A Drier China Adds To Economy’s Woes

GLANCING BACK THROUGH the archives, this Bystander came across a more-than-a-decade-old post about China’s water insecurity.

The problem persists. The unprecedented scale of this year’s heatwave and drought — phenomena that will likely be recurring as they are climate-change induced — has only exacerbated it. The consequences will have high economic costs, including some of the second-order ones.

It is not an exaggeration to suggest that water shortages due to climate change are now one of the most serious threats to an economy that looks increasingly beset by structural challenges.

Droughts — and flooding — are annual events, but climate change is making them more severe and longer-lasting. That also gives foreign companies one more reason to source their raw materials, components and finished goods from elsewhere, threatening the maintenance of China’s central role in international manufacturing supply chains.

One reason that water shortages are so difficult to tackle is the uneven geographical distribution of the country’s water resources. Northern China has sparse natural water flows compared to southern China and to the requirements of its dense population and industrial concentration.

Urbanisation has caused water tables throughout northern China to fall fast, drying up irrigation wells for farmers. Poorly regulated industrialisation has worsened the problem by polluting surface and underground water reserves.

Southern China is expected to provide net water transfers to the north and other parts of the country through the South-North Water Transfer Project, a massive three-canal engineering project to divert Yangtze waters to the arid north.

However, the heatwave and drought that occurred from June to August were centred in the south, and persistently drier conditions will raise further doubts about southern China’s capacity to compensate for the north’s structural water deficit.

Economic disruption

They also imply adverse impacts in various sectors of the economy.

Monsoonal rainfall patterns usually mean that the upper Yangtze basin receives half its annual rainfall in July and August. However, during the heatwave, water levels in the Yangtze river dropped to their lowest since records began in 1865. Hydropower generation along the river fell, causing electricity rationing that interrupted industrial production. Shipping using the country’s longest watercourse, a major transportation artery, was disrupted, causing some factories downstream to close temporarily because of the non-arrival of raw materials or parts.

China’s southern and south-western provinces also export hydroelectricity to the eastern seaboard. In mid-August, Sichuan province, which relies on hydropower for 80% of its energy usage, saw its hydropower generation capacity fall by half. The provincial government there, too, required factories to ration power usage, leading to reduced production, which fed into global supply chains.

A second-order consequence is that the drier conditions will also undermine the ‘Eastern Data and Western Computing’ plan to boost the economically lagging western provinces by locating power- (and water-) hungry data centres there that will serve digital activity in the more developed eastern provinces.

The rationale for setting up data centres in poor, western provinces like Guizhou is that mountain rivers can produce hydropower to generate electricity and the mountains also provide a cool climate to help bring down the cost of cooling, one of the largest expenses for data centres. Those conditions no longer look assured.

Agriculture

Agricultural impacts will likely be significant. According to state media, the summer drought wilted hundreds of thousands of hectares of crops, probably millions.

China is a net food importer, and the government prioritises increased domestic production. Harsher farming conditions will make it more difficult to achieve food self-sufficiency. China will thus remain a significant buyer and price-setter in global food markets as climate change aggravates agricultural problems worldwide.

Beijing has few means to ameliorate persistent nationwide water deficits. The agriculture ministry advised local officials during the drought to increase efforts to ensure adequate irrigation water, open new water sources, rotate irrigation and produce artificial rainfall when necessary.

Inducing rainfall by cloud-seeding can provide local relief (providing there are some clouds to seed) but is not a systemic solution to chronic annual heatwaves and drought. Exhortations to open up new water sources are empty words when rivers and lakes are drying up.

China will double down on investing in renewable energy technologies, increasing its influence in these industries globally. Yet, less hydropower may also sustain the continued construction of coal- and oil and gas-fired power plants, reinforcing climate change effects.

Cross-border disputes

Internationally, the reliance of South and Southeast Asian countries on river water originating upstream in China means that chronic droughts in China may inflame international tensions.

China has a poor record of addressing its neighbours’ concerns about upstream dams affecting water levels in the Mekong, Salween, Ganges and Yamuna rivers.

