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Gail Tverberg: Observations based on my Trip to China

Gail Tverberg: Observations based on my Trip to China thumbnail

One of the first things I discovered on the China trip was that I couldn’t write posts on Our Finite World from China, thanks to China’s censorship. I could, however, read posts that I had previously written on Our Finite World.

The impression I got was that China allows a moderately free expression of opinion, as long as it is through a recognized organization, like a newspaper, or even The Oil Drum, or Energy Bulletin. What they don’t seem to encourage is sites by individuals. Sites that were unavailable included Facebook, any Blogspot blog, You Tube videos, and any site on sites.google.com (including the new Biophysical Economics site). Given the number of sites that seemed to be unavailable, I was glad that ourfiniteworld.com was at least readable from China, even if I couldn’t add new posts. It may be the fact that Our Finite World doesn’t use “wordpress” in the URL that permits it to be read. (I have to access a WordPress page to update it though.) English language newspapers in China seemed to carry a range of stories, including ones about expected power shortages this summer, and about recent college grads not being able to find jobs.

My trip consisted of two parts: (1) A visit to China University of Petroleum for three days, followed by (2) A commercial to tour (by  Viking) which included stops at Beijing, Xian, , and Shanghai and a boat ride down the Yangtze River from Chongqing to Wuhan.

Visit to China University of Petroleum

Professor Feng Lianyong invited me to visit China University of Petroleum, to meet with his students and to speak at a small symposium he was putting on that included a number of local dignitaries, plus people from Petroleum University.

Professor Feng’s students are working on a variety of Biophysical Economics type research projects, with a special emphasis on China’s issues, such as how fast Chinese natural gas production can reasonably be ramped up. Their group makes up ASPO-China. Professor Feng spoke at the Biophysical Economics conference in Syracuse, New York in October, 2009.

Gail, her husband Ben Setzer, Professor Feng, and three of his students at the University.

We met with Professor Feng’s students, and they told me about their projects. I was impressed with their diligence. There are not many places with as many students working on peak oil and EROEI-related projects. They told me that Michael Hook from Uppsala had visited their university earlier.

Gail and Ben with Students

One morning, I participated in a symposium with a number of Chinese leaders from the area. This is a copy of my talk.

At the symposium

The various Chinese leaders spoke in response to what I had to say. I was struck by how much they sounded like US leaders. To them, peak oil was not a major concern, although one of them did agree that some of what I was saying seemed to make sense. One thought that natural gas would save the day. Climate change seemed to be a bigger concern than peak oil. At least one of them seemed to think that by raising interest rates, they could solve the problem of rising food and energy prices. It occurred to me that the United States tried the higher-interest rate approach back in the 2004-2006 period, and those higher rates contributed to the 2006 and subsequent crash in home prices, but I didn’t think to mention it at the time.

The representative from an electric utility was concerned because coal prices are rising, but the Chinese government is not allowing electricity prices to rise by a corresponding amount. Of course, if electricity prices are allowed to rise, China will find that the discretionary income of a lot of people is being squeezed. As the latter part of this post shows, Chinese citizens now have many loans outstanding on condominiums. If citizens find their incomes squeezed by rising interest rates, and by rising food, oil and coal prices, China could see loan defaults similar to what other countries saw in the 2008-2009 recession.

My Travels around China

I saw a lot of interesting things around China. Of course, I saw the usual tourist things, like the Great Wall of China.

Gail’s husband Ben on the Great Wall of China

I noticed many coal-fired power plants, often right within cities. As a result the air seemed to be very gray in many cities. This installation had four cooling towers.

Four cooling towers of a coal plant in Xian

The number of new high-rise buildings is just amazing. This photo is of one group that was being put up. The wider brown area on buildings is bamboo scaffolding during construction.

HIgh rise buildings under construction in Xian.

We were told the national bird is the (construction) crane. This is a picture of a few of the buildings in Chongqing and our boat.

Viking boat in Chongqing

Old housing is being demolished and people are being encouraged to move to new high-rise buildings. The “selling point” is that the new apartments are up to three times as large as the old living spaces, and that they have their own bathrooms (often two) so people don’t have to wait in line for communal bathrooms down the street. In the new apartments, people can also install air conditioners.

We were told that people buy condominiums without flooring, windows, and other furnishings, then get a mortgage to cover the cost of the apartment plus the cost of improvements (or perhaps it is two separate loans, but we were told the loans on the improvements were for 10 or 20 years). Even if the government makes a payment for the old home, most people will still need a loan to cover the cost of the improvements. I expect most will need a loan for the condominium as well. Many of the old style homes seemed to be provided by the government at no cost, so for many people, this is their first experience with a loan of this type.  Condominiums in Beijing and Shanghai are very expensive; condos in other cities are less expensive, but incomes are lower as well.

This is the picture of part of a city: “new” Qutang. The city had been demolished and a new city built, because the new Three Gorges Dam flooded the farms and other businesses along that section of the Yangtze River. (Sorry the picture isn’t too clear–it was quite misty.)

