledacross mountains and highlandsalong this route. Alexandria,Chang’an, Samarkand, Bukhara,Baghdad and Istanbul are justsome of the stops along ahistoric journey that leads rightup to the present day, “Becausethe silk route is not just a storyabout the past, it has to do withour global future.”
On Newsstands
66numbe
r thirty-seven
ed to Turkestan in 1921, the masksoon fell. His “Pan-Turkic” dreamwas to be the foundation of a Turk-ish empire from the Caspian to TianShan, with Bukhara as its capital, tobe tied to Mustafa Kemal Atatürk’sTurkey. Enver’s allies included re-markable Turkish and Tajik war-riors, known to the furious Russiansas the “Basmachi” (killer bandits), whobecame worthy opponents of thefledgling Red Army.In the meantime, the Soviets hadfound their own Central Asian hero.It’s a great shame that history has allbut forgotten Mikhail VasilyevichFrunze, a formidable BolshevikNapoleon, born in Bishkek in mod-ern-day Kyrgyzstan, where he is re-membered with a bronze equestrianstatue and a small museum. Frunzegave one of his sons a fateful name:Timur, after the Turkic conqueror. Ina way, there were parallels betweenEnver and Frunze.The Turkish revolutionary Enverwas barely 40 when, in defiance of theRed Army, he asked for help from theEmir of Afghanistan, calling himself“commander in chief of the armies ofIslam, kin of the Caliph, envoy of theProphet.” His jihad ignited the Mus-lims of Central Asia. In spring 1922,he conquered much of the Emirate ofBukhara, but died soon after on Au-gust 4 of that year. It was said he hadled a kamikaze cavalry charge againstSoviet machine guns. The “Bas-machi” continued their resistancethrough the 1930s, hunted downand repressed only less ferociouslythan the lies and slander used to de-fame their heroism. Three years after Enver’s, his enemyFrunze, the true founder of the RedArmy, met a similar fate in no less am-biguous circumstances. The Sovietleaders in Moscow insisted he had astomach ulcer; of course, the surgerywent wrong. The Central Commit-tee entrusted Frunze’s sons to one ofhis few real friends, Voroshilov. BorisPilnyak’s The Tale of the Unextin-guished Moon is an almost unique ac-count of one of the most repugnantcrimes of a revolution that devouredits own children. Most of all the bestof them.
The life and times of Roman von Ungern-SternbergRoman Nicolaus Maximilian, Frei-herr von Ungern-Sternberg, born inGraz in 1885 to a noble Estonianfamily, is worthy of at least a mentionin this bloody Central Asian saga.The von Ungern-Sternbergs were de-scended from the noblest of familialcocktails, unimaginable to non-cen-tral Europeans. They even—seem-ingly truthfully—claimed lineagefrom Batu Khan, a Tatar prince whoconquered the Germans and Polish
at Liegnitz in 1241.Roman’s family had been Buddhistsfor two generations. His grandfather,a pirate in the Indian Ocean, took ona new faith in Transbaikalia, to whichhe had been deported. After turbulentteenage years in Tallinn, Roman be-
came a cadet at 18, then a naval of-ficer, first in the infantry inManchuria, later in the ZabaikalCossacks during the Russo-JapaneseWar, when he was barely 20. Hestayed with the Cossacks, joining aSiberian regiment in 1909.
He was in some ways a quiet ascetic:he drank no alcohol and did notsmoke. But he was also an avid gam-bler and ended up in serious fights—he was dismissed from his regimentafter one of these fights. First he head-ed for Vladivostok to sail to Estonia,
To the Conquest of the East: theProtagonists
Paolo Avitabile In 1791 he became
governor of Peshawar
then had second thoughts and crossedSiberia alone on horseback with onlyhis dog Misha for company to whathe considered his homeland, Mon-golia. While there, he spent time withTatar lamas, consulted shamans andlived in a yurt. Back in Europe, he
took his grand tour of the major cap-itals, although the already-decadentbelle époque seemed to him futile andseedy. He then returned to Mongo-lia in 1913, where he met Ataman Se-menov. Life took him back to Paris inthe final days of peace in Europe;
there he apparently met his great lovein that remnant of happy days, justlike in all good novels. But it was al-ready summer of 1914 and the baronhad to return to the army. He set sailon the Baltic adventurously to avoidcrossing Germany, then lost thewoman he loved in a shipwreck whileshe was following him. Desperate, hethrew himself into the war, first bat-tling the Austro-Hungarians in Gali-cia, then the Turks in the ArmenianCaucasus. He was wounded severaltimes, was awarded many medalsand clashed with Baron Wrangel, lat-er the commander of the WhiteArmy. Meanwhile, Russia had lost itswar, then the Revolution broke out,followed by civil war. With the Cos-sack Ataman Semenov, von Ungernorganized a regiment of Tatar caval-ry, alongside Buryat Siberians andothers from the Caucasus moun-tains. He was then appointed Chiefof Staff of the first regiment of theWhite Army, made up of 500 Russian,Cossack, Serbian, Tatar, Buryat andeven Chinese, Korean, Manchu andJapanese officers and soldiers. Hespent 1918 crossing Siberia andManchuria, then in early 1919 orga-nized a pan-Mongolian conference,incurring the wrath of his very own“White” front.After this, he became increasingly iso-lated, shutting himself into hisEurasian dream. He hated the Bol-sheviks and despised the West, whichhe considered cowardly and im-moral. He founded an Asian Caval-ry Division, with insignia in the col-ors of the old imperial flag. Instead ofthe black eagle in the gold part of theflag, he added a black U in his name.He dreamed of a Buddhist and con-tinental renaissance of Eurasian civ-ilization. His conquest of Urga (mod-ern-day Ulaanbaatar) is still leg-endary, during which the Chinese andBolsheviks held the “Living Buddha”Bogd Khan prisoner. The savagery ofthe Bolsheviks, who left the woefulcenter swimming in blood, was metwith equal savagery from vonUngern. The Tatars viewed him as a liberator,as Ungern-Khan. He was invincible,immortal, impervious to enemy bul-lets. He had drafted his definitive doc-trine, a kind of revival of the sacreduniversal monarchy of Genghis Khan.The role of the free, strong men ofthe world was to restore monarchy, asper the natural order in a universalmonarchy. On May 20, 1921, his Cav-alry Division departed Urga. Theyhad become the afterglow of theWhite Army. What was Ungern-Khan fighting for? For the shaman-ist-warrior asceticism of his Bud-dhist brotherhood? For the universalmonarchy of the Great Khans, gonesince the mid-14th century? For theunimaginable restoration of monar-
chies collectively wiped out in 1917-18? For the Nothingness of Nirvanahis grandfather had taught his fatherand his father him? The Supreme So-viet sent the 5th Soviet Army inagainst him. They entered Urga onJuly 7. The Tatar dream was at anend.Ungern-Khan tried to regroup hisforces, but even his most faithfulloyalists were deserting him. He wasbetrayed and captured in August,then in September, after numerous“interrogations”, subjected to theusual kangaroo court in the city thatis now Novosibirsk. He was accusedof acts of unheard-of savagery. Theywere true, although his accusers hadlittle right to judge any crime of thesort. They said he was in the serviceof the Japanese Emperor and want-ed to restore the Tsar. It was a uniqueway to capture the heart of the mat-ter yet at the same time understandnothing. He was shot on September17, 1921, in a rush because theywere still scared of him.
The modern, even morebrutal “Great Game”Why did Hopkirk take the trouble in1990 to tell these old stories? Whyshould we learn about them now?When Hopkirk was writing, the So-viet Union was collapsing and it wasvery possible that a new, even morebrutal “Great Game” could begin.Over a quarter of a century later, wecan see this is exactly what hap-pened, with slightly different playersand maybe in an area partly shiftedsouthwest from Central Asia. Themain players now are the U.S. andChina, plus Iran, Turkey, Pakistan, In-dia, certain Arab countries, to someextent Israel, and alongside them araging horde of lobbyists. It’s up toyou to decide whether “history is re-peating itself,” or, in the words of theItalian philosopher Benedetto Croce,whether “all history is contemporaryhistory.”
67
THE OVERTAKE
Nikolai Mikhailovich PrzhevalskyGeneral and internationally-renowned naturalist
Shoqan UalikhanovTsarist secret agent among the Kazakhs and the Kyrgyz
Mikhail GrigorevoichChernyayev General who conquered Tashkent in 1865
Konstantin KaufmanGeneral who conqueredSamarkand in 1868
SkobelevGeneral who completedthe conquest of Central Asia in 1881
Yakub BegTook overmodern-dayXinjiang
Enver PashaStar of the YoungTurk Revolution
Mikhail FrunzeThe Bolshevik Napoleon born in Bishkek
Roman von Ungern-SternbergChief of Staff of the White Army
68
Climate change/China’s energy mix must take urban pollution into account
Urban pollution is the mostcompelling reason for reducing the use of coal and promotinggreater electricity consumption in industry and households. Electric cars and renewables are a step forward, but they are not as effective as generally believed
Alarm over Emissions
he future depends on climate. Climateis affected by emissions, whose in-crease has been driven largely by en-ergy consumption in China, where1.4 billion people are seeking a bet-ter quality of life. China’s energy de-mand has been the main reason forthe 40 percent increase in globalCO2 emissions between 2000 and2016, a growth of 10 billion tons peryear. Of these, 5 billion are due tohigher emissions from the coal-firedplants that produce the electricityused to manufacture the cheap goodsthat China exports throughout theworld, including to virtuous Europe.Between 2000 and 2017, China’s de-mand for coal tripled to a total of 2.9billion tons, which accounts for halfthe current global demand. China’s plans show that electricity de-mand is set to grow from the current6 billion kilowatt-hours, accountingfor a quarter of the world’s total de-mand, to over 10 billion in 2040,equivalent to almost a third of the to-tal. China’s per capita CO2 emissionshave already grown to levels that arein line with European emissions,from around 4 tons per person to over6 tons in 2015. Any action aimed at limiting globalCO2 emissions will need to involveChina, for reasons related to its size,and its electricity system in particu-lar. Two fundamental aspects of theChinese system make improvementin this respect more feasible:1 | Being a recently industrialized
country, China has the potential toadopt new generation technologiesfor electricity production and con-sumption.
2 | China applies command and con-trol policies typical of communistcountries, which are more effectivein steering energy demand andproduction towards solutions morecompatible with environmentalprotection. The system gains pop-ular support by improving livingstandards across the populationthrough planning, a goal that so farhas been easily achieved thanks tothe conditions of extreme pover-ty from which China started.