As India’s industrial activity grows, including power-hungry sectors such as semiconductor manufacturing, management of shared rivers is likely to add to tensions with China over disputed territory.

Power Rationing Widens As China’s Extreme Heat Continues

SHANGHAI IS THE latest city to introduce electricity rationing as drought and extreme temperatures overstrain the country’s power grid.

Buildings along the Bund have been told to turn off external lighting for two evenings early this week to save power.

In the middle reaches of the Yangtze river, where conditions are severe, falling water levels have reduced the power supply from its hydroelectric dams. At the same time, demand for air conditioning has soared.

Factories and shopping malls in Chongqing have already been subject to temporary power cuts as authorities prioritise supply to domestic consumers.

Impacts on production have varied; vehicle maker VW says its plant has shut down, while electronics maker Foxconn says the effects have been minimal.

Authorities have extended the power saving measures by five days into a second week, with Sichuan and the rest of the Southwest bearing the brunt of the extreme heat.

Falling water levels have also disrupted shipping. Tesla’s Shanghai plant has suspended production because components are not arriving from Sichuan.

The impact on agriculture is growing, too. On Saturday, Sichuan’s provincial disaster committee said that 47,000 hectares of crops had been lost and 433,000 hectares damaged. More than 800,000 people face a shortage of drinking water.

In neighbouring Hubei province, authorities say 6.9 million hectares of crops are damaged, and a further 220,000 people are short of drinking water.

Brush fires are starting to be reported, adding further peril.

State media report that the drought threatens the autumn grain harvest, which provides three-quarters of the annual yield. Authorities are cloud seeding to try to induce rain.

China issued the year’s first national drought warning last week, a yellow alert, the third highest. The summer is the hottest and driest since China began keeping temperature and rainfall records in 1961, adding to the stress on an already slowing economy.

Heatwave And Drought Stress China’s Electrical Power Supply

BACK IN 2009, this Bystander alighted on a press report that China spent $100 million a year on cloud-seeding to induce rain and snowfall to combat drought.

That was more than six times the figure quoted for the United States. China frequently resorts to using anti-aircraft guns and rocket launchers to blast the sky with silver iodide, reportedly resorting to this way to make rain more often than any other country.

In the past, most cloud seeding occurred in the increasingly arid North China Plain. Now it is being deployed in parts of central and southwest China amid a severe drought and a two-month-long heatwave that the National Climate Centre says is the country’s longest and strongest since records were first kept in the early 1960s.

However, Hubei and several other provinces along the drought-stricken Yangtze river, now at record low levels following less than half the usual rainfall in some stretches, have run into a familiar problem with the technique: you need the clouds to seed in the first place. They are in short supply in a heatwave.

Upstream in Sichuan, the mercury has risen above 40 degrees Celsius with no immediate relief in sight. With water levels in hydropower reservoirs down by as much as half and demand for air conditioning rising, power shortages of up to several hours are widespread.

Electrical blackouts as authorities ration power are affecting industrial production. Emergency measures instituted to ensure households get priority for what power is available are forcing factories to cut back output or stop work altogether.

Foxconn’s factory in Chengdu, which makes Apple’s iPads, is one business amid a six-day shut down because of power rationing.

The overall impact on the economy of drought-induced temporary factory shutdowns will likely be minimal, but it is another drag on an already decelerating economy.

A longer-term concern may be the loss of crops for the autumn harvest, which could drive up inflation. The Ministry of Water Resources has said that the drought has affected 821,333 hectares of farmland in Sichuan, Chongqing, Hubei, Hunan, Jiangxi and Anhui.

Only half the usual annual release of water from the Three Gorges reservoir to relieve drought downstream has been possible this year. Many rivers and streams that flow into the Yangtse and are a source of agricultural irrigation are reported to have dried up.

Meanwhile, at the mouth of the river, Shanghai hit a sweltering 40.9 degrees Celsius in July, equalling its hottest day since the city started keeping records in 1873.

Meteorologists predict that the long-lasting heat wave will become the ‘new normal’ due to climate change.

