China, Rare Earths and Technological Edge

Introduction

By Jurii (http://images-of-elements.com/praseodymium.php) [CC-BY-3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons

Praseodymium, one of the light rare earth elements

A sign at the entrance of China’s Baotou, Inner Mongolia Pioneering Rare Earth Hi-Tech Zone quotes Deng Xiaoping’s 1992 claim: “There is oil in the Middle East, but there is rare earth in China.” The rare earth elements (REE) are a group of 17 chemically similar metallic elements occurring in the Earth’s crust that are becoming increasingly integral to the production of products ranging from smart phones and LED light bulbs to wind turbines and cruise missiles. Since the 1980s, REE mining and processing has increasingly moved to China. Due to factors such as cheaper labor and less stringent environmental regulations, China has been able to produce the elements at two-thirds the cost of non-Chinese producers. As a result, it now produces over 90% of the world’s REEs. China has also been moving from a supplier of unfinished REEs to a manufacturer of high-end REE products and it believes that mastering high-end REE technology will not only help ensure its safety given REE’s many defense applications, but could also allow it to leapfrog the US and other countries in the production, for instance, of green technologies.

China’s monopoly of REEs came to a head in 2008 when it began restricting the amount of unfinished REEs that it exported while increasing REE export taxes and removing REE VAT rebates. International concern was further increased in 2010 when China was believed to have implemented an unofficial REE export embargo against Japan for two months and the US and the EU for two weeks. A 2012 WTO complaint filed against China by the US, the EU and Japan claimed that the effect of these policies has meant that non-Chinese producers of REE products pay 31% more for their REEs than their Chinese competitors. The US, the EU and Japan also say that Chinese practices are placing pressure on foreign manufacturers to relocate their operations to China in order to minimize the impacts of rising costs and shrinking supplies, as China does not restrict or tax the export of REEs in manufactured products. China counters that its policies are necessary to improve the real environmental degradation that its lax standards have caused and to conserve its finite REE resources.

Rare Earth Elements and the History of their Development

The REEs are a group of 17 chemically similar metallic elements including the 15 lanthanides as well as scandium and yttrium. Scandium and yttrium are grouped with the rare earths as they share similar chemical and physical properties. Despite their name, the REEs– with the exception of the radioactive promethium which is currently synthesized in labs – are quite abundant in the Earth’s crust, although their crustal abundance varies significantly from place to place. The “rare” earth name comes instead from the rarity of the minerals from which they were originally derived. It also comes from the fact that the elements are rarely found in concentrations that are viable to mine.

The REEs are broadly divided into light rare earth elements (LREE) – lanthanum, cerium, praseodymium, neodymium, and samarium (atomic numbers 57-62 on the periodic table)  and heavy rare earth elements (HREE) – gadolinium,  promethium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium (atomic numbers 64-71). Scandium (atomic number 21) and yttrium (atomic number 39) are usually grouped with the LREEs. This division is somewhat random; sometimes the REEs are divided between light, middle and heavy. LREEs are more abundant than HREEs.

Although approximately 200 minerals are known to contain REEs, most REEs are mined from the minerals bastnaesite, monazite and xenotime. While these minerals usually contain the full range of the elements, either LREEs or HREEs tend to dominate one mineral or the other. For instance, bastnaesite, the most commercially productive source for REEs, tends to house a high percentage of LREEs and a small percentage of HREEs. Monazite, the second most common mineral used as a rare earth ore, also contains more LREEs than HREEs, although it typically has a higher concentration of HREEs than bastnaesite.  Xenotime, the third most important rare earth element ore, holds the highest ratios of HREEs. HREEs can also be found concentrated in some soils, absorbed in the form of ions. Bastnaesite, monazite and xenotime all contain traces of the radioactive elements thorium, although the amount varies between the minerals and between ore deposits. The presence of the radioactive element makes REE mining and waste management more difficult.

The first discovery of rare earth materials was made in the late 1800s in Sweden. Given that rare earths occur together and share similar chemical properties, it was a further 150 years until all the rare earth elements were isolated and identified. The last rare earth element to be discovered was the radioactive promethium which was found as a result of nuclear fission research carried out during World War II. In nature, promethium can only be found in trace amounts as it is highly unstable and has a half-life of 17.7 years.

Production of Rare Earth Elements

The periodic table

Until 1948, the majority of rare earths were produced in India and Brazil, followed by South Africa in the 1950s, and the Mountain Pass Mine in California from the 1960s to the 1980s. Since the 1980s, REE mining and processing, and the production of many REE products has moved to China. Between 1990 and 2000, for instance, China increased its REE production from 16,000 to 73,000 metric tons while non-Chinese producers saw their output decline from 44,000 tons to 16,000 tons. In 2009, China produced 129,000 tons while the output from all other countries dropped to 3,000 tons.

China now dominates the REE industry because it can produce REEs and REE products less expensively and with more purity than its competition. Its low cost production is the result of many factors including inexpensive labor, lower environmental standards and a REE industry which has historically been poorly regulated. It is estimated that China’s lower environmental standards have enabled it to produce rare earths at roughly a third the price of its international competitors. China has also made significant investments in REE mining and processing techniques which are now paying off in greater efficiencies. China also mines the majority of their REE as a by-product of their iron ore and other mineral mining, which also reduces their cost basis.

Where Global Rare Earth Resources are Found

The U.S. Geographical Society estimated that in 2008 China held approximately 57.7% of the world REE reserve, the Commonwealth of Independent States (which includes Russia and many former members of the Soviet Union) 13.6%, the US 9.1%, Australia 3.8%, Brazil 0.05%, India 0.84%, Malaysia 0.02% and other countries 14.9%. Additionally, the British journal Nature Geoscience reported scientists led by Yasuhiro Kato of the University of Tokyo, have found huge deposits of REEs in sea mud at 78 locations in international waters east and west of Hawaii, and east of Tahiti in French Polynesia. Japanese scientists have also identified REEs off island of Minamitorishima, an isolated Japanese coral atoll in the northwestern Pacific Ocean.

In China, REEs have been found in 21 of China’s provinces and Autonomous Regions: Fujian, Gansu, Guangdong, Guangxi, Guizhou, Hainan, Henan, Hubei, Hunan, Jiangxi, Jilin, Liaoning, Inner Mongolia, Qinghai, Shaanxi, Shandong, Shanxi, Sichuan, Xinjiang, Yunnan and Zhejiang. In general, China’s REE reserves are distributed in a light north, heavy south pattern. An estimated 75% to 90% of China’s REE output is in LREEs; 50% to -60% of its LREEs comes from its Banyan Obo mine in Inner Mongolia, and another 25% to 30% comes from mines in Sichuan Province. China’s remaining output is HREEs sourced primarily from its ion-adsorption clays located in the provinces of Fujian, Guangdong, Hunan and Jiangxi.Southern China’s ion-adsorption clays are currently one of the most important concentrations of heavy HREEs in the world. Importantly, these clays have extremely low levels of radioactive elements.