As in all modern countries, the elec-trification process in China is un-stoppable. Per capita consumption hasdoubled to 4 kilowatt-hours overthe last ten years, although this fig-ure is still lower than that of the mostadvanced industrialized states.
Electricity is the key to reducing emissionsIncreased electricity use is crucial tolimiting emissions from end-userconsumption by industry, householdsand transport. It is essential, howev-er, to limit the environmental impactof the phase upstream of productionby building more efficient coal-firedpower plants or by employing low-im-
69
THE OVERTAKE
DAVIDE TABARELLI
He is chairman and co-founder ofNomisma Energia, an independentresearch company in Bologna thatdeals with energy and environmentalissues. He has always worked as a consultant for the energy sector in Italy and abroad, dealing with all the major aspects of thismarket. He publishes on majormagazines dedicated to energy issues.
T
THE REAL CHALLENGE IS THE SMOG. The real challengeis the smog rather than theclimate or high-soundingcommitments ot use less coal. In the photo, a singer of the Qinqiang Opera wearing an antismog mask while he performs in Xi’an, in the Shaanxi Province, China.
ROMEPARISBOLOGNABERLINLONDON B
40 µg/m3: EUROPEAN UNION LIMIT VALUE
20 µg/m3: WORLD HEALTH ORGANIZATION GUIDELINE VALUE
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1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017
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ANNUAL MEAN PM10 LEVEL IN A NUMBER OF ITALIAN AND CHINESE CITIES
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19.015.5
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PER CAPITA CO2 EMISSIONS IN 2006 AND 2015 (Tons)
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PER CAPITA ELECTRICITY CONSUMPTION 2006 AND 2015 (1,000 kilowatt-hours)
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CHINA ITALY OTHER EUROPEAN CITIES
pact technologies such as natural gascombined cycles and renewable en-ergy sources. Electric power is an en-ergy carrier that has to be produced,and to date the main source of elec-tricity generation in China has beencoal. The Beijing government isclearly aware of the problem and haslong had policies in place to addressit. But China is still constrained bythe fact that coal remains the onlyplentiful energy source in China,with vast as yet unexploited deposits.On the one hand, coal reduces de-pendence on energy imports, while,on the other, and no less important-ly, it keeps electricity generationcosts low, with consequently lowcharges to companies exportingworldwide the goods they manufac-ture with coal-generated electricity. InChina, coal-fired power plants receivean average charge of around EUR0.04 per kilowatt-hour, and in someprovinces it can be as little as EUR0.02. Taking into account transportand distribution costs, this means aprice to industry of around EUR 0.06-0.08 per kilowatt-hour. In Italy, oneof the world’s most advanced countriesin terms of the transition towards fu-els with low carbon content, in late2017, the generation costs from nat-ural gas combined-cycle plants areEUR 0.05-0.06. But the price toItalian industries rises to EUR 0.15-0.20, mainly due to the cost of sup-porting renewables through direct in-centives or investments on the gridsystem to manage intermittent gen-eration. Despite China’s abundant re-serves, its domestic production isgradually declining since many smallmines with inhumane working con-ditions have had to shut down. Offi-cial sources estimate that around onethousand individuals die annually asa result of mining accidents. Someconsolation can be derived from thefact that the number of deaths before2000 stood at 7,000 per year, sug-gesting that things are improving. Inaddition to the safety aspect, thegovernment still has much to do onthe efficiency front. The average an-nual output of a Chinese miner is 800tons, whereas in Australia, the world’s
largest global exporter and China’smain supplier, a miner’s output is al-most 10 times as much. China can im-port coal from the international mar-ket, where coal is still by far the cheap-est energy source. In late 2017, despitea 30 percent price rise to USD 90 perton in a year, coal is still 33 percentmore competitive than liquefied nat-ural gas (LNG), which is now back toEUR 27 per megawatt-hour in Asia,still almost half the peaks of 2012.
Urban pollution is the heartof the problem The most compelling reason for re-ducing the use of coal is not somuch climate change, or high-sound-ing international pledges. A morepressing challenge is the pollutionproblem in urban areas, where mostof the Chinese population is gradu-ally converging. One of the majorcauses of urban pollution is the fineparticulate matter expelled from thesmoke stacks of many coal-burningpower plants without filtration equip-ment. The World Health Organiza-tion (WHO) estimates that in Chi-na, urban pollution causes one mil-lion premature deaths each yearfrom respiratory diseases, strokes,heart attacks and lung cancer. Theseproblems are far more urgent thanthe predicted long-term climatechanges which, though catastrophic,are still linked to probabilities ratherthan certainties. The data on urbanpollution gathered by the WHOspeaks loud and clear: in Beijing themean concentration of particulatematter PM10 (with a diameter of onehundredth of a millimeter) aver-aged out over the year is 93 micro-grams per cubic meter, compared toan optimal guideline value of 20, be-low which there are no adversehealth effects whatsoever. Concen-trations of the more dangerousPM2.5, which travels through thelungs and enters the blood cells, areat 85, against a WHO guidelinevalue of 10. In Europe, the most pol-luted area is the Po Plain in Italy, dueto both the high concentration of hu-man activities and the mountainoustopography around the plain that
70
Fonte: IEA
Source: NE Nomisma on World Heath Organization data
Fonte: IEA
Fonte: IEA
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CHONGQINGSHANGHAITURINMILANBRESCIAPADUAR BEIJING CHENGDU
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limits air circulation and causes airstagnation. In Milan, which with1.3 million inhabitants is the largestcity in the area and therefore themost polluted, PM10 concentra-tions in 2013 were at 37, and PM2.5concentrations were at 17. The Eu-ropean Union, which is at the fore-front of preventive health carethrough strict environmental regu-lations, sets the annual average lim-it value for PM10 at 40 microgramsper cubic meter, and a target value forPM2.5 at 25. Were it not for Italy’swidespread use of natural gas for elec-tricity generation, these limit valuescould never be complied with. Itshould also be pointed out that de-spite the high emission levels in thePo Plain, life expectancy is among thehighest in the world thanks to thewealth, meant in the broadest senseof the term, generated in the region.In the complexity of China’s tumul-tuous expansion in energy con-sumption, the effort to cut particu-late emissions actually results ingreater use of electricity, both in in-dustry, which is still largely reliant oncoal, and in households, where, in ad-dition to coal, a great deal of woodand biomass from agricultural wasteis burned for heating purposes. Infactories, electricity is used to pow-er electric motors to replace thesteam generated by coal. In house-holds, it provides heating in sprawl-ing urban areas where large con-centrations of people live in high-riseapartment blocks. Europe’s experience of large conur-bations tells us that in addition toheating, the other major source ofparticulate matter is transport. InChina, as in the rest of the world, thisis handled predominantly by road ve-hicles that still rely on the internalcombustion engine, to guaranteeflexibility, which is powered bypetroleum derivatives. Petroleumderivatives, and gasoline in particu-lar, account for 90 percent of thetransport sector’s energy consump-tion, while natural gas—a fuel sourcethat produces half as much particu-late as gasoline-powered vehicles–ac-counts for a significant 5 percent.
The “green” goals of electriccars and renewablesThe diffusion of electric cars has be-come one of China’s most interestinggoals for the global energy industry.The goals are clearly ambitious, butreality has already proved to be verychallenging, dampening the initial en-thusiasm of a few years ago. The Chi-nese market for electric cars is themost important in the world, witharound 700,000 cars, although it ac-counts for just 0.5 percent of the mar-ket share in relation to the 160 mil-lion vehicles on the road in China.The number of cars is expected to riserapidly to 400 million, compared totoday’s 135 million, but the 10 per-cent target for electric cars by 2030,i.e. 40 million, is unlikely to beachieved. Obviously the key factor inall this are the batteries, which, ac-cording to the government, should bemanufactured entirely in China, sothat in the future they will becomeone the leading technologies forshowcasing globally the cutting-edgequality of Chinese made goods. Thefact that the Chinese are strugglingto achieve 10 percent of the total, de-spite all the advantageous conditionsthey enjoy, reflects the limitations thatthe electric car is facing in the rest ofthe world, including in more devel-oped markets such as those of Europeand America. China’s keen interest in electric carsis similar to its focus on renewable en-ergy sources, i.e., solar and windpower, whose growth is often point-ed to as proof of the transition to-wards decarbonization. The reality isthat here, too, the changes are moreof a facade, and in actual fact obscureseveral serious problems. As in theGerman case, the significant increasein new sources of renewable energywas only possible thanks to Ger-many’s vast coal-fired capacity. On theone hand, this has contained the im-pact of higher costs on consumerprices, and, on the other, it has beencrucial for managing problems withenergy flows in the system caused byintermittent generation of wind andsolar power. With rapidly growingelectricity consumption, challeng-
ing grid issues and the costs of re-newables remaining high, it will bedifficult for China to avoid relying in-creasingly on coal. In the next twen-ty years, China’s electricity demandis expected to rise to 4,000 billionkilowatt-hours, a leap that wouldtake it to the current levels in theUnites States, the world’s most energyhungry nation. This new demandshould be largely met by renewableenergy sources, whose share is ex-pected to increase from the current6 percent to 20 percent of the total.These are difficult targets to achieveand, in any case, they would not af-fect coal production, which would re-main at current levels. If, as is likely,they should prove to be overopti-mistic, then the use of coal would in-crease once again. The use of gasbased on modern combined-cyclegeneration should rise, but this is lim-ited by the scarce availability of do-mestically produced gas and the needfor imports whose prices are muchhigher than coal. If China couldadopt the same hydraulic fracturingtechniques as the Unites States, do-mestic shale gas production couldrapidly increase, but China does notenjoy the same favorable backgroundconditions. As well as economic con-cerns, an additional constraint on im-ports is fear about the security of sup-
plies, obviously a very sensitive issuefor the Chinese central government.Nevertheless, on December 8, 2017,the first icebreaker left the Yamalpeninsula in the Russian Arctic car-rying LNG bound for China. Itcame from the new LNG plant joint-ly owned by Novatek, Total and theChina National Petroleum Compa-ny with a Chinese state investmentfund. It is the first tanker that is ex-pected to carry up to 20 billion cubicmeters of gas per year from the vastSiberian gas fields to China across theArctic Sea, which, due to rising tem-peratures, has become navigable.Warmer temperatures, in this case,are beneficial, since they enable coalto be replaced with gas in China.