This will force authorities to pay more attention to the inadequacies of the country’s national power grid, as evidenced by Vice Premier Han Zheng, who, on a visit to the State Grid Corporation of China this week, highlighted the importance of the energy and power supply for social and economic stability.

Worst Summer Rains In 60 Years Lash Southern China

SOUTHERN CHINA HAS been seeing its heaviest summer rains for 60 years, bringing floods, widespread destruction of crops and more disruption to supply chains.

Hundreds of thousands of Guangdong and Guangxi residents living around the Pearl River delta have been evacuated after a week of persistently high rains. State media have aired footage of people being rescued with ropes and rubber dinghies, and cars floating down streets. Several cities in Guangdong have raised their flood alerts to the highest level.

The rain has disrupted manufacturing and shipping, already suffering under strict anti-Covid measures. Particularly in the more mountainous north of the province, where the flooding is most severe and landslides have happened, businesses were ordered to close temporarily, and public transport was suspended as rising waters approached dangerous levels. The direct economic loss so far is estimated at more than 1.7 billion yuan ($250 million).

To the north of Guangdong, Jiangxi province has also raised its flood warnings. Officials report direct economic losses already reaching 470 million yuan, with 43,300 hectares of crops inundated.

In neighbouring Hunan province, 21,607 hectares have been damaged, and there are reports of landslides and building collapses.

China’s National Meteorological Center warned that downpours could continue for another week, although the heaviest rains are expected to move northwards across central China from mid-week.

In recent years, climate change has made the south wetter and the north hotter and drier.

China’s Strong Airline Safety Record Is Tragically Interrupted

THERE ARE NO reports of survivors from the Kunming to Guangzhou flight that plunged into a forested hillside near Wuzhou in Guanxi on Monday afternoon with 123 passengers and nine crew on board. Nor, as of Tuesday, had any bodies been recovered, according to state media.

China’s first fatal civil aviation accident in more than a decade has understandably caused widespread shock.

Some 2,000 rescuers who have reached the mountainous district are searching for the aircraft’s flight-data cockpit-voice recorders, assisted by drones. Aviation experts hope the ‘black boxes’ will reveal the cause of the tragedy. However, the high speed of impact may have destroyed them. (Update: At least one of the black boxes has been found, authorities said on March 23.)

The airliner involved, a Boeing 737-800 that was less than seven years old, and the airline, China Eastern Airlines, have strong safety records.

It is too early to speculate on the cause of the accident. Yet, the aircraft essentially nosediving into the ground from a cruising altitude of around 9,000 metres, as shown in the graphic above from the flight-tracking website, FlightRadar 24, suggests an extraordinarily untoward incident, rather than the sort of design problem that caused the worldwide grounding of the Boeing 737 Max after two fatal crashes in 2018 and 2019.

The Civil Aviation Administration of China (CAAC) will handle the investigation. As the aircraft was US-made, the US National Transportation Safety Board has appointed an investigator for the crash. It will assist the CAAC, ‘if asked’.

China Eastern has grounded its Boeing 737-800s fleet. Of the more than 4,200 of the aircraft in service worldwide, Chinese airlines account for 1,177. The CAAC has urged an immediate two-week-long safety overhaul of civil aviation.

Since the unsafe flying days of the 1980s and 1990s, China’s civil aviation had become remarkably safe thanks to investment in new aircraft and strict safety rules imposed after two flights crashed within a month in 2002, with a combined loss of 234 lives.

Last month, the CAAC said that Chinese airlines had set a world record on February 19 by operating without a major accident for 100 million flying hours, stretching back to August 2010 when a Henan Airlines flight from Harbin crashed on approach to the airport in Yichun in Heilongjiang province.

China’s COP Cop Out On Coal

CHINA HAS EMERGED from the COP26 climate summit in Glasgow relatively unscathed, given that it is the world’s top emitter of CO2.

As one of the world’s top two oil producers and exporters, Saudi Arabia took the early heat in Glasgow from activists pushing for an end to the use of fossil fuels. As attention swung to coal, the most polluting of fossil fuels and on which China remains heavily dependent for power generation, India, not China, was most prominent in watering down COP26’s final agreement.