Mining and Processing of Rare Earth Elements

Most REEs are mined either by digging in open pits or in underground mines. The ore is then crushed, heated and treated with various chemicals in order to separate first the bastnaesite, monazite and xenotime, and then to separate the REE from the bastnaesite, monazite and xenotime. In order to ensure a high market value, REE needs to be of high purity. This is a difficult process because REEs share such similar chemical properties. Each REE has its own unique extraction steps and refinement processes, and often these elements need to be reprocessed in order to achieve the ideal purity. Once separated, the REEs are in the form of oxides which are then made into metals. It takes an average of 10 days to go from mining to the production of rare earth oxides. China currently leads the world in REE separation processing technology.  Chinese companies can produce REEs of 99.9999% purity compared with French companies at 99.99% purity and Japanese at 99.9% purity.

Outside of China, companies in the US, France, Russia and Japan can complete some of the refining steps, but only China has the industrial capacity to complete the entire REE refinement process for all the elements. Mining companies such as US Molycorp and Australian Lynas which extract REEs outside of China currently find it necessary for technological and economical  reasons to ship their minerals to China for processing despite their respective efforts to move further down the REE processing chain.

Separating REE from bastnaesite, monazite and xenotime is more difficult than separating REE from the ion-adsorption soils. In Southern China, most of its REEs are found in clay deposits. Not only is it easier to separate REEs from the clay compared with the hard minerals, but it is also usually easier to access the clays in the first place. The ion-adsorption clays are near the crust’s surface, and generally require little drilling or blasting to remove. China’s Jiangxi South Rare Earth Hi-Tech Company has reduced the costs of the clay processing further by pioneering in-situ mining. This method involves drilling holes directly in the clay deposits, pumping in ammonium sulphate or salt-based solutions which remove 90% of the REE from the clay and then collecting the resulting liquid from pipes drilled in at lower levels. The liquid is then pumped into tanks where it is treated with further chemicals, filtered and roasted to produce rare earth oxides.

Uses of Rare Earths Elements

Rare earths are essential in the production of X-ray machines

REEs are essential to many products that are fundamental to our modern life. REEs can be found in products as diverse as TVs, plasma screen technologies, microwave filters, ear phones, self-cleaning ovens, flint lighters and computer memories. Because REEs are extremely effective in absorbing ultraviolet light, REEs are used in glass bottles, sunglasses, and camera lenses. Because they allow for the development of powerful permanent magnets – which differ from electrical magnets in that they produce their own magnetic field – REEs create improved magnetic performance in smaller sizes. They are, thus, important in miniaturization technology, and are a key reason why laptops, cell phones and smart pads are becoming increasingly lighter and smaller.

Permanent neodymium-iron-boron magnets are also fundamental to many green technologies, especially wind turbines. Their superior magnetic strength means that they increase the amount of electricity that a wind turbine can produce. REE magnets also have the advantage that they retain more magnetism when heated. These qualities make them ideally suited for the production of hybrid cars. The Toyota Prius, for instance, contains 1 kg of neodymium in each of its electric motors. REE magnets also improve the energy efficiency of many appliances and cooling systems. REE magnets have been shown to reduce the power consumption of air conditioning systems by as much as 50%, and have led to the development of more environmentally friendly refrigeration methods. Energy efficient lighting such as the fluorescent lamp and LEDs are also big users of REEs.

REEs are also employed in other green technology applications. For instance, REEs are essential to the automotive catalytic converter whose job it is to convert pollutants in engine exhaust gases into non-toxic compounds. They also used in oil refineries to process heavy crude oil into lighter gas, jet fuel and petrol. They are also proving essential to the development of solid oxide fuel cells – a low-pollution technology which electrochemically generates electricity at high efficiencies – and other fuel cells which are being developed as power generators for zero emissions electric vehicles.

Besides, the green technology industry, REEs are also found in a wide range of industrial applications. For instance, REEs are employed in many aspects of nuclear energy production because of their ability to absorb neutrons while remaining stable at high temperatures. They are also found in ceramics, glass coloring and in the colors displayed on TV, computer and hand-held screens. They help paint pigment deflect ultraviolet light which makes them less likely to fade. Most finished glass products, such as mirrors, have been shined by REE concentrates and oxides. REEs are also a critical component in the creation of super-alloys or super-metals which are a class of heat resistant alloys used in the aerospace and power industries, particularly in gas turbine engines. REEs are also elemental to the technology that allows for the solid state storage of hydrogen.

REEs are also found in many medical technologies including x-rays and PET scan detectors. REEs not only improve the performance of MRI machines, but they also enable the physical internal scanning space of the machines to be wider, which serves to reduce feelings of claustrophobia for sick patients. Medical lasers produced with REEs are used in the cosmetic industry to remove pigmentation and scarring on skin, as well as in many other surgical procedures. There are also increasingly used in dentistry to remove tooth decay.

REES are crucial for the defense industry. They can be found in disk drive motors installed in aircraft, tanks, and command and control centers, and in radar systems and in reactive armor. They are key to the production of precision guided munitions, helping to guide the direction of the missile once it is launched. They are fundamental to lasers employed in enemy mine detection equipment, underwater mines and other countermeasure weapons systems. REEs are also found in components used in military communication networks including satellite, radar and sonar. They are also used in optical equipment and speakers.

In 2011, the US Geological Society estimated that the global use of rare earths broke down as follows: catalysts 47%, metallurgical applications and alloys 24%, glass polishing and ceramics 15%, permanent magnets 9%, computer monitors 19%, radar, television and x-ray machines 5%.

Environmental Consequences of Rare Earth Mining

The manufacture of REEs poses significant environmental hazards because of the large amounts of chemicals used in processing and because the processing waste often contains toxic gases and traces of the radioactive thorium. In northern China’s Bayan Obo  (Baiyun Ebo) mine in Inner Mongolia, for instance, REEs are mined and then transported 120km south to Baotou to be processed. Dozens of new factories have been built around Baotou’s processing facilities in what has been called Baotou’s Pioneering Rare Earth Hi-Tech Development Zone. A coal-fuelled power station supplies electricity to Baotou’s large and growing industrial complex.