71
THE OVERTAKE
orecasts by the World EconomicOutlook, published by the Interna-tional Monetary Fund on April 23,2017, estimate that global Gross Do-mestic Product (GDP), calculatedin nominal terms, will reach USD77.99 trillion in 2017. However, ac-cording to the Purchasing PowerParity (PPP) calculation method—aimed at standardizing differences inthe cost of living in different coun-tries—the 2017 global GDP forecastis USD 126.69 trillion. Using PPP,the world economy will therefore be1.62 times larger than it is in nomi-nal terms.Based on data in the same report, theU.S. and China are the largesteconomies in the world, both innominal terms and in terms of pur-chasing power parity. In particular, 2017 U.S. GDP is esti-mated to grow by 2.2 percent to a to-tal of USD 19.42 trillion, 24.9 percentof the global economy. Chinese GDPis forecasted to increase 6.8 percentto a total of USD 11.80 trillion, 15.1percent of global GDP. In terms ofpurchasing power parity since 2014,China takes the lead with USD 23.19trillion (18.3 percent), compared tothe United States’ USD 19.42 trillion(15.3 percent).In 1981, when Ronald Reagan becameU.S. President, the Chinese economywas only10 percent of the size of theAmerican economy. It is now 115 per-cent (in PPP). Never in the history ofmankind has a country grown soquickly on so many levels.Analysis of the ranking of the top 10
economies in the world, calculated innominal GDP, shows that only threeof them are in Asia: China (in 2ndplace), Japan (3rd) and India (6th). InPPP terms, five of the top 10 are Asiancountries, with three in the top five:China in first place, India in 3rd andJapan, 4th. The Russian Federationhas risen from 11th to 6th place, In-donesia from 15th to 7th.
The major driver of globalgrowthThe Economic Survey of China 2017,published by the OECD (Organiza-tion for Economic Cooperation andDevelopment) on March 21, 2017,stresses that China remains “the ma-jor driver of global growth.”When founded in 1949, the People’sRepublic of China was the poorestcountry in the world. What are themore recent causes of such fast, con-solidated growth following the eco-nomic (but not political) reformslaunched by Deng Xiaoping in 1978,reforms aimed at increasing the roleof private capital and overseas in-vestment to develop China’s manu-facturing power? What are the mainchanges taking place?During the 10th and 11th Five-YearPlans (2001/2010), the percentage ofChinese investment in GDP termsquadrupled, then decreased in relativeterms from the implementation of the12th Plan (2011-2015) onward. Ac-cording to research published in2012 by the economists Andy Roth-man and Ji Zhu, “It is important tounderstand that China is a continen-
tal economy driven by domestic in-vestment and consumption, one inwhich exports only play a supportingrole.”Quantitative analysis of Chinese out-put shows that net exports (Trade Bal-ance plus Services Balance) formedonly 4 percent of GDP in 2010. Wecertainly do not mean that exportshave played a minor role in Chinesegrowth. If exports were to fall, therewould clearly be negative conse-quences for the economy. However,4 percent of GDP in 2010 is still low-er than the 6.3 percent recorded forthe same year by Germany, which hasthe largest economy in the Eurozone.As proof of Rothman and Zhu’s the-sis, it is interesting to note that in2007-2008-2009, when the increasein exports collapsed, with a resultantreturn to pre-crisis levels (2007: 26percent; 2008: 17 percent; 2009: -16percent), there was a slight, but cer-tainly lesser, slowdown in the vigor-ous growth of fixed investments(2007: 35 percent; 2008: 31 percent;
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DEMOSTENES FLOROS
A geopolitical analyst, he is professor of the master’s program in InternationalRelations, Italy—Russia, at theUniversity of Bologna, as well as beingthe head and professor of the thirdcourse in Geopolitics, established at the Open University of Imola (Bologna).He collaborates with the EnergyInternational Risk Assessment (EIRA)and geopolitical magazine Limes.
Markets/Economy and energy
China remains the major driver of global growth. Its decision to open up to overseas companies,announced at this year’s Congress of the CPC, willgive the U.S. access to Chinese savings. But it willalso support the internationalization of the yuan
F
Growth: TheMiddle Kingdomat the forefront
2009: 27 percent). These figuresdemonstrate that Chinese manufac-turing was mainly directed at domesticdemand, and that the vast majority ofgoods produced in China remain inChina.Conversely, qualitative analysis ofexports shows that a significant por-tion of the goods apparently made inChina only consisted of the assemblyof their components: 55 percent of to-tal exports in 2001, 44 percent in 2011(with a similar value in 2014). In fact,processed exports have tended tocontribute less to the growth of Chi-nese GDP when compared to otherdomestically-produced exports.From 2012 to date, investment as partof GDP has declined significantly asthe massive economic growth rateshave slowed down, while the contri-bution of the services sector to the in-crease in GDP has exceeded that ofindustry. Nevertheless, savings ratesremain relatively high.In 2013, the economist Stephen S.Roach suggested that the China’s
slowdown was welcome, as it re-flected a transition from growth driv-en by investments and exports to aneconomic structure more focused ondomestic private consumption, basedon adjustments in wages (moderate re-cent inflation following deflation,triggered by a process of expansion indemand, in turn stimulated by realwage growth). Considering that theservices sector requires approximately35 percent more jobs per GDP pointcompared to manufacturing, Chinacould grow at an annual rate of 7 to8 percent and still reach its objectivesin terms of employment and pover-ty reduction.In that regard, since 1981, China hasextricated 728 million people frompoverty. In rural areas, the number ofpeople living in poverty fell from98,990,000 in 2012 to 43,350,000 in2016, while the Gini index – used tomeasure income inequality – fellfrom the end of 2009 onwards, as didthe ratio between disposable incomein cities and the countryside.
In all likelihood, the most interestingdata suggesting a dynamic reading ofthe “China & Energy” trend comefrom manufacturing. In fact, accord-ing to the United Nations, Chinesemanufacturing as part of global pro-duction increased to 5 percent in1995, 8 percent in 2000, 12 percentin 2005, 19 percent in 2010, 22 per-cent in 2012, and, as per the Con-findustria Rapporto Scenari Industriali(Industrial Scenarios Report by Con-findustria) of November 8, 2017,29.5 percent this year. In the mean-time, the U.S. share has fallen to 19percent, with Germany at 5.9 percent.If the Middle Kingdom wishes tomaintain this performance for yearsto come, a performance manifestedobjectively in the still-dominant roleof the public sector over the private,it must urgently address the issue offinancial risk, due to the high debt lev-els of some corporations. China mustalso optimize the use of its resourcesto construct a modern welfare state,especially in terms of healthcare.
Energy consumption and mixIn 2016, global primary energy con-sumption totaled 13,276.3 Mtoe (mil-lion tons of oil equivalent), an increaseof 1 percent on 2015, compared to anaverage annual increase of 1.8 percentfrom 2005-15.China was number 1 in terms of pri-mary energy consumption with 3,053Mtoe, 23 percent of world con-sumption, 1.3 percent higher than in2015. In second place, the United States ofAmerica with 2,272.7 Mtoe, 17.1percent of total consumption, 0.4percent lower year-on-year. Howev-er, given that China has 22 percent ofthe global population and the U.S. 5percent, every Chinese person con-sumes an average of just over 2.2 tonsof oil equivalent (toe) per capita a year.An American consumes around 7toe.The world’s energy mix in 2016 isconsidered below, followed by ananalysis of fossil fuels.1 | Oil – 33.27 percent (4,418.2 Mtoe);
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C H I N A
XINJIANG
INNER MONGOLIA
SHANXI
SHAANXI
Russia 29.2 (11%)
Angola 27.1 (22%)
Saudi Arabia 26.5 (1%)
Iraq 17.8 (6%)
Oman 17.0 (0%)Iran 14.5 (-3%)
Brazil 12.4 (48%)
Venezuela 11.3 (14%)
Kuwait 8.0 (3%)
UAE 6.2 (3%)
Other 42.0
212.4(14%)
Where’s the coal?
Crude oil imports, 2017 (in Millions of tons)
January-June 2017; Year-on-year percent variation in brackets
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2 | Coal – 28.11% (3,732 Mtoe);3 | Natural gas – 24.13% (3,204.1 Mtoe);4 | Hydro – 6.85% (910.3 Mtoe);5 | Nuclear – 4.45% (592.1 Mtoe);6 | Renewables – 3.16% (419.6 Mtoe).According to the BP Statistical Re-view of 2017, oil remains the mostwidely used source of energy. Inrelative terms, the share of oil in theglobal energy mix has increased forthe second year running after thesteady decline from 1999 to 2014. Inabsolute terms, the increase was1,600,000 barrels per day (b/d) (+1.6percent), well above the averageover the last 10 years (+1.2 per-cent). This is primarily due to trends
in Chinese and Indian consump-tion (+400,000 b/d and +330,000b/d respectively). In contrast, 2016 oilproduction only increased by 400,000b/d, the slowest since 2013.In 2016, overall coal consumption de-creased by 53 Mtoe (-1.7 percent).The main decreases were in the U.S.,-33 Mtoe (-8.8 percent) and in Chi-na, -26 Mtoe (-1.6 percent). As a re-sult, coal’s share in the global energymix fell to 28.1 percent, the lowestsince 2004. In fact, from 2005-14,consumption of the most pollutingfossil fuel grew by an average of 1.9percent, but total use has started to de-cline since 2015.
Overall 2016 coal output fell by 231Mtoe (-6.2 percent), due to lower sup-ply from China and the United States,which reduced by 140 Mtoe (-7.9 per-cent) and 85 Mtoe (-19 percent) re-spectively.While the end of coal usage is un-doubtedly still far away, it seems thatthe decline has begun. The trend inadvanced capitalist countries shouldtherefore be a slow but steady with-drawal from using the fossil fuel of theIndustrial Revolution in the West. For“developing” economies, it is highlylikely that the expansion of coal con-sumption will be slower than in thepast, due to both lower growth rates
in their economies, and the serious,undeniable issues of pollution. Inthat regard, it is important to note thatsince 2014, global CO2 emissionshave stabilized substantially (+0.1percent in 2016).In 2016, consumption of natural gas,the cleanest of the fossil fuels, in-creased by 1.5 percent or 63 billioncubic meters of natural gas (bcm),compared to average 10-year growthof 2.3 percent. The world’s leading ex-porter of natural gas, the Russian Fed-eration, is also the country with thehighest percentage of gas in its ownenergy mix (52.20 percent), and it hasalso contributed more than any oth-
ChinEnergy
China’s major coal reserves arelocated in four of its regions.China is one of the largest coalproducers in the world.