At the last minute, the wording was changed from ‘phasing out’ the use of coal to ‘phasing down’, the same formulation that had appeared in the China-US climate dialogue agreement that the head of the Chinese delegation Xie Zhenhua and his US counterpart John Kerry had forged three days earlier.

Although Delhi put forward the revised wording to the final agreement, Beijing had been instrumental behind the scenes in getting the language changed, reportedly threatening to torpedo the final agreement if it was not. Washington lent its support by not offering any opposition.

Alok Sharma, the Conservative UK politician chairing COP26, offered an emotional apology subsequently, saying he was ashamed by the last-minute change and that China and India would have to justify themselves to the countries most vulnerable to climate change.

The glass-half-full view is that this is the first of the 26 rounds of COP meetings to make any formal commitment on coal. The half-empty view is that the compromise over phasing out its use belies the scale and urgency of the task.

Fatih Birol, executive director of the International Energy Agency, says that to reach the goal of limiting global heating to 1.5C, more than 40% of the world’s existing 8,500 coal plants would have to close by 2030 and no new ones built.

Last year, China commissioned more coal capacity than the rest of the world retired, according to a study by Global Energy Monitor. This US-based pro-green energy group that tracks fossil fuels says China commissioned 38.4 gigawatts (GW) of new coal plants in 2020, accounting for 76% of the global 50.3 GW new coal capacity and offsetting the 37.8 GW of coal capacity retired last year.

Facing disruptive energy shortages, China hit a new record for daily coal production during COP26. With the sixth plenum coinciding with the second week of COP26, it was inevitable that domestic concerns would be foremost for China’s delegation in Glasgow.

With Or Without Xi, COP26 Involves China

THE UK GOVERNMENT’S decision, as host of the COP26 climate summit in Glasgow, ‘not to provide the video link method’ and so prevent President Xi Jinping from participating directly in the event just seems petty.

The UK has insisted that only leaders attending in person could address the meeting. Xi, who has not left China since the outbreak of the Covid-19 pandemic last year, has been able to submit only a written statement.

As the world’s largest polluter today, China has to be part of whatever solutions world leaders come up with for mitigating greenhouse gas emissions. Marginalising it does not seem to help in that regard, even if Foreign Ministry Spokesperson Wang Wenbin passed on a softball opportunity to make an issue of Xi’s exclusion when questioned by state news agency Xinhua during the ministry’s routine press conference today.

Xi, too, pointedly brushed off any perceived insult. The official English translation of his statement opens thus:

There is little doubt in this Bystander’s mind that the UK would not have insisted on in-person participation without the approval of the United States.

The poor state of China-US relations could cast a long shadow over the climate summit. Beijing has not been receptive to US President Joe Biden’s attempts to carve out climate as a rare area of cooperation, although members of his Democratic Party are divided on the extent to which other US interests, such as human rights, should be traded for cooperation on climate.

Biden may also have less than fond memories of how China lobbied other developing nations at the Copenhagen edition of the COP summit that left the Obama administration, in which he was vice-president, taking far more of the blame for that meeting’s lack of progress than it deserved.

It is unclear when the decision to ‘uninvite’ Xi from Glasgow was made, whether before, after it during last weekend’s G20 leader’s meeting in Rome, which Xi did attend by video link.

However, hopes that that meeting would result in an agreement to phase out coal consumption were dashed with China, which contributes 28% of carbon emissions and consumes more coal than any other nation, among the countries resisting making binding commitments.

After the meeting, US President Joe Biden called out China, Russia (President Vladimir Putin is another Glasgow no-show) and Saudi Arabia for being uncooperative.

Last month, China confirmed to the United Nations its updated pledges to bring its emissions to a peak before 2030, cut them to net-zero by 2060, and raise its wind and solar power generation capacity to 1,200 gigawatts by 2030.

However, it has not offered any new pledges to cap energy consumption or make an earlier start on cutting back its use of coal from 2026. Xi’s statement to the G20 confirmed that the ‘1+N’ framework is the timetable China will be following.