The Yellow River

The Chinese Society of Rare Earths estimated that for every ton of rare earth oxide it produces in Baotou, China generates up to 12,000m³ of waste gas containing dust concentrates, sulfur dioxide, hydrochloric acid and sulfuric acid, and about 2000 tons of mine tailings. Tailings are the ground materials left over once the REEs have been removed from the ore. In northern China, these tailings contain traces of radioactive thorium. In addition, it is estimated that all factories and processing facilities in the Rare Earth Hi-Tech Development Zone create approximately 10 million tons of all types of waste water every year.  Much of this waste water along with an estimated 7-8 million annual tons of mine tailings are dumped into what has grown into an approximately 11km² waste impoundment lake without being effectively treated. A 2006 Chinese report undertaken by local authorities found that the level of thorium in soil near the lake was 36 times higher than in the soil in other areas of Baotou. From the lake, the chemical and radioactive waste has seeped into the ground water. The waste has also found its way into the Yellow River which passes to the south of Baotou before continuing another 1300 miles to the Yellow Sea. The Yellow River is subsequently used as a water supply for a large concentration of China’s population, including the residents of Beijing and Tianjin.

Around Baotou, most fish in the Yellow River have died. Agriculture has also been severely affected as lake wastewater has contaminated irrigation water supplies and the soil. Local farmers say that since the 1980s, fruit trees have either yielded no fruit or that the fruit they do grow is small and foul-smelling. Vegetable plants have stopped producing and many livestock in the area have become ill and died.

Residents inhaling the vapors and drinking the contaminated water have noticed higher incidents of diabetes, osteoporosis, respiratory diseases, leukemia and other cancers, skin and eye irritations, irritation to the gastrointestinal tract, black lung disease and kidney damage.

China’s southern REE mining and processing operations have also caused significant environmental degradation. The in-situ extraction method, which was hoped to be less environmentally damaging, has also resulted in reduced or eliminated crop yields and in fish dying in the rivers in the areas around which it is being mined. One issue in the south has been the extensive presence of illegal mines which are particularly prone to releasing toxic waste into the general water supply.

Until recently, China has never had firm pollutant discharge standards for the rare earth industry. Additionally, it poorly enforces the regulations that do exist. This lack of stringent environmental regulation and enforcement has meant that China’s REE industry produces REEs at roughly a third the price of its international competitors. While some Chinese REE companies have tried to improve their mining processes to make them more environmentally friendly, many have chosen to keep their environmental costs to a minimum in order to maintain a competitive edge in the market. In addition, as the government owns the land on which the factories lie, companies have little incentive to protect it. Additionally, China’s still-developing legal structure means that people and companies cannot easily be held accountable through the country’s judicial system. In Western countries, if employees or residents become ill due to unsafe production methods, those responsible would likely face due process which could result imprisonment and fines. This is not the case in China, unless victims have the support of the government. Yet the government often has a stake in the REE production process which acts as an incentive for the REE processing to continue untouched.

Characteristics of China’s Rare Earth Industry before Government Reform

Fluorescent light bulbs require rare earths

Starting in 2000, China’s government began to re-evaluate its REE strategy in the light of its rapid development, the poor profitability of its rare-earth producers and the rapidly growing demand for REEs worldwide. While its achievements in the REE field since 1978 are undeniable, the government has become increasingly concerned about a number of issues. These issues were outlined in Situation and Policies of China’s Rare Earth Industry published by the Information Office of the State Council of the People’s Republic of China in June 2012 and included: severe ecological damage to the environment, excessive exploitation of REE resources, poor profitability of the REE industry causing what it considered to be a severe divergence between the price and the value of REEs, and the illegal mining and sale of REEs.

While the environmental degradation that has been caused by China’s REE production is quite widely known, part of the purpose of the China’s REE report was to inform on the other challenges that China faces in managing its REE resources. Specifically, China found that 50 years of aggressive mining of its REE resources have significantly reduced its reserves. In Baotou, for instance, the report stated that only about one third of the original volume of REE resources was left in its principal mines. In its ion-adsorption clays, the reserve extraction ratio – the remaining supplies of REE in years – has declined from 50 years of remaining resources 20 years ago to 15 years of REE resources today.

While China publishes the country’s REE data yearly, these reports are not available to foreign researchers. Independently verifying the PRC’s calculation of its reserve levels has thus been difficult. For instance,

s China’s Situation and Policies of China’s Rare Earth Industry paper calculated that China holds 23% of the world’s reserves, while the 2008 US Geological study calculated that China held 58% and a 2011 British Geological Survey Rare Earth Elements paper calculated that China held 44%. That said, there can be no doubt that China has seen a rapid depletion of REE reserves in the last three decades.

China has also expressed concern about the poor profitability of the REE industry. Historically, the Chinese REE industry has been characterized by numerous, relatively small-scale enterprises, particularly in the south, which often engage in cutthroat competition. This has often meant that REE producers have often struggled to maintain profitability. Yet, as many local governments have relied on REE producers to provide employment and revenue, they have continued to encourage local production even it means exceeding national production targets. As a result, China feels that it REE resources have been sold at prices which do not reflect their real value or take into account environmental costs. To support this argument, China cites the fact that between 2000 and 2010 the price of rare earth products increased by 2150%, while the prices of gold, copper and iron all increased by in excess of 4300%.

China’s REE has also been plagued by illegal mining and smuggling. The report states, that from 2006 to 2008, statistics collected from foreign customs offices were 35%, 59% and 36% higher than the volumes that China officially exported over this time period. In 2008, it was estimated that approximately 29,000 tons of rare earth materials were smuggled out of the country, representing an estimated one-third of total REE exports. In 2014, it was estimated that illicit sales rose to 40% of all REE production or as much as 40,000 tons. Illicit REE materials are often hidden as steel composites, then reverse-engineered out when they reach the customer’s home country. It is believed that Japan is the largest importer of illicit REE materials, and may get as much as 20% of its REEs from China’s black market. Smuggling hurts China’s rare earth industry both by depressing prices, more quickly depleting REE resources and by increasing environmental damage as smugglers usually pay scant attention to pollution management.

Rapid Increase in Domestic Demand for REE Products

China has also seen a rapid increase in domestic demand for REEs, and it expects this demand to continue to increase in the future. In 2000, for instance, Chinese REE consumption was about 19,000 metric tons while non-Chinese usage was about 72,000 tons. By 2009 Chinese REE consumption had reached about 73,000 tons while other usage had declined to 59,000 tons. China uses more REEs today as its REE industry is moving higher up the manufacturing value chain. For instance, its 1987 production of products such as catalysts, magnets, phosphors, and polishing powder represented only about 1% of the total REE that it consumed. By 2008, the production of these products accounted for about 53% of the REEs used in China. Going forward, China expects its REE use in the new material technologies to grow faster than in its other traditional industrial sectors.