Source: data processed by the author
The leading oil supplier of China is Russia. In the first six months of 2017, Beijing imported 29.2 million barrels of crude oil from Russia. China’s other main oil suppliers include Angola andSaudi Arabia. Source: Wood Mackenzie
er country to the slowdown in glob-al consumption with a rate of -12 bcm.Consumption in the European Unionis above average, at +7.1 percent or+30 bcm, the greatest increase since2010, at the same time that E.U. out-put has been in steady decline foryears. According to forecasts of the In-ternational Energy Agency, global de-mand for natural gas will grow by anannual average of 1.6 percent through2022. China will be responsible for 40percent of this increase, equivalent to134 bcm, an annual average of +8.7percent.China’s 2016 energy mix is set out be-low.
1 | Coal – 61.82% (1,887.6 Mtoe);2 | Oil – 18.95% (578.7 Mtoe);3 | Hydro – 8.61% (263.1 Mtoe);4 | Natural gas – 6.2% (189.3 Mtoe);5 | Renewables – 2.82% (86.1 Mtoe);6 | Nuclear – 1.57% (48.2 Mtoe);China has seen its own energy de-pendence— i.e., the share of im-ported energy raw materials as part oftotal primary energy consumption—increase by 21.14 percent (6 percentin 2011 to 16 percent in 2014). In2003-2016, China’s consumption roseby 368 percent, increasing its share ofthe global total from 12.5 percent to23 percent.China is the heaviest user of the fos-
sil fuel coal, in both absolute and rel-ative terms. The main deposits are lo-cated in northern China, in theprovinces of Shaanxi, Shanxi, Hebei,Xinjiang, Henan, Shandong, Anhuiand Inner Mongolia, and in theNortheast, with significant deposits inHeilongjiang, Jilin and Liaoningprovinces.China is followed by India, with411.9 Mtoe or 56.9 percent of its en-ergy mix, overtaking the U.S. (358.4Mtoe, 15.76 percent). Analysis ofthe development in the energy mix ofthe two Asian giants shows that theimportance of coal in Chinese primaryconsumption is decreasing (66 percent
in 2014), while in India it remainsconstant (57 percent in 2014).
The necessary move towards gasThese data highlight the urgent need,especially in China and India, tochange their energy mix, movingfrom the massive use of coal towardsthe “cleaner” and cheaper—even com-pared to oil—option of natural gas,which makes up only 6.2 percent ofBeijing’s and New Delhi’s energy mix.Since May 2014 the People’s Repub-lic of China and the Russian Feder-ation have signed two major naturalgas contracts, gas to be transportedthrough the Altai (Western Route)and Power of Siberia (Eastern Route)pipelines. A number of other newagreements have also been made tostrengthen the strategic Russia-Chi-na alliance. According to TsvetanaParaskova, during the next 20 to 30years China will be the main driver ofdemand for natural gas, as has beenthe case for oil in the last 20 years, un-til it exceeds U.S. demand betweenthe late 2040s and early 2050s. Thesame trend is also confirmed byWood Mackenzie, whose report in-dicates the tripling of current demandfor as by 2035. For Neil Beveridge atSanford C. Bernstein & Co., China’sgas market has entered a new “gold-en age,” thanks to governmentalstimulus policies, the effects of whichcan already be clearly seen. In late Au-gust 2017 demand had already ex-ceeded that of the entire previous yearby 18 percent. Estimates for 2020 sug-gest that consumption will reach 300bcm from 206 bcm in 2016, andthen increase to 600 bcm in 2040.Despite an annual average increase inproduction of 6.6 percent or 65 bcm,taking total Chinese output fromthe current 140 bcm to approxi-mately 200 bcm, the IEA forecasts in-creased consumption from the current205 bcm to 340 bcm in 2022, 140 bcmof which will be imported. In 2016,only 70 bcm were imported.If these forecasts are correct, thenatural gas share of China’s energymix will increase from 5.9 percent in2015 to 10 percent in 2020. The onlyscenario where growth in demand fornatural gas could be weaker is if re-newables grow much faster than ex-pected, thus shortening the period ofnatural gas acting as a bridge fuel be-tween fossil fuels and renewables.
Oil: data on strategic reserves and exports In terms of Chinese oil production,the main domestic sources of supplylie in deposits in Northwestern andNortheastern China. The Daqingoilfield is particularly important. It isthe fourth largest in the world with 5.7billion tons of crude oil and 1 trillionm3 of natural gas, although its output
Energy basket
OECD Asia
0 100 200 300 400
OECD Europe
Latin America
India
Africa
OECD America
Other Non-OECD
Middle East
China
Growth in consumption of natural gas (Billions of cubic meters per year)
GROWTH IN CONSUMPTION 2014-2015 2025-2040
61.85% 1,887.6 MTEP
8.61% 263.1 MTEP
18.95% 578.7 MTEP
6.2% 189.3 MTEP
2.82% 86.1 MTEP
1.57% 48.2 MTEP
CoalOilHydroelectricNatural Gas RenewableNuclear
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THE OVERTAKE
The demand of China for natural gas is growing steadily. It is clearthat by 2040 China’s growth in demand will be higher than that of anyother country, exceeding 400 billion cubic meters of gas per year.
Source: Sanford C. Bernstein & co.
China is the country with thehighest exploitation of coal, inboth absolute and relative terms.
Source: data processed by the author (2016)
is falling by approximately 7 percentper year, and more than two-thirds ofits reserves have already been ex-tracted. The oil major CNPC (Chi-nese National Petroleum Corpora-tion) has recently discovered a new oildeposit in the Junggar Basin, in theXinjiang region, with current re-sources estimated at 1.24 billion tonsof crude oil and proven reserves of 520million tons.It is very complicated, however, to becertain about China’s Strategic Re-serves. In April 2017 the governmentofficially stated a figure of 33,250,000tons, equivalent to 243,000,000 bar-rels, an increase on the 31,970,000tons in early 2016. According to theOECD model, China’s aim is reservesequal to 90 days of net imports. Theobjective is therefore to accumulate550,000,000 barrels by 2020.In terms of demand for oil, the state-owned CNPC has calculated that arecord of 11,880,000 b/d will beachieved in 2017, an increase of 3.4percent year-on-year. Moreover, im-ports will grow by 5.3 percent, to a to-tal of 7,950,000 b/d.Data from the General Administra-tion of Customs have the RussianFederation as the main supplier ofcrude oil to the People’s Republic ofChina in the first half of 2017.In July of 2017, China bought1,170,000 b/d from Russia, com-pared with a monthly average for 2017of 1,180,000 b/d (+16 percent year-on-year). In September 2017 im-ports reached a record of 1,545,000b/d. Over the last six years, Russiancrude oil exports to China have morethan doubled, exceeding those ofSaudi Arabia, following the 25-year
contract worth USD 270 billion for360,300,000 tons of crude oil, anagreement signed in 2014 betweenRosneft and the CNPC. A recentagreement was also made by Rosneftand CNFC Energy, for a total of60,800,000 tons per year until 2023.In 2017, Chinese imports from An-gola also surpassed those from Sau-di Arabia.It is worth noting that in 2016, Chi-na not only became the main importerof crude oil in the world, overtakingthe U.S., but is increasingly emerg-ing as the main buyer of U.S. crudeoil, having surpassed Canada. Un-surprisingly, notes the China expertAlessandra Colarizi, only Sinopeccould reduce Washington’s tradedeficit with Beijing ($347 billion in2016) by $10 billion per year.According to the statistics in the BPEnergy Outlook 2017, in the 2035 en-ergy mix of the People’s Republic ofChina, the importance of coal will re-duce drastically, from the 64 percentof 2015 to 42 percent, while theshare of natural gas will increase to 11percent, roughly doubling. Oil willrise slightly from 18 to 20 percent.In 2016, the use of renewable sourcesincreased by 12 percent, although theyare only a bit more than 3 percent ofthe global energy mix.The Institute for Energy Economicsand Financial Analysis states thatChina has become the unrivaledleader in renewables, overtaking theU.S. following the investment of Eur32 billion in renewables technology(a +60 percent increase in expenditureyear-on-year). In addition, by 2021,it is estimated that China will have in-stalled almost one-third of global
capacity in wind, hydroelectric and so-lar power. Impact on employment isalso worth a mention. According tothe International Energy Agency’sWorld Energy Outlook 2017, of8,100,000 workers employed in therenewables sector, 3,500,000 are withChinese companies while only770,000 are at U.S. ones.
Analysis of oil futures priced inyuan and convertible into gold In September 2017, the Chinesegovernment announced its intentionto issue oil futures both denominat-ed in yuan and convertible into goldat the Shanghai International Ener-gy Exchange (INE).If this actually happens in the comingmonths, as Shanghai INE assess-ments in December 2017 seem to in-dicate, what would be the economicand geopolitical significance of this fi-
nancial transaction, given that itwould be implemented by the State,which recently became the main im-porter of oil in the world?To attempt to contribute to a discus-sion whose purpose is not to soundthe umpteenth death knell for thegreenback nor to overlook any futureglobal implications, the followingclarifications must be made.1 | According to some analysts, issu-
ing these securities forms part ofChina’s broader plan to replace thedollar, with other analysts suggestthey enhance the role of the yuanas an international reserve cur-rency;
2 | Oil futures are only one of themany securities released into themarket to create an alternative orparallel cash option to the dollar,thus increasing China’s strategic in-fluence;
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20%
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1971 1976 1981 1986 1991 1996 2001 2006 2011 2016
CHINA
WORLD
GDP COMPARISON Source: OECD
As shown in the graph, the growth rate of China’s real GDP has beenmuch higher in recent years than the global GDP growth rate,confirming China as the main driver of global GDP.
3 | It is certainly true that the securi-ty in question is a way for China tobuy oil (although a distinctionmust be made between physicalbarrels and futures), but it couldalso be used by crude oil produc-ing countries to make purchasesand investments in China.
The following prerequisites are nec-essary for the People’s Republic ofChina’s plan to take shape:1 | Oil futures must always indicate
the benchmark oil quality;2 | The major oil producers will have
to accept payments in yuan and/orphysical gold, in turn to be investedin the Shanghai Stock Exchange;
3 | Physical gold will act as collater-al, as an exchange guarantee.