Buildings in “new” Qutang

The area that was flooded by the new higher water level was good flat farm land along the Yangtze River, created when the river flooded in the past. We were told that farmers were encouraged to carry the good top-soil up the hills to new locations, but it is hard to see that there would be very good farming locations in such a hilly place. Some of the other businesses were lost as well when the area was flooded. Now, many people have lost their former types of employment, and are trying to make a living from tourism. Building an economy on tourism doesn’t look like a formula for long-term success, especially if oil and coal are in shorter supply in the future.

The characters that cannot be seen in the picture above were covered by a land slide. Landslides are fairly common on the steep limestone hills along the Yangtze. A person would hope that the landslides do not affect new high-rise apartment buildings.

People very often purchase window air conditioners for their condominiums. The building shown below is quite typical. (We were told that buildings are generally centrally heated, using coal as a fuel in northern China. Heat often isn’t needed in the southern parts of China.)

Apartment building with air conditioners

With a massive amount of new building, and new air conditioners everywhere, it is easy to believe that China will be running into electricity capacity constraints. English language Chinese newspapers are talking about electricity shortages this summer. According to Chinese papers, residential use is supposed to be given priority, if there is not enough electricity to go around. It is easy to see that there might not be enough electricity for commercial and industrial use, with the amount of new residential use that is being put into place. Furthermore, if coal prices are rising, and the government is not allowing electricity prices to rise, electricity supply may also be constrained by cutbacks in production by electric utilities that cannot make profits.

Agriculture

The agriculture we saw did not appear to use fossil fuel for cultivation. We saw many farms terraced on hill sides. It appeared that only human labor was used in tilling these farms.

Terraced fields on hill

We also saw goats in one area. It didn’t look as though the area was good for many other types of agriculture.

Goats grazing on hill side.

On flat areas, we saw water buffalo being used to till the soil.

Man plowing with water buffalo.

I have no way of knowing whether more fossil fuels were being used for cultivation elsewhere. It looked to us as though fossil fuels were mostly being used for industry. This is one plant we saw along the Yangtze. I am not sure what it does, but it does seem to have emissions.

Industrial plant along Yangtze

Conclusion

We were astounded by the progress that China is making in raising the standard of living of at least some of the Chinese. This is a picture of my husband and me in the “Bund” area of Shanghai.

Gail and Ben in Shanghai

The catch seems to be that much of this progress is being financed by loans. As long as growth speeds along, and the employment level is high and condominium values continue to rise, borrowers will have a reasonable chance of paying back their loans with interest.

The problem with these loans in China is the same as the problem in the rest of the world–it is hard to maintain the high level of growth needed to keep the whole system working, that is, enough people employed, and the values of the condominiums growing. It seems likely that some people will have trouble paying back their loans if the economy stumbles at all.

The problem is that as the government tries to cool the economy with higher interest rates, or as electricity prices naturally rise with higher coal prices, people will find their incomes squeezed. The “consumer” economy in China is not nearly as large as in the US, but it will still have an impact on the Chinese economy. Also, the rest of the world is approaching a point where it is hitting government debt limits. So demand from the rest of the world may very well begin to decline in the next few months.

There are also special regional issues, including the current drought in parts of China, and the areas where jobs were lost along the Yangtze, west of Three Gorges Dam, including new Qutang. These areas are likely to have more problems with loan defaults than other areas.

China, like everywhere else, depends on fossil fuels for most of its growth. China has been different from the rest of the world, in building its growth on coal use, rather than oil use.

China’s energy consumption, from Energy Export Data Browser

China’s weak point would seem to be rising coal prices, because rising coal prices tend to raise electricity prices and home heating prices. Rising oil prices can also be expected to have an impact. China imports a lot of food (sorry I don’t have a percentage–our tour guide said 50%, but that would be hard to believe), and imported food prices tend to rise with oil prices. The weak point in other economies is the financial system–the ability to pay back debt with interest when fossil fuel prices rise. The fact that governments raise interest rates to choke back increases in fossil fuel prices tends to make this problem worse, and China is following the higher-interest rate route.

I don’t know how well the Chinese government will be able to deal with debt default issues and falling condominium prices. China seems to have power to change laws more quickly and in different ways than OECD countries do, so once the debt-default problem starts, China may be able to disguise the problem for quite some time. But to the extent that China has changed itself to a capitalist system, it seems like China will have the same debt-default issues as everyone else, as the economy slows.

The next few months will be interesting (??) to watch. Governments of OECD countries are facing debt limits. As governments cut back on spending in response to these limits, the West is likely to re-enter recession. This time, recession may affect China to a much greater extent than in the past, because of the greater role household debt plays now, and because coal and food prices are now higher.

It will be interesting to see how all of these forces will work together. China remains an enigma, but perhaps these observations will give a little insight into how China fits into the world picture in the future.

Our Finite World



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