As an example, in July 2008, China had approximately 600 million mobile phone users; by November 2012 China’s Ministry of Industry and Information Technology estimated that China’s mobile phone owners had exceeded one billion. Similarly, in 1998, the United States, Europe and Japan produced 90% of the world’s permanent neodymium-iron-boron magnets; today China manufactures 76% of the world’s total. In 2009, China produced 12,000 gigawatts of wind power; by 2015, China aims to have 100 gigawatts of on-grid wind power generating capacity, and to be generating 190 billion kilowatt hours (kWh) of wind power annually.

China’s Reform of its Rare Earth Industry

As early as 1990, the Chinese government deemed REEs to be a strategic mineral critical to China’s long-term political, economic and military power and began restricting foreign investors from mining rare earth, or from participating in smelting and separating except in joint ventures  with Chinese firms. By 2000, Chinese scientists and military experts were calling for even greater controls over its REEs. In 2005, Xu Guangxian, China’s leading REE scientist, argued that at the current rate of extraction the Bayan Obo mine would be depleted in 35 years.

As a result, the Chinese government began to implement a number of initiatives designed to reform the industry. Laws regarding REE mining, production and waste management were reviewed, and efforts have since been made to improve enforcement. Additionally, in 2005, the government eliminated the value-added tax rebates for REEs, and taxes on the export of unimproved REEs were raised. The government also reduced the number of REE mining and processing licenses issued. In 2006, 47 domestic REE producers and 12 Sino-foreign rare Earth producers were licensed to export rare earth products from China. By 2011, that number had dropped to 22 domestic REE producers and 9 Chinese-foreign joint venture REE producers. It has also begun to stockpile REE materials with the goal of reaching reserves of 30,000 to 55,000 tons of rare earth concentrates.

Additionally, it created the 2009-2015 Plan for Developing the Rare Earth Industry, and established the Chinese Society of Rare Earths, consisting of 150 members whose aim is to develop a fully integrated REE sector. Part and parcel of this, it has divided the country into large REE districts: Jiangxi, Guangdong, Fujian, Hunan, and Guangxi in the South; Inner Mongolia and Shandong in the North; and Sichuan in the West. Between 2009 and 2015, the government expects Inner Mongolia and Sichuan to be primarily responsible for producing LREE with additional capacity coming from Shandong as needed. HREEs will be produced in Jiangxi, Guangdong and Fujian. Increased inspections by government officials will be carried out in order to ensure that facilities are not exceeding national quotas and that mining and manufacturing are meeting environmental regulations.

Since January 2014, China has pressed aggressively ahead with its efforts to consolidate the REE industry under six large state owned enterprises (SOE)including Inner Mongolia Baotou Iron and Steel Group, China Minmetals Corporaion, Aluminum Corporation of China (Chinalco), Guangdong Rare Earth Group, Xiamen Tungsten, and Ganzhou Rare Earth Group. These SOEs will control the industry by geographic region. An estimated 300 smaller, independent REE producers have been forced to shut down or  to merge  with  the SOEs. These SOEs will invest in all aspects of the rare earth industry chain. Currently, these six companies control 94% of China’s RE resources,  75% of its mines and  60% of the smelting and separating capacity. After consolidation, the six SOEs are expected to have complete control over these sectors. These  conglomerates will be supported by financial subsidies, tax breaks, and other form of government  investments, and will be encouraged  to expand their expertise  in areas such as REE recycling.

China continues to view the REE industry as of strategic importance to the country. Its goal is to have a significant market share of the entire REE supply chain from mining, smelting and separating to manufacture of high-end rare earth technologies. China’s dominance in the middle aspects of the REE supply chain – transforming mined materials into useful ingredients – enables China to draw in related domestic and multinational businesses that depend on the REE materials. This in turn increases China’s importance to supply chains in everything from mobile phones to wind turbines.

Since January 2014, Beijing has also stepped up its campaign against illegal mining. It has forced smaller, wildcat producers to close, and is now conducting helicopter searches in areas where illegal mines are purported to be operating. It is also going after the gangs who are running them as well as local government officials who turn a blind eye.

Beijing is also working to stamp out illegal production by larger, licensed companies which avoid production quotas by exporting RRE under ambiguous labels such as “iron alloy”.  New export license paperwork for the big six will be more onerous and exacting. Beijing is also trying to implement a RE supply chain trace-ability system.

Since July 2014, China has push ahead with its plans to grow  its domestic REE stockpiles.  China plans to use it stockpiles to ensure  adequate resource  supply  in the future, especially in light of growing domestic demand. It will also use it stockpiles as a mechanism  to support REE  pricing.

Export Quotas

Chinese ships loaded with rare earth minerals for export

The government also began to implement quotas on the amount of REEs that it allowed to leave the country. From the Chinese perspective, quotas felt appropriate as foreign countries, particularly the United States and Japan, were seen to be taking advantage of China’s cheap, environmentally-destructive REEs while maintaining strategic stockpiles in their own un-dug mines. Quotas would also help ensure that the Chinese had plenty of REEs for their domestic needs. Historically, separate export quotas have been set for domestic REE producers and for Sino-foreign joint venture REE producers. Between 2005 and 2007, the government authorized domestic REE producers to export 40,000 metric tons and Chinese-foreign joint ventures to export 16,000 metric tons. In 2008 and 2009, China reduced the domestic quota by 21.6% and 2.5% respectively while holding the Chinese-foreign joint venture quota steady. By 2010, China’s overall REE export quota was reduced an additional 37.1%, this time impacting both domestic and Sino-foreign joint venture producers alike.

The government’s new policies are specifically designed to restrain the export of unprocessed REEs, as no quotas have been placed on REEs exported in finished products. Part of the reason for this is that the government wants to encourage foreign REE manufacturers to relocate their production facilities to China, particularly to Baotou’s Pioneering Rare Earth Hi-Tech Development Zone.  It is estimated that approximately 50 foreign companies are already operating within Baotou’s industrial complex. From the Chinese perspective, this would allow them access to new technology and would generate jobs for its citizens. Non-Chinese consumers of REEs have criticized this policy saying that it is pressuring them to relocate to China in order to stay cost competitive. This in turn could put their proprietary REE technology at risk, and it would continue international dependence on China’s REE industry.