Regarding the first point, after failedattempts by Tokyo and Singapore toestablish an “Asian derivative crudecontract,” for now the only liquid
crude futures in the region are onesfor Oman crude dealt on the DubaiMercantile Exchange. The data re-ferred to above suggest that the crudeoil quality benchmark of the gold-backed oil yuan futures could well befrom the Russian Urals, althoughSaudi light crude or Iranian oil can-not be excluded.On the second point, Iran has begunto accept the yuan as payment for itsbarrels, following the sanctions im-posed on Tehran by the U.S. In2017, Venezuela started to do thesame, while in 2015, the RussianFederation negotiated some oil con-tracts in RMB.As for gold, according to data pub-lished by the World Gold Council onNovember 2, 2017, China ranks 5thafter the United States of America,Germany, Italy and France, with of-ficial People’s Bank of China re-
serves of 1,842.6 tons. Because thequantity of gold has significantly in-creased over the last few years, someanalysts suggest that this figure maybe considerably underestimated.
Xi’s new policy and thepower of the RMBFollowing Trump and Xi’s meeting on8 November 2017, the Chinese Min-istry of Commerce announced thatChina would remove the restrictionson majority holdings in financial,venture capital and insurance compa-nies. From now on, foreign companieswill be able to hold up to 51 percent.How should this policy decision be in-terpreted?One possible answer is in-spired by the words of Chinese Pres-ident Xi Jinping at the 19th Congressof the Communist Party of China. Xistated that opening the market morewidely to overseas investors would be
accompanied by the stronger presenceof trade unions, and especially theCPC, in Chinese facilities producingmaterials and more. Therefore, asnoted by the economist PasqualeCicalese, it is an exchange. On onehand, the U.S. economy will begranted access to the massive savingsof China, albeit under the control anddirection of the Party. On the otherhand,, the yuan will be internation-alized, and the gold-backed oil yuanwill be launched.To date, having overtaken the Swissfranc, the RMB is the fifth mostwidely used currency in the world andis about to overtake the yen and thepound sterling. De-dollarization is un-doubtedly still a long way off, al-though it seems that the real loserswill be the option of war, and the euro.
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INVESTORS WANTED BY XI JINPINGAfter the Trump–Xi meeting of 8November 2017, China took offmajority restrictions of financialcompanies, of venture capitaland insurance. A choice that,listening to the words ofPresident Xi Jinping during theXIX Congress of the ChineseCommunist Party, volute becausethe greater opening of themarket to foreign investorswould have been accompaniedby a stronger presence of unionsand above all the CCP. In thephoto, a moment of the phasesof the XIX Congress of the PartyChinese Communist.
THE OVERTAKE
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Investments/The overseas destinations of Chinese capital
Chinese investment worldwide has gone from USD 55.9 billion in 2008 to USD 196.15 billion in 2016. This increase is due to one main objective: acquiring know-how. The yuan now favorsSingapore, Hong Kong and Africa over the United States
The Dragon Shops
he Chinese authorities’ restrictions oncapital outflow have made them-selves felt, with Chinese overseas di-rect investment (ODI) falling by 40percent year-on-year in the first tenmonths of 2017. This was noted in therecent report by the Economist In-telligence Unit (EIU, the think tankof the prestigious British magazineThe Economist), ranking the 60 largesteconomies in the world in terms of at-tractiveness for Chinese enterprises.According to the EIU analysts, theseare temporary measures, however.Chinese ODI flow remains consistent.Greater expansion of Chinese acqui-sitions around the world will contin-ue in the coming months and years.Why is this?
Towards modern, advancedindustryThe answer lies in Beijing’s plans,which aim to transform the Chineseeconomy into a modern, advanced in-dustry. “China is doing best in man-ufacturing. Focusing on an archaicsector has required its moderniza-tion,” said Michele Geraci, AssistantProfessor of Finance at the Notting-ham University Business School Chi-na and Director of the Global Poli-cy Institute. “That’s how China cameup with Made in China 2025, the planto create an advanced manufacturingsector and focus on the environ-ment and innovation. No more T-shirts. Artificial intelligence, robotsand electric cars instead.” Chinese in-vestments are guided by a strict log-ic: acquiring the skills to assert lead-ership in the technology of the future.There are two types of skills: “On onehand, domestic capacity. On the oth-er, acquiring know-how from foreignindustries,” Geraci explained. “Wherethat doesn’t happen, China will needto go into M&A (Mergers and Ac-quisitions).” Beijing intends to directinvestment along two main lines.Infrastructure, i.e., ports and railways.Put simply, the Silk Road, the Beltand Road Initiative (BRI or OBOR,
One Belt One Road), USD 900 bil-lion of infrastructure links by land andsea between Asia, Africa and Europe,as announced by Xi Jinping in 2013.This is the new “Chinese globaliza-tion” project, involving 60 countries(mostly developing countries). Chi-na is entering a “new era” of social-ism with Chinese characteristics,with an ultimate aim of becoming afully-developed economy by 2049,100 years after the creation of thePeople’s Republic of China (PRC).The Congress of the CCP in Octo-ber added Xi Jinping’s thought to thestatutes, and reconfirmed him asGeneral Secretary. Opposing Ximeans opposing the Party. Thestatutes now also include an indica-tion of the Chinese President’s twomain political strategies: the Beltand Road Initiative and supply-sidestructural reform. The latter is the keyelement of the “New Normal” strat-egy, aimed at improving productivi-ty and the Chinese industrial fabric,with the objectives of cutting over-capacity and Made in China 2025 atits core.
Beijing’s restrictions Chinese investment worldwide hasseen an incredible increase, fromUSD 55.9 billion in 2008 to USD196.15 billion in 2016. But concernsover the financial system led theChinese authorities to impose re-strictions. “Non-financial outboundChinese investment at September30, 2017 stood at USD 78.3 billion,down 41.86 percent on the first ninemonths of 2016,” explained AlbertoRossi, an analyst at CeSIF – CentroStudi per l’Impresa, Fondazione ItaliaCina (business think tank, Italy-Chi-na Foundation). In November 2016,the Chinese government imposedrestrictions on overseas acquisitions,fearing an outflow of capital. The cli-mate for Chinese investors has wors-ened. The policies controlling “un-reasonable” investments have beenstrengthened, in what the head of the
Chinese State Administration of For-eign Exchange (SAFE) Pan Gong-sheng called “roses with thorns” (af-ter the record USD 183 billion andUSD 225 billion in acquisitions in2016). In recent years, foreign ex-change reserves have been drained,weakening the yuan. The latest re-striction, ordered by the State Coun-cil on August 18, aims to place stricterlimits on acquisitions in sport, hotelsand entertainment. These fields giverise to speculation and are oftenused to hide capital outflow overseas.The Chinese authorities have classi-fied investments into three cate-gories: “prohibited,” “restricted” and“supported.” Concerns over the fi-nancial system, especially in terms ofcapital outflow overseas, have ledthe Chinese authorities to curb in-vestment. This affects mainly privatebusiness conglomerates, also knownas “white rhinos” and “financialcrocodiles,” which are hampered byrestrictions on loans for overseas ac-quisitions,” said Alberto Rossi. “Aswell as fears of capital outflow, thereare now concerns over falling foreignexchange reserves. In January, for thefirst time since February 2011, the re-serves fell below the psychologicalthreshold of USD 3 trillion (com-pared to USD 4 trillion in June2014),” Rossi noted. Two factors arepushing the Chinese giants to goshopping overseas: the prospect of in-creasing revenue by entering newmarkets and acquiring new tech-nologies. Investments falling underOBOR are a third factor.
Bye-bye United States, hello to the new favorites, Singapore and Hong KongThe EIU report shows that Singaporehas overtaken the United States as themost important destination for Chi-nese investment. Then come HongKong, Malaysia and Australia.“Malaysia and Singapore are estab-lishing themselves as attractive des-tinations for projects related toOBOR, based on an investment en-vironment characterized by oppor-tunity and low risk,” the report said.Six industries were considered: auto,consumer goods, energy, financialservices, telecommunications andhealthcare. The Made in China 2025plan identifies ten strategic sectors forinvestment to transform China intoan industrial superpower (IT, robotics,aerospace, shipbuilding, electric cars,energy, agriculture, new materials,biopharmaceuticals), each requiringthe massive investment typical ofhigh-tech industries. The develop-ment of artificial intelligence alsoplays a major role. The Chinese in-ternet giants, such as Tencent and Al-ibaba, are the main investors in e-commerce startups in Asia. (Ten-cent, the first Chinese high-tech
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THE OVERTAKE
ALESSANDRASPALLETTA
Journalist and Sinologist. Lived long-termin China, working as Investor RelationsManager for the Mandarin CapitalPartners Fund. Now lives in Rome,working as a journalist at the pressagency AGI, coordinating the AgiChinaportal. Author of two e-books, Diavoli e Dragoni. L’affare Milan-Cina: storia,protagonisti, retroscena and La nuova eracinese. Co-author of Cina, la primaveramancata (L’Asino d’Oro, 2012) andModello Cina (L’Asino d’Oro, 2011).
T
CHINESE INVESTMENTSWORLDWIDE. The map showstotal Chinese investments (debtand equity) from 2005 to date,dividing them by geographicalregion. Each column is dividedby industry.
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200,000
250,000
300,000 Millions
UTILITIES
TRANSPORT
TOURISM
TECHNOLOGY
REAL ESTATE
OTHER
METALS
FINANCE
ENTERTAINMENT
EAST
ASIA
EURO
PE
NORT
H AME
RICA
SOUT
H AME
RICA
SUB-
SAHA
RIAN
AFRI
CA U.S.
