Big Risk, Shortages Of Power....

One of the biggest risks facing China over the next decade on the economic front is a shortage of energy or the intervention of government to allocate energy supplies by fiat. If enough energy cannot be produced to power the plants and meet growing demand from consumers, how will the Chinese economic miracle continue?

Many Chinese still remember the massive brownouts last summer, when 22 provinces, two-thirds of the nation, suffered from power shortages.

The situation could be much worse this year. Twenty-four provinces, including some in China's better-developed Southeast, are expected to suffer from power shortages.

Additionally, as I have argued before, here and here, China's economic growth does not take into account the unmeasured costs of pollution on the health and lower productivity of labor.

A recent study indicated losses caused by power generation, mainly coal-fired, have cost China nearly 8 per cent of its gross domestic product (GDP) per year since the late 1970s. That would be almost the equivalent of the country's GDP growth.

But I digress, so how does China solve the problem's facing them on the energy front?

China's energy industry regulator, the Energy Bureau of the National Development and Reform Commission (NDRC), may soon be abolished for failing to solve massive power shortages across the country.

But analysts say the agency, an office of around 20 people in the cabinet-level NDRC, was never given enough power to solve the country's energy problems in the first place.

Seems like steps are being taken but the top down solution of old Marxist allocation of resources will ultimately fail. Also, it looks like its getting to fingerpointing and laying the blame time.

"China's always going to go for bureaucratic solutions rather than free-market solutions, so this shouldn't come as too much of a surprise," Sam Dale, Singapore bureau chief of Petroleum Intelligence Weekly, told RFA.

"China has been blindsided by its voracious energy demand over the last three years, and I guess it's only human nature to look for someone to blame,"

This style of management leads me to think that there will be more problems down the road. Energy will probably be diverted from residential use to industrial use and certain industries that are either politically well connected or figure into China's leaders long-term strategic plans will have first call on power. Rationing will have to have some kind of rationality to it. And the potential for severe shortages are very real.

Based on China's current coal production plans and decrease of producing capacity of existing coal mines, officials said the country's coal supply would be at least 100 million tons short of demand by 2010, and the shortage would jump to 600 million tons by 2020.

Furthermore, foreign buyers of goods may find that delays due to power shortages or higher costs may slow down the investment in troubled regions of China and change the calculus of investing there.

This scenario is neither good for China nor those that they do business with. The US relies upon China as a source of cheap goods. Bottlenecks in production may cause inflation and ultimately a drop in aggregate demand from the engine of global consumption, the US, leading to slower world-wide economic growth.