Chinese Suspension of Rare Earth Exports

On September 7th, 2010, a Chinese fishing trawler rammed a Japan Coast Guard vessel near to the Senkaku/Diaoyu disputed islands, known in Japan as the Senkaku Islands, and in China as the Diaoyu Islands. The islands are administered by Japan but are also claimed by China and Taiwan. The Japanese subsequently detained the captain, causing a major diplomatic dispute between the two countries.  Despite repeated demands by the Chinese government, the Japanese refused to release the captain, saying that instead his case would be handled by the Japanese courts. In retaliation, the Chinese canceled official ministerial Sino-Japanese meetings, and revoked an invitation for 1000 youths to attend the Shanghai World Expo. (Lin, 2010) Although denied by the Chinese government, on September 21st, it is widely believed that the Chinese also orchestrated an unofficial halt of REE exports to Japan by having its custom agencies prevent the export of REEs, though this has recently been questioned in academic studies, particularly in light of the fact that shipments to Europe and the US were also halted the following month, and given that the Japanese government had expressed grievances over the rare earths issue as early as August 18th. Beijing claimed instead that the export stoppage was a spontaneous, independent demonstration of support by Chinese REE exporters and custom agents. Regardless of its origin, the embargo has enabled China to exert political pressure on Japan. The unofficial nature of the embargo also made it more difficult to challenge in the World Trade Organization (WTO) which bans most unilateral export stoppages.  On September 24th, Japan released the Chinese captain, with the Chief Prosecutor citing “Japan’s national interests”.

By mid-October 2010, China was also blocking some shipments to the United States and Europe after the Obama administration opened an investigation into whether China was violating free-trade rules with its green energy policies including its restrictions on REEs. China resumed shipments to the U.S. and Europe at the end of October, but did not resume shipments to Japan until the November 24th. Part of its decision to resume shipments to Japan might have been due to the fact that many Chinese assembly factories, employing hundreds of workers, were running low on Japanese-made components when suppliers began to face shortages of some of the REEs needed in their manufacture.

Consolidating the Industry and Ending Illegal Mining and Smuggling

Since 2006, the government has stepped up its efforts to shut down illegal mines in the provinces of Guangdong, Jiangxi and Sichuan. Over the last two years, China has investigated and rectified 600 cases of illegal mining, has identified an additional hundred cases against which further action will be taken, and has closed 13 mines and 76 processing facilities. Similarly, in 2011, China launched a campaign to crack down on REE smuggling, retrieving 769 tons of smuggled REE metals and prosecuting 23 criminal suspects in eight cases.

China has also been urging its REE producers to merge together. Ultimately, the government envisions that the REE industry will be eventually controlled by a few, state owned enterprises. Surviving Chinese producers have seen advantages to this consolidation strategy as it has helped to reduce unnecessary competition and increase profitability. For instance, Dingnan Dahua New Materials Co., Ganxian Hongjin Rare Earths Co. Ltd, Minmetals Nonferrous Metals Co. Ltd have all joined together to form Minmetals Ganzhou Rare Earth Co. Ltd to process REEs in Ganshou, Jiangxi Province. Their operations are expected to slowly subsume the majority of the production of the 88 smaller REE producers that have historically been operating in the area.

Improving Environmental Regulation

Rare earths are crucial for wind turbines

China also plans to implement stricter environmental standards. The Ministry of Environmental Protection has now set discharge standards for six types of atmospheric pollutants and for 14 different types of water pollutants. China will aim for its new REE facilities to be built to ISO 9000 and ISO 14000 certificate standard. It may also force its dirty mining and processing facilities to halt operations until they are also able to secure the ISO accreditation. The ISO 9000 and ISO 14000 are internationally recognized accreditations that look at how a product is produced rather than the product itself. The ISO 14000 standards help organizations establish procedures that minimize negative effects to the environment. If China enforces its tougher environmental standards, it is estimated that it could add between $145 and $220 to the production costs of every ton of REE products. These higher costs would significantly erode China’s cost advantage in the industry.

Additionally, China intends to increase the recycling rate of both REEs in discarded electronic products as well as recycling an estimated 12.6 million tons of REE oxides that had been deposited in its Baotou tailings pond. Currently there are no cost-effective ways to recycle rare earth elements from old equipment such as computers, electric motors and cell phones. Similarly, technology to extract residue REEs in tailings ponds is also in need of further development. China is also working on technology that will reduce the amount of REEs that are flushed into tailings ponds in the first place.

China’s Rare Earth Industry Research and Investment

As China considers its REE industry to be of critical strategic importance, it is heavily investing in REE research and development. It hopes breakthroughs in REE technology will help ensure its national security, and could enable China to leap-frog the West to lead in the development of many new advanced technologies such as those found in the rapidly emerging environmental sector. Indeed, in 1999 President Jiang Zemin noted that if China could master REE technology, its REE resource advantage could then help lead China to economic superiority.

Much of China’s REE investment has been funneled through the State Key Laboratory of Rare Earth Materials Chemistry and Applications, affiliated with Peking University in Beijing, and the State Key Laboratory of Rare Earth Resource Utilization, affiliated with the Changchun Institute of Applied Chemistry which is run under the direction of the Chinese Academy of Sciences. Between the two labs, there are approximately 70 faculty members, 35 professors and 75 graduate students dedicated to REE research. Additionally, China also conducts REE research through the Baotou Research Institute in the General Research Institute for Nonferrous Metals. Each of these institutions run complementary but independent research into the efficient and environmentally friendly mining and processing of REEs, the development of technology employing REE materials, the recycling of REEs from already existing products and the reclamation of REE materials in its extensive waste ponds.

China is not only investing in REE domestically, it is also purchasing stakes in rare earths natural resources abroad. For instance, China has purchased a 25% date in Arafura Resources Ltd, an Australian Rare Earth developer.

World Response to the Reform of China’s Rare Earth Industry – WTO filing

In March 2012, the United States, European Union, and Japan filed a complaint with the WTO against China’s REE trade practices in response to export restrictions, restrictions in export licensing, higher export taxes, and the withdrawal of the 16% refund of value-added tax on exports of unimproved REEs. They argued that the effect of these policies has been that non-Chinese producers of REE products pay 31% more for their REE materials than their Chinese competitors.  The US, EU and Japan are also challenging aspects of the allocation and administration of export quotas, export licenses and the manipulation of export prices. They contend that Beijing aims to satisfy domestic REE demand first, and to control the international price of REEs abroad. They also say that Chinese practices are placing pressure on foreign manufacturers to relocate their operations to China in order to minimize the impacts of rising costs and shrinking supplies. It is expected that the complaint will take between one and three years to resolve.

WTO ruled against China's REE export restrictions

WTO ruled against China’s REE export restrictions

China has countered that its policies are intended to improve the environmental standards of its REE mining and processing facilities as well as to promote the long-term economic sustainability of its REE resources. It has rejected a call for the establishment of a WTO panel. China has also countered that foreign suppliers have not complained of China dumping low-cost REEs as they previously had with China’s export of low-priced steel and textiles.

The US, EU and Japan feel that a WTO ruling made in January 2012 supports their case. In that ruling, the WTO decided that price and quantity controls primarily targeting foreign entities were not a reasonable implementation of a resource conservation policy. It also stated that trade restriction measures for the purpose of environmental protection can only be applied in conjunction with restraints on domestic production or consumption.