WEST
ASIA
Source: data processed by Michele Geraci
company to break through the ceil-ing of USD 500 billion dollars in stockmarket value, together with Baidu andAlibaba makes up the BAT triumvi-rate of Chinese high-tech, an openchallenge to Silicon Valley.) From theprevious report published in 2015,while developed countries are themain destinations for Chinese in-vestors, developing countries haverecorded the greatest flows. Why is this? Two factors make themattractive. On one hand, incentives forinvestment in OBOR-related infras-tructure, on the other, the stabiliza-tion of raw material prices. Theranking rewards countries such asMalaysia (up from 20th to 4th), Kaza-khstan (from 51st to 12th), Thailand(from 38th to 18th), and Iran (from52nd to 19th), while it penalizes oth-ers, including the U.S. (down from 1stto 2nd) and India (from 28th to36th), both of which are sufferingfrom diplomatic tensions and tradefrictions with Beijing. According tothe Chinese Ministry of Commerce,non-financial direct investment incountries involved in OBOR projectsgrew by 18.2 percent to USD 14.8 bil-lion in 2015, falling 2 percent to USD14.5 billion in 2016, then dramaticallydropped 13.7 percent in the firstnine months of 2017. Of course, notall projects falling under OBOR havethe same luck. An investigation con-ducted by the Financial Times and theCenter for Strategic and Interna-tional Studies (CSIS) revealed someof the issues faced by Chinese projectsoverseas. Failed railway projects in theU.S., Venezuela, Mexico, Myanmarand Libya were worth USD 47.5 bil-lion according to Financial Times es-timates, while ongoing ones in Laos,Saudi Arabia, Turkey and Iran cometo USD 24.9 billion according toCSIS estimates. In total, the value ofthe eighteen high-speed projects, in-cluding those under construction,those that have been announced andone already completed, the Ankara-Istanbul line, is now more than thevalue of the Marshall Plan, nowworth around USD 130 billion (USD13 billion at the time).But there are doubts over their fi-nancial viability. For example, Chinesestandards don’t seem to be welcomedeverywhere. One of the most con-troversial projects is the railway linefrom Belgrade to Budapest, stoppedfirst by the European Union in Febru-ary to investigate alleged breaches ofE.U. rules. According to the EIU re-port, Italy, in 35th place in 2015, hasnow fallen to 50th. Even so, theworst performer is the United King-dom. Following the decision to leavethe European Union, Britain hasdropped from 28th to 40th place. Thecountries keeping high positions in allsix sectors are the United States,Japan, India, and Iran. Although the
United States and Japan remain at-tractive destinations offering oppor-tunity to investors to acquire tech-nology and brands through M&A op-erations, India and Iran are marketswith high growth rates where Chinesecompanies can compete. For example,two giants are already in India:Huawei, the leading telecommuni-cations company, and Xiaomi, the fifthlargest smartphone manufacturer inthe world. Among the BRICS coun-tries (the emerging economies ofBrazil, Russia, India, China and SouthAfrica), Russia has moved from 24thto 10th place, based on commodityprice increases, while South Africa hasrisen six places to 44th. Just like In-dia drop in ranking mentioned above,Brazil fell 19 places to 53rd. In the au-tomotive sector, Japan is 1st (of theE.U. countries, Germany comes in9th). In consumer goods, the UnitedStates leads (in the E.U., Romania is10th).In the energy sector, India is the coun-try that attracts the most Chinese cap-ital. Things are changing in the oil andgas sector, with a greater flow of Chi-nese ODI in countries with large min-eral deposits. The three largest Chi-nese oil companies – China Nation-al Petroleum Corporation (CNPC),Sinopec and China National OffshoreOil Corporation (CNOOC) – haveinvested mainly in North America(the biggest deal was the acquisitionof 33 percent of Devon Energy in2012), Central Asia (especially inKazakhstan), Latin America (mainlyin Brazil and Venezuela, where Chi-na invested $1.5 billion in PDVSA in2016). However, there seems to be re-luctance on the part of Chinese com-panies to invest in Latin Americanbusinesses, known for their high riskof default. In the Middle East, the twolargest oil producers, Saudi Arabia andIran, have attracted little attentionfrom Chinese investors. Analystsnote that the increase in sanctionsshould nevertheless increase invest-ment in Iran. In the financial servicessector, the United States takes firstplace, followed by Hong Kong, Sin-gapore, Sweden, and several Euro-pean countries: Switzerland, Slo-vakia, Poland, Norway, plus the UKand Canada. In the healthcare sector,the US and Japan lead, with the bot-tom five places taken by Europeancountries: Germany, Sweden, Nor-way, Denmark and France. Telecom-munications is dominated by Japan,the U.S. and India.
The importance of a precisedefinition of “investment”For Michele Geraci, in the world mapof Chinese investments the top spotis taken by Africa, followed by Europeand the United States. “Making a listof Chinese investments around theworld is extremely complex,” noted
Geraci. Why is this? The definitionof “investment” varies from organi-zation to organization. The Organi-zation for Economic Co-operationand Development (OECD), the Min-istry of Commerce, People’s Repub-lic of China (MOFCOM) and theEuropean Union all have differentcriteria. “Investments can be in shares,corporate debt, or government-issuedbonds,” the analyst noted. “China hasinvested USD 3 billion in the foreignexchange reserves of other coun-tries—in Europe, Japan and theU.S.—where Beijing has bought a bil-lion government bonds. Foreign ex-change reserves are almost nevertaken into account.” There are alsogreen field investments, where a fac-tory is opened with no investment inan M&A operation. For example,“The OECD also considers the ‘re-tained earnings’ of a company pur-chased many years earlier as an in-vestment,” Geraci went on. Whatdoes that mean? “Say a Chinese in-vestor purchased a company last yearor 20 years ago. In the current year,to which the hypothetical relationshipapplies, the company records profitsof $1 billion and pays dividends of$300 million. The difference be-tween profits and dividends ends upin ‘retained earnings,’ regarded as di-rect investments,” Geraci explained.“This money should have gone backto the parent company, but remainswithin the organization. In otherwords, it is considered a non-returnflow.” Then there’s a conventionthat applies to M&A operations. “It’sonly an investment if the proportionof share capital is more than 10 per-cent,” the analyst continued. For ex-ample, the People’s Bank of China(PBoC) holds almost 2 percent of theshares in Generali, Telecom Italia,Eni, Enel, Fiat and Prysmian. How-ever, these holdings are not consid-ered direct investments. “The para-dox is that – say – if the Chinese cen-tral bank increased its holding by 1percent per year, the day it reached 10percent, it would suddenly be record-ed as ODI,” Geraci suggested.Michele Geraci has analyzed totalChinese investments (debt and equi-ty) from 2005 to date, dividing themby geographical region: Middle Eastand North Africa (around USD 150billion); Australia (around USD 100billion); East Asia (around USD 210
billion); Europe (around USD 290billion); North America (aroundUSD 60 billion); South America (al-most USD 150 billion); Sub-SaharanAfrica (around USD 270 billion);United States (around USD 170 bil-lion); West Asia (around USD 240billion). Each column is divided by in-dustry: utilities; transport; tourism;technology; real estate; other; metals;finance; entertainment. “The region with the most Chineseinvestment since 2005 is Africa, witharound $330 billion: $280 billion inSub-Saharan Africa and $50 billion inNorth Africa,” the analyst explained.“Investment is concentrated inEthiopia, Algeria, and Nigeria. Thereis a high concentration in infras-tructure: transport and energy. Thenumbers speak for themselves. InAfrica, poverty started to reducewhen China began to invest. Bychance or cause and effect?” Geracinoted. Europe comes next, withUSD 280 billion. The old continent“is interesting for Chinese investorsespecially for its know-how and man-ufacturing, driven by the need to ac-quire new technologies in line withthe objects of the Made in China 2025Plan.” The drive to acquire know-how is alsobehind the approximate USD 170 bil-lion invested in the United States.China is essentially interested in two
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THE EXPANSION OF TOURISMThe Chinese invest in Europe
especially to acquiretechnological know-how they
can transder to China. Tourism is also a large-scale sector. Inthe picture, Chinese tourists
at the 34th Harbin InternationalIce and Snow Festival, in China.
things when investing in Africa: en-ergy and transport (with companiestaking orders for infrastructure de-velopments). When investing in Eu-rope, there is no need for new in-frastructure, so the Chinese buyknow-how. This is demonstrated inrecent acquisitions from Germany’sKuka (USD 4.5 billion) to Switzer-land’s Syngenta (USD 43 billion), andthe recent purchase of Esaote, an Ital-ian gem in the manufacture of med-ical devices, by a consortium of sixChinese partners.
To Europe in search of know-howChinese investment in Europe from2010 through 2016 rose from USD20 billion to USD 35 billion. In2016, Italy was confirmed as thethird European country destinationfor investment from Beijing, withUSD 12.84 billion in stocks. As not-ed above, the Chinese invest in Eu-rope mainly to acquire know-how andtransfer technological expertise toChina, where it is needed to completethe move towards quality manufac-turing. Chinese purchases in highadded value technology sectors are re-flected in the growth in overseas in-vestment in the manufacturing sector,rising from 13.7 percent in 2015 to19.4 percent in 2016, according todata from CeSIF, the think tank at the
Fondazione Italia Cina. Comparedwith China’s 2016 USD 35 billion in-vestment in Europe, the USD 8 bil-lion of European investments pale insignificance. This clear distinction hasrevived the issue of reciprocity. A cri-sis point occurred in 2016 during theaforementioned purchase of 35 per-cent of Kuka, a German robot man-ufacturer, by China’s Midea. Thepurchase was taken badly by AngelaMerkel, resulting in an anti-predatoryprotectionist measure to defend thestrategic interests of Europe, as an-nounced by the President of the Eu-ropean Commission Jean-ClaudeJuncker at the request of Germany,France and Italy. “The right way, al-though an imperfect one,” com-mented Alberto Rossi. “Discussingthis matter is essential, although Ithink it would be almost impossibleto achieve full reciprocity with theChinese. The wind changed in Eu-rope, wanting to go for more controls,and in China, where a restriction wasimposed on capital outflow, which willresult in increased monitoring of in-vestments. Despite the central role ofthe Belt and Road Initiative, whichshould be fully implemented with aview to investment in the next decade,this is not the right time for mutualinvestments, both from China toEurope and from Europe to China.”China has invested around USD 22
billion in Italy (including USD 7 bil-lion in Pirelli alone) from 2008 todate. “The vast majority of this is ac-quisitions, with very few greenfield in-vestments,” Geraci commented.What does this mean? “That the Chi-nese have not opened factories or re-search centers in Italy, other than invery rare cases. Instead, they havebought existing companies. ThisUSD 22 billion has added no value toour economy. In fact, it’s only an ex-change between shareholders. TheChinese just want to acquire ourknow-how,” the analyst explained.