China Lays Out Ambitious Vault To Net-Zero Carbon Economy

CHINA’S PATH TO ‘peak carbon’ by 2030 and becoming a net-zero carbon economy by 2060 is dubbed 1+N — one overarching blueprint and n number of implementing policies. On October 24, we got the ‘1’ in the form of a guidance document jointly released by the Party’s Central Committee and the State Council.

All future policy decisions on economic planning, macroeconomic adjustment and industrial policies will have to be compatible with the blueprint, which contains objectives and timelines for broad areas of the economy, including heavy industry, energy, transport, construction and finance.

The headline objective is raising non-fossil fuels share of energy consumption to at least 80% by 2060, a fivefold increase from 2020’s level, with a timeline for non-fossil fuels to hit a 20% share by 2025 and 25% by 2030. Both interim targets have been previously announced, but not the 2060 one.

Even before the current electricity shortages, coal accounted for approaching 60% of energy consumption, so scaling that back will be a dramatic change, and one being undertaken slowly.

Over the past five years, non-fossil fuels have been increasing their share of energy consumption by barely half a percentage point a year. That will need to be accelerated to triple that rate if the goal of creating a ‘green, low-carbon and circular economic system’ is to be met.

That is not only a question of increasing non-fossil fuel energy generation. It also means structural changes to industry and consumption to make the economy less energy-intensive. To have any hope of achieving its goals, Beijing will have to oversee the world’s largest reduction in carbon intensity.

As well as the coal, oil, and gas industries, chemical and petrochemical producers and steel makers can expect close attention from authorities regarding their energy efficiency.

The risks to economic growth inherent in a full-blown green transition are recognised. He Lifeng, head of the National Development and Reform Commission (NDRC), the top economic planning agency, says carbon reduction must be balanced with ensuring the security of industrial output and supply chains and, in what appears to be a nod to recent power outages, disruption to ‘people’s everyday lives’.

A leading group was established under the NDRC in May to guide and coordinate the transition. Yet, much of the implementation will depend on provincial and municipal authorities, and provinces will get some latitude over timing depending on the industrial structures.

However, local officials are on notice that their performance will be judged on their success in meeting their carbon reduction targets. Those who fall short can expect the same criticisms that came the way of officials who failed to meet economic growth targets when they were the benchmark. Officials will, no doubt, get as creative over emissions reductions accounting as they were with growth.

The guidance promises financial carrots as well as administrative sticks. Beijing is considering creating a national fund to promote the transition to a low carbon economy. That would likely support the development of carbon sinks, carbon capture and storage, and other carbon removal mechanisms.

An expansion of the national carbon trading market is all but inevitable. Supportive central banking (e.g., incorporating green credit into macroprudential assessment) and development of the green finance sector are also mentioned in the guidance.

So, too, is the encouragement of private investment in low-carbon industries. Banks and other financial institutions will be guided to provide long-term, low-cost funds for green and low-carbon projects. Policy banks will play a core role in underpinning long-term stable financing to support the green transition, which will not fail for lack of a plan.

This Bystander expects further details to emerge during the COP26 climate summit in Glasgow that starts at the end of this week.

Power Cuts Highlight China’s Decarbonisation Challenge

REPEATED POWER BLACKOUTS are a sign of misfiring economic management that does not reflect well on governments. Electricity shortages have hit many regions of China over the past month, affecting manufacturing, traffic and street lighting, and homes, often without warning. Sixteen out of 31 provinces have begun rationing electricity, and the northeast faces the prospect of power cuts running through the winter.

The power shortages are the consequence of a combination of contradictory policies: moves to improve energy efficiency and cut consumption in support of carbon reduction goals, and fitful reform of the largely coal-fired power generation sector where long-standing subsidies and price controls cannot withstand the rise in global coal prices, leaving power plants short on fuel.

Provinces’ implementation of obligatory emission-reduction targets imposed on them by central government has been haphazard, varying from draconian to lax. In addition, the 3% reduction target for energy intensity for 2021 has also got ahead of the planning process.