In June 2014 the WTO ruled against China and in August 2014 China lost its appeal. The WTO stated that China’s efforts conserve its limited REE resources and to protect its environment by restricting foreign access to REE tungsten and molybdenum through export duties, export quotas, minimum export pricing requirements and additional requirements and procedures constitute a breach of WTO rules. Instead the WTO found that the China’s REE restrictions were designed to achieve industrial policy goals rather than REE resource conservation or environmental protection. The WTO ruled this because no measures were put in place to restrict domestic access to REE supplies. Instead the export restrictions gave domestic companies preferential access to REEs at prices below that available to foreign customers.

World Response to the Reform of China’s Rare Earth Industry – Developing New Rare Earth Sources

Car production could be affected by rare earth shortages

Many governments and companies around the world are also beginning to develop new REE sources, now feasible given the higher REE prices which have resulted from increased REE demand and China’s export restrictions. The Australian company Lynas Corporation, for instance, has invested in an $800 million processing plant located on Malaysia’s East Coast. Once fully operational, Lynas’s Malaysian processing plant is slated to become one of the largest REE processing plants in the world. Yet, the opening of the plant has been plagued by protests from Malaysian activists who worry about its environmental implications. The plant is located on reclaimed swampland just 12 miles from Kuantan, a city of 600,000 people. A particular worry is that the plant’s toxic wastewater, containing chemicals and low levels of thorium, will seep into the groundwater, and that its storage ponds could become vulnerable to the monsoons that inundate the swampy coastline each autumn. Currently, Mitsubishi Chemical is investing $100 million to clean up its Bukit Merah REE processing site which it was forced to close in 1992 when local residents began complaining of leukemia and other ailments tied to thorium contamination. This environmental contamination has caused Malaysian activists to demand greater environmental regulation for all future RE processing facilities located on its soil.

In California, near Death Valley, Molycorp Minerals has invested $781 million in the modernization and expansion of its RE mining and manufacturing facilities that were shuttered in 2002 when it was unable to produce REEs at prices which could compete with Chinese producers. Molycorp aims for its newly refurbished Mount Pass facility to be one of the most technologically advanced, energy efficient and environmentally friendly REE processing operations in the world. By the end of 2013, Molycorp expects Mountain Pass to be producing 40,000 metric tons of REEs annually. As the US currently consumes between 15,000 and 18,000 metric tons of rare earth oxides each year, this would mean that the US would turn into an exporter of REE products in the near future.

Mines are also under consideration in Canada, Australia, South Africa, Greenland, Mongolia, Vietnam and India. In 2009, Japan signed a contract with Vietnam to invest in a rare earth mine that will produce solely for Japanese vehicle manufacturers. The problem is even if these new mines and accompanying processing plants were given the go-ahead, it could still take between 3 and 10 years, not to mention hundreds of millions of dollars, before these new projects would become fully operational. Others are investing more heavily in the manufacturing of high-end REE products outside of China. Japan’s Hitachi Metals Company, for instance, is investing in a permanent magnet factory in China Grove, North Carolina instead of locating it in China as it had originally envisioned.

A concern for those investing in new REE mining and processing locations is that China could increase production again driving down REE prices just as their projects come on line, once again making non-Chinese mining and processing facilities uneconomical. Ironically, a WTO judgment in favor of the US, the EU and Japan could have this effect by forcing them to withdraw export restrictions which would once again flood the market with Chinese REE product. To protect against this, some non-Chinese scientists and industrialists have called for their governments to provide federal support in the form of loan guarantees and other assistance. Others argue that the rapidly growing demand for REEs should help maintain prices, even in the event of a significant increase in Chinese REE production.

World Response to the Reform of China’s Rare Earth Industry – Other Initiatives

International consumers of China’s REEs are also taking other steps to become independent from Chinese supplies. As a short term stop-gap, countries such as Japan and South Korea already have strategic stockpiles of rare earth metals. Countries are also increasing research into REE substitutes and REE recycling.

Trends for the Future

Rare earth mining is certain to be an important part of China’s future economy

China’s REE industry continues to grow at a strong clip. According to the Industrial Minerals Company of Australia, China’s REE annual output is forecasted to rise from 105,000 tons in 2011 to approximately 130,000 tons by 2016.

China considers the development of REE technologies a national priority. To support this objective, it will continue to invest heavily in research and development in all aspects of REE production from improved mining efficiency to the development of cutting-edge REE technologies.  It will also continue to invest in technologies that will allow it to reclaim REEs from its tailing ponds and to recycle REEs from discarded electronic products.

China should be able to have substantially greater influence over REE’s supply and the pricing. To some extent this will offset its inability to control supply and price by export quotas and by other trade restrictions now ruled to be illegal by the WTO. China will also continue to build domestic stockpiles.

The financial and academic resources China is investing in basic REE research are unparalleled anywhere in the world. Similarly, no other country has identified the manufacturing of REE technologies as a national objective and is pursuing it as single-mindedly. Given China’s significant level of naturally occurring REE reserves, its destination as a low-cost manufacturing base, and its heavy research and investment in all aspects of the REE sector, it can be expected that China will continue to rapidly consolidate its already strong foothold in the manufacture of many of the REE technologies. It is likely it will dominate the production of many of these technologies in the future.

Rising REE prices and aggressive Chinese REE policies have caused non-Chinese REE miners and manufacturers to seek alternative REE sources and alternative locations to produce their REE components. Over the next 10 years, it can be expected that new REE mining and processing sources will come on line, allowing international competitors to claw back some unfinished REE market share. In particular, US Molycorp and Australian Lynas both have brought REE mines on stream. Similarly, international REE producers, wary of the Chinese subsuming their technology, will continue to seek alternative, cost-effective places to manufacture. That said, they will struggle to compete against China’s advantages.

Hydro-Power and Hydro-Hegemony: China’s Prolific Dam-Building

The History of Hydro-Power in China

Before 1949, only 22 large dams existed in China. A dam study by Oregon State University concluded that since that time, the People’s Republic of China has undergone four waves of dam construction. Socialist agricultural policy between 1949 and 1960 encouraged the construction of many small and medium-sized irrigation dams. In particular, the 1958-1960 Great Leap Forward policy advocated that each of China’s 1,465 counties build at least one water conservation dam. As a result, tens of thousands of dams were built in China, mainly by peasant-led teams with limited equipment, materials and training. During the period from 1968 to 1980, the pace of dam construction increased. Water projects grew in size and complexity and were progressively constructed for hydropower and flood control. While fewer dams were built between 1980 and 2000, those that were constructed were larger in scale and more technically difficult. The 1978 market reforms allowed China to import foreign technology, know-how and funding, enabling the building of dams that previously had been too difficult and expensive to undertake.

