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China’s Coal Sector – Part 2 – History

China Coal Sector

Part 2 - History

Sub Heading

Image of China Coal Plants
Image - SINOLOGIX
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Reprinted w/ Permission

To put China’s massive pollution problem in perspective, it’s important to understand that China’s transition from an agricultural to an industrial economy happened over a span of less than 40 years. While the US and other western countries gradually adapted to industrialization over a 150-year span, China has had to deal with industrialization over a much shorter period and at a scale that dwarfs that of the US.
SINOLOGIX Staff
www.sinologix.io
info@sinologix.io
2023-12-13
China's Coal Sector - Part 2

A (Very) Brief History of Modern China

From Dynasty to Free Market Economy in 100 Years

There have been eight major phases in modern Chinese history:

1911 – Chinese Revolution of 1911 – ended nearly 2,000 years of dynastic rule and spawned the first of several different political/economic systems – the Republic of China (ROC) was formed by the Nationalist Party and was later joined by the Communist Party, which was founded in 1921.

1927 to 1937 – First Civil War – triggered by a philosophical and political split between the Nationalists and Communists amid accusations of rampant corruption in the ROC.

1937 to 1945 – Second Sino-Japanese War – marked Japanese occupation of large sections of eastern China – the Nationalists and Communists suspended their civil war to fight their common enemy.

1945 to 1949 – Second Civil War / Chinese Revolution – essentially a resumption of the First Civil War between the Communists and the Nationalists. In 1949, the Communists defeated the Nationalists, who fled to Taiwan.

1949 to 1976 – Mao Era – a period of true communism. However, the country suffered from many of Mao’s attempts to sustain a revolutionary culture, fend off political enemies within the CCP and introduce industrial reforms (see Attempts at Industrialization below).

1980 to 1997 – Deng Xiao Ping Era – began around 1980 (the leadership transition from Mao to Deng was a rocky one). Deng’s reforms gradually led China away from a planned economy and opened it up to foreign investment and technology. This was a pivotal point in China’s environmental history (see Market Reforms below).

2001 to 2012 – WTO / Integration with Global Markets – China formally joined the WTO in  2001, sparking 12 years of rapid integration with western markets, industrialization and the world’s largest ever infrastructure buildout.

2012 to present – Xi Jin Ping Era – began in 2012, when Xi Jin Ping consolidated power across all branches of government and initiated massive changes in domestic and foreign policy (see Belt and Road Initiative below).

Agrarian Society

It’s important to understand that China was essentially an agrarian society until Mao attempted to industrialize the newly founded People’s Republic of China. China’s population in 1950 was already 550 million people and the per capita income was less than $90…per year. China was truly an impoverished nation. While the US began implementing environmental laws in the 1970s, China was still struggling to bring its citizens out of poverty.

Mao Era – Attempts at Industrialization

Mao attempted to industrialize China with several ill-planned (and ill-fated) programs – the most notable was the Great Leap Forward, which resulted in the deaths of some 30  million people from starvation. Officially, the cause was famine from drought, but some historians believe Mao sold “surplus”  rice and wheat to the Soviets in exchange for nuclear weapons, while peasants were forced to live off of 1250 calories per day.

Deng Xiao Ping Era -
Market Reforms and Early Industrialization

Deng Xiao Ping’s “Reform and Opening Up” program in the 1980s was a massive departure from the original planned economy of the Mao era. The government started with small free market reforms in 4 “special economic zones”, which operated with few restrictions.

Entrance to the WTO –
Pivot to Large-scale Industrialization

After Deng’s death in 1997, China continued its aggressive campaign to modernize its economy. It joined the WTO in 2001 and became the “world’s factory” with a no-holds barred approach to industrialization and its attendant pollution. The combination of cheap, but industrious, labor and minimal environmental compliance costs made a compelling case for many manufacturers to move their factories to China. It’s difficult to imagine the scale of China’s factory economy – mega factories in Guangdong are self-contained cities with worker populations that can exceed several hundred thousand people.

Image of Coal Smokestack
Image - SINOLOGIX
(tap image to expand)

In less than 30 years, China has become an economic powerhouse - per capita GDP has risen to approximately $12,670 per year and it will soon be the largest economy in the world. It is the greatest (and fastest) economic transformation in world history.