The Silk Road: A platform for relationsAccording to MOFCOM data re-ported by CeSIF, 12.3 percent of non-financial Chinese investments comeunder the Belt and Road Initiative. Inthe first nine months of 2017, over-seas Chinese investment amounted toUSD 78.03 billion, while invest-ment in the OBOR was USD 9.6 bil-lion. “It’s important to note that in-vestment in the Belt and Road Ini-tiative is still not high compared to to-tal overseas Chinese investment,”said Rossi. “This means that, even be-fore a major investment plan, OBORis now mainly the construction of aplatform for relations. Its main ob-jective is not so much the develop-ment of new logistics and infras-
tructure platforms – this can only bethe first stage, but a genuine new Chi-nese globalization plan, focusing ondefending and protecting Chinese in-terests overseas. In terms of Sino-Eu-ropean relations, it will also be im-portant to see if it’s possible to iden-tify how to develop for mutual ben-efit and win-win cooperation.“There’s no win-win with the Chi-nese,” in the view of Alberto Forchiel-li, managing partner of the MandarinFund. “The Sinocentric nature of theChinese model brings no benefits toother countries.” He emphasized therisks: “Becoming an imperial powerhas costs as well as benefits. FromVenezuela to Ecuador, from Africa toSoutheast Asia, the Chinese haveinvested with no real return. Anyway,it is more reasoned investment thanAmerica’s, with them fighting wars inAfghanistan and Iraq, ending up giv-ing their adversaries an advantage.”The American model, especially inthe last 20-30 years, is “fundamentallymilitary,” Forchielli noted. “Instead,the Chinese model is economic andpolitical, with less investment, less riskand higher returns,” he went on. TheU.S. drop bombs and make many en-emies. The Chinese do not bomb,they buy and spend less. The USD 63billion loaned to Venezuela is thesame amount that America spends inone day of war. The new Silk Road isa “priority,” Xi Jinping has said. Theobjective is to “further open Chinathrough links towards the east andwest, by land and sea.” “OBOR is aninstrument of soft power,” MicheleGeraci said. “The aim is to exportmanufacturing overcapacity to over-seas markets, especially in certain in-dustries (such as steel), and is linkedto the reform of state-owned com-panies. However, the impact ofOBOR on the Eurasian economycould be huge. Building infrastructurein poor countries produces immedi-ate results, because it’s a start fromscratch. It is therefore positive in-vestment. For example, in Africa,China is building by exchanging re-sources, contributing to the stabi-lization of the region,” Geraci said.What about the impact on the Eu-ropean economy? “It will be inter-locutory, after the protectionist mea-sures announced by Juncker. AndItaly? “At most, we can aim at pro-moting the port of Trieste,” Geraciadmitted. Alberto Forchielli thinksEuropean protectionism won’t beeasy to apply. “For Eastern Europeancountries, Chinese investment is likemanna from heaven. Beijing wants toconquer Eastern Europe to expandwestward. The liberal Northern Eu-ropean countries are hostile to pro-tectionism, and do not view these kindof maneuvers favorably.”
81
THE OVERTAKE
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Olympians of the Celestial EThe People’s Republic of China first took part in the Olympics in 1952.On that occasion, Chinafailed to win a singlemedal. Then, because
of political status disputes,the PRC sat out the games
for 32 years, finallyreturning to the Los
Angeles games of 1984.Since then, the country’sfortunes have improveddramatically, culminatingin its great success at theBeijing Olympics in 2008.There, China was first in total medals won
with 100 (51 gold, 21 silverand 28 bronze).
CHINA AT THE OLYMPICS
Edition
1952 Helsinki 0 0 0
1984 Los Angeles 15 8 9
1988 Seoul 5 11 12
1992 Barcelona 16 22 16
1996 Atlanta 16 22 12
2000 Sidney 28 16 14
2004 Athens 32 17 14
2008 Beijing 51 21 28
2012 London 38 27 26
2016 Rio 26 18 26
2
1
83
portfolio
1 | Wu Minxia, diver. Between 2004 and 2016, he won 7 Olympic medals (5 gold, one silver and one bronze). 2 | Zou Key, gymnast. Between Beijing 2008 and London2012, he won 6 Olympic medals (5 gold and 1 bronze). 3 | Zhong Man, fencer. He was the first Chinese athlete to win a gold in the saber (Beijing 2008). 4 | Wang Nan, table tennis. From 2000 to 2008 he won 4 gold and one silver. 5 | Liu Xiang, track and field. The reigning worldchampion, world record holder and gold medalist in the110 meter hurdles at the 2004 olympics. 6 | Sun Yang, swimmer. The first Chinese male swimmerto win gold at the Olympics. In London 2012, he won goldmedals in the men’s 400 meter free style and the 1500meter freestyle.7 | Zou Shiming, boxer. He won the first Olympic gold in boxing in Beijing 2008.
mpire
3
4 5
6
7
watc
h A Janus-faced View on the Environment and Development
China seemed to
have made its
“Great Leap
Forward” during
the last days of
the Obama presidency, when
Xi Jinping appeared side by
side with the U.S. President
to announce that their two
countries would formally ratify
the Paris Agreement, better
known as COP21. Until then,
the deal had been struggling
to get off the ground, and it
had seemed that getting the
adherence of the required
number of countries
representing 55 percent
of total global greenhouse
emissions would be a long
and difficult process. After
September 3, 2016—within
less than a month and with all
the members of the European
Union plus a number of
important BRICS countries
(Brazil, Russia, India, China
and South Africa) having
decided to ratify the
agreement—that target was
reached, Obama won acclaim
just as he was leaving the
White House, and China
earned global respect as a
“non reluctant” superpower.
But China is actually acquiring
an even more significant role
with Donald Trump, and not
always for noble reasons. This
is simply because the current
U.S. President’s “denial”
theories (on climate change
in this case) are giving a boost
to Beijing’s “official” policies.
But these policies seem to be
Janus-faced, with one
attractive and innovative face
and another that is more in
line with Trump’s “laissez faire
capitalism” in many parts of
the world where China is
active with its capital and its
new entrepreneurs.
The risks andopportunities of rapiddevelopment
The starting position certainly
seemed to present an
impossible challenge. In the
last thirty years, China has
endangered virtually all its
water resources, and a
quarter of its agricultural land
is threatened by
desertification. China’s basins
are increasingly at risk due
to high levels of hazardous
chemicals and salts, as are
several large and glorious
water courses like the Yellow
River. And water is only one
of the serious environmental
challenges facing the country.
We also need to consider the
energy issue (China accounts
for 20 percent of global
energy demand) in a country
that is short in oil but rich
in coal, which, according
to the experts, China burns
in greater quantities than the
United States, Japan and the
European Union. In addition,
there is the problem of
environmental pollution
caused by China’s rapid
industrialization, as well as
by specific highly polluting
production processes such
as steel manufacturing.
Efforts to protect theenvironment
With the passing of time and
its growing economic links,
China has opened itself up
to new ideas, and one of the
documents addressing the
topic of “the environment and
sustainable development,”
presented at the recent 19th
Congress of the Chinese
Communist Party, listed the
changes that have been made
on this front in recent years.
These include six
environmental protection laws,
ten laws on natural resources,
over thirty environmental
protection decrees, ninety
government regulations on
environmental protection, 430
national regulations, and over
a thousand local laws and
decrees. Then there is the
news that over 84,000 heavily
polluting small businesses
were shut down, and that over
90 percent of existing
factories are complying with
environmental regulations. All
this represents a real leap into
modernity, a leap that also
received recognition by
external experts from NGOs
at the Bonn COP23
conference held in November
2017. Yet the picture is not
entirely rosy. William Laurance,
an Australian scholar who has
published several articles
on the subject, and one in
particular titled “The Dark
Legacy of China’s Drive for
Global Resources” featured in
“Yale Environment 360,” takes
the following view. While he
doesn’t deny China’s green
conversion and large-scale
investments in wind and solar
power, as well as its extensive
tree planting efforts to address
the problem of air pollution,
Laurance also highlights how
this domestic policy all too
often acts as a filter to
disguise China’s different
image around the world,
especially with its investments
in nations that, unlike China
itself, are still “developing
countries” and could be said
to fall below the global poverty
line, particularly in Latin
America and Africa.
One policy at home andanother policy abroad
Wherever China has brought
its legal interests, sometimes
on the fringes of legality, there
is always a need to build
transit routes. Here Chinese
entrepreneurs, particularly
in Africa but also in Latin
America, don’t focus too
much on details such as
securing sustainable local
development or ensuring that
infrastructure doesn’t alter the
bio-anthropological conditions
of the areas in which they
“buy their goods.” We are
talking about the 10 billion
dollar railway projects in East
Africa, the mines and
deforestation in the Congo
basin, the large-scale
hydroelectric dams in Congo
and Ethiopia, and the 5,000
kilometer railway line—in Latin
America in this case—running
across forests and savannas
to transport soy, wood and
other resources up to the
Pacific coast from which they
are shipped to China. We still
don’t know whether the
laxness of the past will be
replaced with the same
environmental awareness
that seems to have become
the accepted rule at home.
But if this is not the case,
and if Trump’s isolationism will
enable freedom of action in
other regions, especially in the
Pacific area, we would face a
great and dangerous paradox.
We would have a superpower
fighting to protect its
environment at home, after
years of unrestrained industrial
and economic growth, and
that same superpower
growing outside its borders
without environmental
constraints, taking full
advantage of an auspicious
time with little inclination
towards self-restraint. The
rush to invest, occupy and
take advantage of the current
favorable media and
diplomatic trends would
position China at the “top
of the class” in terms of
achieving the goals of the
Paris Agreement domestically,
but at the same time it would
undermine achievement of
these same goals in areas
of the world that are inhabited
by 60 percent of the world’s
population and produce 30
percent of the global GDP.
This would be a truly negative
outcome for humanity. And
the greatest paradox of all is
that only the U.S. can restrain
this drive.
ROBERTO DI GIOVAN
PAOLO
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Roberto Di Giovan Paolo, a journalist, has written for,among others, ANSA, Avvenireand Famiglia Cristiana. He wasSecretary General of the ItalianAssociation for the Council of European Municipalities and Regions, and he is a lecturer at the University ofInternational Studies of Rome.
poin
t of v
iew
Xi Jinping’s high-risk Ambitions for China
Borders of China
have remained
unchanged at
least since the
time of the
Roman Empire. The Romans
may be long gone, but
imperial China lives on,
governed by a despotic
communist party that has
nevertheless managed to
engineer a boom. And herein
lies its geopolitical
uniqueness. China’s
determined defense of its
borders has sparked wars
with most of its neighbors
since 1949, and yet this
undemocratic nation is a
powerhouse of the global
economy. These two factors
have prevailed for thousands
of years, and are crucial to
any understanding of China’s
future and the strategies
of President Xi Jinping.
October’s nineteenth
Communist Party Congress
made much of the fact that
China looks set to exceed its
ambitious 6.5 percent GDP
growth target in 2017. But
China watcher Loren Brandt,
professor of international
trade and economics at the
University of Toronto, says
this figure is less impressive
than it looks. Manufacturing
growth averaged 2.6 percent
a year from 1998 to 2007,
but has since slowed almost
to zero. The gap between
rising output and waning
productivity is the result
of massive state subsidies
that have disproportionately
benefited state-owned
businesses since 2008.