Government measures since 2003 have led to a decentralization of hydropower production. The State Power Corporation was disbanded, its assets were distributed and development rights on China’s main rivers were shared out. While the central government has a majority of stock in each of the companies into which the State Power Corporation was split, in general, the enterprises act quite independently. The “corporatization” of China’s hydropower sector has created a significant increase in domestic and overseas dam building as companies compete to secure existing assets and to develop new hydro-projects.

Today, China runs about half the world’s approximately 45,000 dams larger than 15 m in height. In total, the number of dams in China is estimated to exceed 85,000. In 2009, China’s installed hydropower was calculated to be approximately 200,000 MW, representing about 17% of China’s total electricity power. According to recent reports, of the 37 GW hydro-power capacity added worldwide in 2014, a full 22 GW (nearly 60%) was added in China alone, dwarfing developments in other nations (the five largest contributors behind China added a combined 8.7 GW). This has brought China’s hydro-power capacity up to 27% of the world total. China continues to set high goals for itself, with China’s National Energy Agency planning to increase China’s hydro-power capacity to approximately 380,000 MW by 2020. Huge hydropower cascades have been proposed and are being constructed on some of China’s remaining pristine river basin systems including the Lancang, (upper Mekong), the Nu (Salween) and upstream of the Three Gorges Dam on the Yangtze. It is estimated that China has relocated a total of almost 23 million citizens since 1949 to make way for its water projects.

The Three Gorges Dam

Large dams are enormous interventions into highly complex ecosystems. Their impact can be felt thousands of kilometers away and often occur many years after construction has been completed. It is impossible to anticipate and mitigate all the social and environmental impacts that such projects can cause. The Three Gorges Dam provides a good indication of the challenges that such large dams pose.

Originally conceived by Chairman Mao and supported by Zhou Enlai, the Three Gorges Dam, and its related infrastructure, is the largest water project in the world. It stretches approximately 2km across the Yangtze River, which flows 6,418 km eastward from the Tibetan glaciers through China’s southwest, central and eastern regions before eventually emptying in the East China Sea at Shanghai. The Three Gorges Dam reaches nearly 200m in height, and has created a reservoir 600km long with a storage capacity approaching 40 billion m³. Three Gorges generates approximately 22,000 MW of electricity, equivalent to the burning of 50 million tons of coal annually, compared with Hoover Dam, for instance, that has an installed capacity of only 2080 MW. It was built at an estimated cost of $27 billion, although if hidden costs are taken into account, some appraise the dam’s actual cost to be in excess of $60billion. Hidden costs include losses incurred as a result of the reduction in commercial fishery production, the cost of landslides caused by frequent fluctuations in water levels and the further population resettlement that these landslides are likely to require, the costs of water pollution as raw sewage and fertilizer run-off collect in the Three Gorges Reservoir instead of being flushed downstream, the shrinking of the Yangtze river estuary, and the weakening of downstream dikes caused by the dam’s faster than anticipated water discharge. Besides generating emission-free energy, the Three Gorges Dam was built to control flooding, to improve water resource utilization and river navigation. Access to the major port of Chongqing, for instance, which receives 90% of its goods by water, has improved markedly even though it is located more than 600 km upstream of the dam. The Three Gorges’ lock system is one of the world’s largest, and has also helped to increase the amount of cargo able to move into the river’s upper reaches.

Despite these real benefits, the Three Gorges Dam has also generated significant problems. Most important of these has been the disruption of the Yangtze’s ecosystem. When the river flowed naturally, it helped to cleanse industrial pollution. It also traditionally transported large sediment loads from the river’s upper reaches to the East China Sea. The Three Gorges Dam has significantly decreased downstream sediment transport, changing the river’s chemical balance, temperature and flow. This in turn is impacting fish habitats. In addition to changing the river’s ecological characteristics, the dam is also blocking fish migration, impacting access to spawning grounds; it also may have contributed to the extinction of the Yangtze river dolphin. Between 2003 and 2005, annual fish harvests from below the dam were 50% to 70% below previous baselines; larva and eggs levels have dropped off even more sharply. Although pollution and other factors were already causing a reduction in fish stocks before the dam was constructed, the Three Gorges accelerated the trend.

The river’s reduced silt load has also deprived downstream agricultural land and fisheries of nutrients. Additionally, because less silt is reaching the river’s mouth, approximately 980 acres of coastal wetlands are disappearing each year. This has allowed sea water to intrude further upriver, affecting coastal agricultural and drinking water. Silt buildup within the reservoir is also impacting its overall storage capacity, causing higher volumes of water to be released from the dam, stressing downstream levees.

Landslides around the Three Gorges Reservoir have also been a greater problem than was first expected. The fluctuating water levels of reservoir have weakened hundreds of miles of its slopes, triggering massive mudslides. Controlling this erosion is projected to require a further investment of $10 billion or more. In some cases, landslides have produced massive waves as high as 50 meters, causing even more damage to the reservoir’s edges.

Every large dam built in China has led to the resettlement of local people because of China’s high population density along its major rivers. Over 1.2 million people have already been resettled as a result of the Three Gorge’s construction. Originally, residents were to be shifted to higher ground nearby, given new homes and new jobs. Yet, greater than anticipated erosion and landslides made large uphill areas unsuitable for building, so the displaced were eventually resettled to 11 different provinces. In late 2007, it was announced that another 4 million people – a number equivalent to the entire population of Scotland – are likely to be relocated from the Three Gorges Reservoir area in the next 10 to 15 years. Officials dispute that these are related to the reservoir’s landslides and ecological degradation, arguing instead that they are part of the national experiment to ease regional overpopulation and to provide greater opportunities for industrial development.

Many scholars are now finding that people displaced due to construction projects face the long-term risk of continued food insecurity, lack of access to good arable land, joblessness and social marginalization. Displaced women are often more severely affected than men. Taking farmland from the host population to give to the resettled groups has also often caused tensions and conflict between the two groups. Studies indicate that early resettlement efforts at the Three Gorges have indeed led to diminished living standards for many of the displaced. Local government corruption has aggravated resettlement challenges as 12% of the resettlement funds were estimated to be embezzled; hundreds of local officials have now been imprisoned.

In addition to the social costs, many now believe that large dam reservoirs can also cause seismic events as their weight can place unsustainable pressure on local faults. The Three Gorges Dam sits on two major fault lines, and scientists have acknowledged that seismic activity has increased slightly since the reservoir first started impounding water. Earthquakes can also damage a dam’s structure. Many of the new hydro-projects outlined in 12th Five-Year Plan are to be constructed in China’s mountainous southwestern region, which is crossed by numerous active fault lines. The tectonic movement in the three parallel Rivers area of the Nu, Upper Mekong and Upper Yangtze is one of the strongest in the world, for instance, yet China is planning to erect a cascade of dams in these areas. Research in the Chinese Journal of Geology and Seismology has recommended that further study be undertaken to determine the role that dam reservoirs play in triggering quake activity.