Made in China 2025

Xi Jin Ping and the Party leadership have long recognized the limits of a low-cost manufacturing / export economic model. The Made in China 2025 (MIC 2025) strategic plan proposed in 2015 is intended to transform China from the world’s factory to a high-tech economy that moves upstream to product design and innovation. MIC 2025 is discussed in greater detail in a separate research paper (see Related Posts below), but in the context of China’s dependence on coal-based energy, the shift away from low-cost manufacturing to a blended products and services model will provide some relief (at least in terms of CO2 intensity per unit of GDP).

Related Issues - Modern China

Cultural Issues

Although many western politicians still refer to China as a “communist country”, in fact it is really more of a hybrid centrally-planned / free market economy. The US has more socialist programs than China, which has few social safety nets. This is an important factor in any discussion of pollution.

Chinese are natural mercantilists who place a premium on self-sufficiency – to wit, the common Chinese idiom: “the man who tends his rice field every day will never go hungry”.

Nearly 74% of Chinese do not believe in the concept of God – in lieu of worrying about a spiritual existence after death, Chinese concentrate on  accumulating wealth that can be passed on to future generations. Lack of religious beliefs also informs a somewhat pragmatic attitude when it comes to moral issues.

The combination of a cultural emphasis on making money, the residual trauma from the Great Leap Forward and the lack of a social safety net can have a profound impact on environmental considerations.

Importing Pollution

When China joined the WTO (and during the Deng Era), the government made a conscious decision to prioritize economic growth over environmental concerns – the environmental cost has been catastrophic:

  • 16% of China’s arable land is contaminated with heavy metals, such as arsenic, cadmium and lead.
  • Although conditions have improved with natural gas in urban power plants, at one point some northern Chinese cities had winter air that was so contaminated that PM2.5 pollution could not be measured.
  • The government published a study acknowledging that living in certain provinces would reduce life expectancy by 10 years.
  • Many outlying districts of major cities had no zoning controls and because factories were co-mingled with farms, many irrigation systems have been contaminated with heavy metals.
  • The rare earth mining sector has polluted large swaths of Fujian province and coal mining has similarly contaminated Inner Mongolia, Shanxi and Shaanxi.

Confronting the Problem

China’s economic situation has improved markedly in the last 20 years and the government is now intent on remedying the environmental sins of its earlier policies. It has already started shutting down some of its worst polluting factories. And, similar to the challenges the US faces with its coal mining industry, China has had to find a way to support displaced coal mining and infrastructure workers. The government has many creative ways to deal with sector downturns – for example, idle steel factories and shipyards have been tasked with building the world’s largest navy (mission already accomplished).

Belt & Road Initiative

China’s Belt and Road Initiative (BRI) is a 35-year, $7 trillion infrastructure project that will link countries from SE Asia all the way to Europe – it’s stated goal is to create the largest integrated commerce system in history. But it also has many sub-threads:

  • The Asian Infrastructure Bank is China’s answer to the World Bank and IMF. It has already approved more than $160B in loans to support BRI-related projects around the world.
  • China doesn’t just partner with other countries – in many cases, Chinese companies take the lead in BRI projects outside China, especially in LDCs that don’t have the expertise to build their own ports, airports, railways and…energy infrastructure.
  • While China’s official energy policy supports the eventual decommissioning of its domestic coal plants, it’s continuing to perpetuate a reliance on coal in many BRI partner countries.

Exporting Pollution

Belt and Road Initiative - Map
Image - Clingendael China Centre / Martin and Lammertink
(tap image to expand)

Chinese companies have built (or are building) over 300 coal-fired plants outside of China. Other projects include open pit coal mines in places like Pakistan, railroads in SE Asia and port facilities in Europe (China operates Greece’s largest port) and Africa.

Transition to Natural Gas

Regardless of China’s long-term commitment to renewables, the government recognized in 2010 that urban air pollution was becoming intolerable – a key feature of almost all northern Chinese cities was the use of coal-fired steam for winter heating. Power and steam plants were actually built inside city limits – vast networks of steam pipes connected apartment complexes with urban steam generation plants. Pollution from these urban coal-fired plants was so bad that even indoor particulate pollution was a major problem, with a fine silvery-gray dust coating apartment interiors.

To deal with urban pollution, most cities mandated that heating systems  could only operate between November 15th and March 15th – every November 15th the skies in Beijing and other cities would suddenly be filled with billowy clouds of brown smoke (many of these coal plants used lignite).

Beijing was the first northern city to completely replace its coal-fired steam generators with natural gas. Other cities have since followed suit. But net energy demand has only increased, so electricity generation has been relocated to nearby rural areas, which have lax enforcement of  environmental laws.

Auto Pollution

Pollution from ICE autos has also been a huge problem, given that: a) China has the largest auto market in the world; and b) many Chinese cities have populations of 15 – 25 million people.