This is another thorny
problem, and another
reflection of China’s long
authoritarian tradition.
Consumer spending has risen
by only 2.5 percent of GDP
since 2010, which is not
much considering that urban
disposable incomes have
increased by 7.3 percent.
President Xi has obviously
decided that any consumer-
focused strategy will be hard
to achieve, and is focusing on
flexing China’s muscles
internationally while
maintaining domestic stability.
State aid set to continue
The ruling party still describes
itself as communist, and still
draws up five-year plans,
so state investment is likely
to remain a constant. This
includes the huge New Silk
Road project in cooperation
with other Eurasian countries,
as well as plans to support
the aerospace, robotics
and electric vehicle sectors
with subsidies, easy credit
and low taxes.
In this scenario, Donald
Trump’s claims of a falling
bilateral trade deficit are the
least of China’s problems.
It can deal with this, and is
unlikely to experience a lower
total deficit than the United
States unless interest and
domestic savings rates rise
significantly.
The more serious
complications for the U.S.
and China are geopolitical.
China needs to expand its
influence in southeast Asia,
the Pacific and Siberia as part
of its strategy of central
planning, and to manage
the geopolitical tensions born
of globalization.
The transition to a global nexus of power
As China becomes even
more global and invests
in the domestic and
international economies, it is
also expanding its interests
abroad. This has been a
factor in territorial disputes
in the South China Sea,
the North Korea crisis, and
tensions with Japan and
India, none of which will be
easy to resolve.
Trump’s America First policy
and China’s attempts to fill
the resulting power vacuum
are only a part of this
problem. Rising tensions over
North Korea have damaged
China’s alliance with the U.S.,
its relationship with India
remains unresolved, and
expansionism is an unwieldy
process. The country will
have difficulty obtaining the
resources it needs unless
it can increase productivity.
Overdependence on state
subsidies has thwarted more
than one attempt at global
hegemony in the past, as
witness the collapse of the
Soviet Union. China’s future
will also be complicated by its
focus on consumer spending,
and it must settle its long-
standing neighbor disputes
if it is to become a nexus
of global power.
Geminello Alvi has workedat the Bank for International Settlements in Basel, he hascollaborated with EspressoGroup and with Corriere della Sera. He has also beenCouncilor of the Ministry of the Economy.
GEMINELLO ALVI
85
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olitic
s
In the recent 19th National Congress of the PPC, as expected, Xi Jinping wasconfirmed in his role of secretary of party and president of the country.
data
86number
thirty-seven
Welcome Back to the SixtiesMARKET DEVELOPMENTS
Brent crude continues its riseafter breaking through the USD55/b mark in October and rising
above USD 60/b in November, the highest value since May 2015. In parallel, the backwardation pricestructure (lower futures prices) isstrengthening, confirming the currentbullish trend. Crude prices aresustained by the output cuts of largeproducers who since the beginning of the year have shown high levels of compliance (around 90 percent forOPEC countries and over 80 percentfor non OPEC countries) and by thedecision to extend the agreement untilthe end of 2018. In order to maintain a balanced market, at the OPECmeeting of November 30, in additionto confirming the output cuts agreedto at the end of 2016, Libya andNigeria were also asked to cap theirproduction and not to exceed 2017levels. Market confidence is alsoboosted by shrinking stockpiles. At the end of September, total OECDstocks dropped below the thresholdvalue of 3 billion barrels, turning the 40 mb surplus at the beginning of theyear into a deficit of around 100 mb.Specifically, U.S. crude stocksdropped (from the 30 mb surplus to the current 36 mb deficit) and, from July, European stocks returnedwithin the range for the last 5 years.The world oil report for the 3rd quarterclosed once again with a deficit (-0.2 mb/d), albeit smaller than that forthe 2nd quarter (-0.9 mb/d), due toincreased supply, particularly from theU.S. and Canada. There are renewedgeopolitical tensions, with widespreadsupply disruptions, which resulted in a reduction of around 0.4 mb/d in October compared to last year.Interruptions in northern Iraq,Venezuela’s sharp decline andchallenges in Nigeria are only partiallyoffset by recovery in Libya’sproduction. Since mid-October therehas also been optimism amongfinancial operators with expectations of price increases and total net longpositions (Brent and WTI) at an all-timehigh (over 1 million contracts). Markets are continuing to focus ongrowth figures for U.S. output, themost significant bearish factor, asshown by the wide discount betweenWTI and Brent, which in recentmonths has been around USD 6/b.
Crude price rises above USD 60/b, good for OPEC, perhaps too good for the U.S.?è OIL PRICES
15
35
55
75
95
115
135
$/b
Oct-2
012
Oct-2
013
Apr-2
013
Oct-2
014
Apr-2
014
Oct-2
015
Apr-2
015
Oct-2
016
Apr-2
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Apr-2
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Oct-2
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-2.0
-1.0
0.0
1.0
2.0
3.0
90.0
92.0
94.0
96.0
98.0
100.0
Mb/d Mb/d
Surplus/Deficit Supply Demand
1Q20
14
2Q20
14
3Q20
14
4Q20
14
1Q20
15
2Q20
15
3Q20
15
4Q20
15
1Q20
16
2Q20
16
3Q20
17
2Q20
17
3Q20
16
4Q20
16
1Q20
17
BRENT PRICE
SUPPLY/DEMAND BALANCE
Source: EIA-DOE, Europe Brent Monthly Spot Price FOB
Source: Eni’s elaboration on IEA data
Prepared by Anna Capalbo, Simona Serafini, and Francesca Vendrame - Eni
87
In the 3rd quarter of 2017growth in demand fellcompared to the previous
quarter (up 1.3 mb/d during3Q17 from 2.2 mb/d in 2Q17).Most of the slowdown was dueto decreases in U.S.consumption primarily linked to hurricanes Harvey and Irma. In the U.S., demand for gasolineand jet-kerosene slowed growth,while demand for LPG fell.Demand for gasoil bucked thetrend, due to the positive effect of post-hurricane reconstructionactivities and growth in industrialproduction (up 1.2% in AugustYOY; up 1.6% in SeptemberYOY). Europe continues tocontribute positively to growth inglobal demand even though therehas been a slowdown comparedwith the first half of the year dueto the negative impact of higherfinal prices. In the 3rd quarter,growth in global demand wasagain concentrated almostexclusively in the non OECD area(up 1.2 mb/d). Preliminary datafor China show significant growth(up 0.6 mb/d 3Q17 YOY), in linewith the overall growth forecast
for the year. In September (YOY)demand rose by almost 1 mb/d,driven by high refinery runs due tostart up of new capacity, with partof the output ending in productstorage. According to somesources, there has also beenincreased stockpiling of gasoil –non automotive – in China to takeadvantage of expected price risesdue to the introduction of tighter
specification between November2017 and January 2018 (reducingthe amount of sulfur content from50 ppm to 10 ppm). Gasoil,used in the construction, mining,fishing and agriculture sectors,accounts for 30 percent ofChina’s total gasoil consumption.India’s economy appears to beperforming well and thepreliminary data for September
show a marked improvementcompared to August. India’s demand experienced the highest growth since August 2016, with dieselbouncing back after dropping in August due to the large-scalefloods that struck the countryduring the previous months,drastically reducing commercialactivity.
Global oil supply rose to 97.8mb/d (up 0.9 mb/d from 3Q16)in the 3rd quarter. Compared
to a year ago only non-OPECcountries increased, while OPEC was slightly down.U.S. crude (up 0.6 mb/d) is driving thenon-OPEC increase for the secondconsecutive quarter, with tight oil closeto 5 mb/d. Canada’s strongperformance continues (up 0.2 mb/d),having grown steadily for over a year.After recovering the volumes lost as aresult of the 2016 wildfires, output fromoil sands has grown by over 100 kb/din September. Output is rising inKazakhstan (up 0.3 mb/d from 3Q16)due to positive results from Tengiz.Russia remains stable, at just under 11 mb/d in line with OPEC-non OPECagreements, while its complianceduring the 3rd quarter remained steadyat over 100 percent. Mexico’s outputsuffered a sharp decline (down 0.3mb/d from 3Q16) hitting a 30-year low(1.9 mb/d), mainly due to the effects ofthe August and September hurricanes. OPEC crude supply was sharplydown again (down 0.2 mb/ from3Q16), in compliance with agreed
output cuts since the beginning of theyear. Saudi Arabia, one of the mostdisciplined countries alongside Qatarand Kuwait, kept production below 10 mb/d (down 0.6 mb/d from 3Q16),with compliance averaging 120percent. During 3Q17, combinedoutput from Libya and Nigeria, bothexempted from supply cuts,
recovered over 0.9 mb/d from lastyear’s lowest levels. In October, Libyareached the 1 mb/d target again. For2018 total combined output by Libyaand Nigeria must not exceed 2.8mb/d. After growing for severalmonths, Iraq’s output declined due to interruptions in the Kirkuk oilfields in the wake of Iraqi forces regaining
control. Strained relations with theKurdish government continue tohamper the resumption of exportsfrom northern Iraq. The worseningeconomic and political situation inVenezuela, exacerbated by recentU.S. sanctions, has brought crudeoutput to below 2mb/d for the firsttime in the last thirty years.
€ OIL DEMAND
€ OIL SUPPLY
-2.0
-1.0
0.0
1.0
2.0
3.0
OPEC Crude NON OPEC Crude Total Crude
Mb/d
1Q20
14
2Q20
14
3Q20
14
4Q20
14
1Q20
15
2Q20
15
3Q20
15
4Q20
15
1Q20
16
2Q20
16
3Q20
16
4Q20
16
3Q20
17
2Q20
17
1Q20
17
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
3.5
3.0
2.5
OECD Americas OECD Europe China Non-OECD Americas Middle East WorldIndia Other Asia
Mb/d
1Q20
14
2Q20
14
3Q20
14
4Q20
14
1Q20
15
2Q20
15
3Q20
15
4Q20
15
1Q20
16
2Q20
16
3Q20
16
4Q20
16
3Q20
17
2Q20
17
1Q20
17
ANNUAL DEMAND CHANGE BY SELECTED AREAS
ANNUAL CRUDE SUPPLY CHANGESource: Eni’s elaboration on IEA data, annual change
Source: Eni’s elaboration on IEA data, annual change