The 14th five-year plan (2021-25) mandates targets for improving energy intensity (energy consumption per unit of GDP) and reducing CO2 emissions per unit of GDP. There is also a binding minimum target for the domestic energy supply from all sources of 4.6 billion tonnes of standard coal equivalent (versus 4.86 billion in 2019), but no caps on carbon emissions and coal consumption, and only an aspirational goal to increase the share of non-fossil-fuels in total energy consumption.

The 14th Five-Year Plan for Energy, likely to be published around or after the COP26 summit in Scotland in November, will provide provincial and municipal governments with a more detailed road map. However, that will cover the years through to 2025 and not show the full path to the 2060 net carbon neutrality target date. However, until they have that road map, Chinese and foreign firms operating in China will delay drawing up the emissions reduction strategies that are likely to be required.

The current energy intensity target has also run headlong into China’s infrastructure-investment pandemic stimulus and export- and industry-driven recovery. Factories have put filling orders now, with the consequent surge in demand for power, ahead of improving their energy efficiency.

Last year, primary energy consumption rose 2.1%, coal consumption 0.6% and carbon emissions 0.3%, whereas energy consumption and emissions declined in almost every other economy. The trends have accelerated into 2021.

Beijing is now having to arrange emergency coal supplies for fuel-short provinces and marshall the distribution grid for inter-provincial power-sharing.

The power situation illustrates the costs Beijing will have to shoulder politically and economically if President Xi Jinping’s decarbonisation goals are to be met, and more generally in structurally changing the economy for the next phase of economic development.

Achieving both will mean slower growth, which will have political as well as economic management dimensions. All but the wealthiest provinces are still industrialising, reliant on energy-intensive infrastructure and industries for growth and jobs, and remain fossil-fuel dependent. Xi has also set a goal of doubling the economy over the next quarter-century, implying 4% annual growth.

Yet even with modest growth rates reducing energy demand, technological advances in energy efficiency and the fledgling national carbon trading market taking wing, it will still require rigorous enforcement of central government policies to change the country’s energy mix to lessen its dependence on fossil fuels. As the efforts to impose energy intensity standards are now showing, provincial and local officials will readily foot drag or worse in implementing Beijing’s policies when it is in their interests to do so.

As with many aspects of rebalancing, the tight networking of local officials and local industries provides inherent resistance to policy direction from the centre. This is exacerbated by many of the major players in energy, including the oil companies, major power generators, the two grid companies and industrial consumers such as steel and cement manufacturers, are state-owned enterprises with size and political influence, especially at the local level.

China is far from alone in having to deal with the conflicting tensions between climate mitigation measures and jobs and economic growth. Beijing has prioritised the former of late, but continuing to do will require sufficient political will at high enough levels of the leadership. That will continue to exist until it does not because the political calculations have changed.

China Will End Coal-Fired Power Plants Abroad If Not Yet At Home

CHINA WILL STOP funding the construction of overseas coal-fired power stations under the Belt and Road Initiative, President Xi Jinping told the UN General Assembly meeting in New York via a video link.

The decision will be taken as a welcome, if somewhat symbolic, boost to global control of greenhouse gas emissions, with the next round of COP climate discussions due to take place in Scotland in November.

However, Xi was light on details of how the policy change would be implemented; his announcement amounted to a single sentence in his speech. It appears that China has not funded any coal-fired power stations abroad so far this year, although it has accounted for the majority of new coal projects around the world in recent years.

The bigger switch for China, the world’s largest emitter of greenhouse gases, would be to wean itself off its dependency on coal for domestic power generation.

Half the coal burned in the world is burned in China, and in the first half of this year, authorities approved the construction of 24 new coal-fired domestic power plants, according to Greenpeace, although that is a fall of 80% from the same period last year.

Many of these plants will have a lifespan of 40 to 50 years. That will make meeting Xi’s other climate commitments made last year at the UN, including China achieving peak emissions before 2030 and then transitioning to carbon neutrality by 2060, challenging to achieve.