Initially, local governments attempted to restrict the number of cars on the road – in 2009, Beijing implemented a policy where cars could only be used every other day (based on license plate number). Other affluent cities use licensing fees – the cost of a license plate in Shanghai is more than $10,000.

But these policies were ineffective in light of the number of cars already on the roads. So, the federal government has imposed a mandate on automakers requiring that electric vehicles (EVs) make up 40% of all sales by 2030. China already has the largest EV market in the world.

Note that, while the EV policy will reduce local urban pollution, it places even more pressure on China’s electric power grid, which will rely on coal-fired power plants for the foreseeable future.

NOTES

References and Disclaimers

Third-Party Contributors

From time to time, SINOLOGIX offers third-party content that complements our core focus. The authors we endorse are subject matter experts and thought leaders in their respective fields. We strive to offer a diverse range of perspectives on any given topic and these contributors help us achieve that objective.

Works Cited

Soares, Andre; The interest of Chinese Electricity Companies in Brazil (2016); from Beyond Borders

Why Is China Placing A Global Bet on Coal? (2019); from NPR

Understanding the Chinese Coal Industry (2010); Coal Age

Report Extract – Supply (2020); from EIA

Related Research and Articles

China’s Coal Sector – Part 1 – The 800 Pound Gorilla

China is both the world’s largest producer of greenhouse gas emissions (GGEs) and the world’s largest producer of renewable energy. From a climate change perspective, China is the 800-pound gorilla in the room – no matter what the rest of the world does in terms of GGEs, as China goes, so goes planet Earth. If China fails to reign in GGEs, catastrophic climate change may be inevitable.

Retrieval Augmented Generation

Work in Progress...!

PLEASE NOTE – We’re in the process of developing a full Retrieval Augmented Generation (RAG) component that will tap into a database of economic, tech trends and other data associated with our research reports. This initial prototype includes content that we’ve already published in the form of text articles, but we’ll soon be adding structured content that will enable in-depth analysis not generally available through public chat apps.

Retrieval Augment Generation refers to generative AI that is supplemented with proprietary structured data, text, images, audio and video content that we have curated from our research.

Thanks for your patience! This initial prototype will soon be replaced with a more advanced UI capable of generating complete multi-modal reports. Please bear with us – this prototype is text and speech only.

Other Data Insights

"Things change gradually at first...

...then all at once..."

China GDP vs UST Holdings (2010-22) (billions)

(click/tap legend to filter data)
China GDP vs UST Holdings (2010-22) (billions)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

(click/tap legend to filter data)
Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

(click/tap legend to filter data)
Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Western media is starting to pay attention to China’s efforts to influence members of the so-called Global South, or more specifically the BRICS+ and Shanghai Cooperation Organization (with substantially overlapping membership), to denominate international trade in the Chinese Renminbi (RMB), aks the Chinese Yuan (CNY) and/or other local currencies. For very different reasons, Russia has promoted the idea of an entirely new currency for trade settlement. This is an accelerating trend among countries that have formed close economic and political relationships with China.

Coincident with the pivot to the RMB for trade settlement is a growing sentiment among the BRICS+ and SCO members that holding USD as their primary reserve currency poses a risk in the event the US declares sanctions and/or freezes a country’s assets, as happened with Russia and Belarus in 2022.  

The combined effect of these two trends should be observable in a country’s US Treasuries holdings, and that’s exactly what we’re seeing in the chart above – China’s USD and Treasuries holdings peaked at $1.277 trillion in 2013 and declined by more than 32% in 2022.

Things change “slowly at first, then all at once”...

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Chart - Sub Heading - H3

(click/tap legend to filter data)
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China and De-dollarization – Part 1 – Overview

The so-called “de-dollarization” phenomenon is really a reflection of China’s ascendancy to superpower status – there can be no question it is the main driver behind the emergence of increasingly powerful inter-regional economic organizations, innovative trade agreements that circumvent the USD’s role as the world’s primary currency for trade settlement, and conceivably, the demise of the USD as the world’s de facto reserve currency. In this Part 1, we summarize the key factors that might trigger a future change in currency usage by China and its trading partners.

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The last few weeks have seen remarkable changes in China – the (reported) COVID numbers have stabilized and even declined in some provinces, 2022 Q4 GDP numbers (vastly) exceeded analysts’ expectations, a projected 5.2% GDP growth target for 2023 is driving demand for oil, and the latest Bureau of Statistics reports confirm a population decline. A lot to digest…

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