Environmental Movement Impacts Hydro-Power in China

The Chinese government has tried to address some of the problems associated with dams by improving the legislation which regulates the industry. While not always enforced, recent legislation has required more stringent procedures for environmental and social impacts assessment. A September 2003 law, for example, obliges companies planning projects with significant environmental impacts to conduct environmental impact assessments, and to have the assessments approved by the appropriate Environmental Bureau or the Ministry of Environmental Protection. Additionally, public participation in environmental impact assessment is increasingly encouraged. 2008 legislation has laid-out basic instructions on methods for public disclosure of environmental impact assessments, when to involve the public in the environmental impact assessment process, and who should be included in public participation. Indeed, in 2004 for instance, criticism from environmentalists, the public and the international media at least temporarily halted the development of a 13 dam cascade planned for the Nu River in Yunnan province, one of China’s last free flowing rivers. Laws passed in 2006 made efforts to better protect those displaced by dam construction by setting out appropriate land compensation, requiring that displaced people be provided with a level of livelihood similar to or greater than that which they had prior to the dam being built, and that resettlement plans must include economic development strategies as opposed to simply providing one-off monetary compensation.

Damming of Trans-boundary Rivers – Hydro-Hegemony

Many of China’s new planned hydro-engineering projects are on trans-boundary rivers, including the Mekong, Salween or Nu, Brahmaputra and Amur. On the Brahmaputra River, for instance, a series of five dams is planned to be built close to disputed territory between China and India, which will impact India and Bangladesh downstream, causing concern that China may divert the Brahmaputra’s water for its own needs. Many of the planned dams on trans-boundary rivers are being designed as cascades – one dam after another – or as mega-dams – with walls of 100 meters or higher-both of which have a greater impact on a river’s ecology. One of the new dams approved for the Brahmaputra, for instance, is to be twice the size of the Three Gorges Dam and situated almost on the contested border with India.Overall, about a third of China’s geography is within an international river basin, and China shares 18 rivers with its neighbors, many of which originate in China. Indeed, the Autonomous Province of Tibet provides China with access to some of the best untapped hydro-power in the world as does its Yunnan province, often termed China’s hydro-power storehouse. China is acting as “hydro-hegemon” in regard to its shared rivers as it is damming without the support and partnership of its neighbors, and at times in outright opposition to their wishes. But it is not just the unilateralism of its damming on international headwaters that upsets downstream countries; it is also the opacity around which it builds and runs its dams. China does not readily share environmental or technical information with its neighbors when building the dams nor, many feel, does it give real weight in its decision making as to how its dams will impact river ecology downstream. Indeed, many of China’s international river dams will provide it with the physical ability to change the hydrogeology of the rivers it is damming, thus creating new hydro-strategic and hydro-political realities, and thus allowing it to dictate the status quo of water allocation. By controlling large parts of Asia’s water tap, in an area where per capita freshwater availability is less than half the global average, China is acquiring tremendous leverage over its neighbors.

Yet, China considers developing large-scale hydropower to be critical to meeting its future energy needs and thus its national security. The Chinese government has thus worked to keep these resources under its control, and has been unwilling to sign any comprehensive water sharing agreement with downstream riparian nations or to join any river basin associations such as the Mekong River Commission, which was established in 1995 “to promote and coordinate sustainable management and development of water and related resources for the countries’ mutual benefit and the people’s well-being.” It is also one of only three countries that voted against the 1997 UN Convention on the Law of Non-Navigational Watercourses which lays down rules on the shared resources of international watercourses. Additionally, China has been reticent to share information on water levels and flows with its downstream neighbors once its dams are operational. China is now impounding water for the large reservoir behind the Xiaowan dam on the upper Mekong, for instance, which some believe exacerbated 2010 drought conditions downstream. Only after the drought became severe, and China came under significant pressure from the Mekong River Commission, did it start to provide information on daily water flows from its dam cascade.

China has tried to offset complaints and the potential creation of anti-Chinese alliances by its downstream neighbors by using trade and development incentives – developing the Southeast Asian electricity grid and building sewage and road infrastructure in Cambodia as examples – to weaken their ability to challenge China’s dam-building activities. It also engages in a public discourse that not only advocates the importance of hydro-power to its national security, but emphasizes exclusively the benefits of the dams without considering how they will disrupt downstream ecosystems and water access. Specifically, it talks about flood control, reduction of Chinese CO2 emissions, and the benefits of improved navigation and water flow during the dry season. In many cases, it is also helping to fund and construct dams downriver in places such as Vietnam, Laos, Myanmar and Cambodia. Their own independent construction of dams with Chinese financing has weakened downstream riparian neighbors’ ability to protest the ecological destruction that China’s upstream dams are causing.

The Lancang Cascade

The Lancang Cascade is an example of China’s dam building on trans-boundary water. China is currently halfway through construction of a cascade of eight dams on the Upper Mekong (called Lancang in China). The Mekong River flows 4,800 km from the Tibetan plateau, across China’s Yunnan province, through Myanmar, Thailand, Laos, Cambodia and Vietnam, before pouring into the South China Sea. The Lancang comprises only 16% of the Mekong’s total discharge as measured in the delta, yet it accounts for 100% of the flow at the Laos border, 45% of Cambodia’s average flow in the dry season, and originates 50% of the river’s total sediment. The upper basin is characterized by deep gorges, with more than 80% of the drop in elevation occurring in Yunnan province. Indeed, Yunnan and Laos have the greatest hydropower potential in the basin. The lower basin is characterized by plains and deltas which support large-scale irrigation, fishing, and transportation. The Mekong is vital to the food, water supplies and transportation of over 60 million inhabitants in the region. An estimated 8 out of 10 people within the basin depend on the Mekong River for subsistence, either in terms of fish catch or agriculture, with at least 50% of Cambodia’s animal protein consumption coming from Mekong fish and the Mekong Delta supplying waters for more than 50% of the agricultural component of Vietnam’s GDP.

The Lancang cascade is part of China’s “Develop the West” program. Initial plans for the Lancang cascade were developed in the 1980s, before Yunnan opened to foreign trade, and when China’s political relations with its lower Mekong neighbors were not as robust as they are today. Currently, four of the eight dams have been completed with construction on the fifth dam at Nuozhadu expected to be completed by 2015. China espouses that the Lancang cascade will benefit its lower riparian neighbors by providing flood control in the wet season, increasing water supply in the dry season, improving irrigation and navigation, and reducing overall carbon emissions.

Yet, as seen with the Three Gorges Dam, large hydro-power projects change the hydrology of a river. Of key concern for the Mekong is whether the dams will negatively impact the hydrological dynamics of the Mekong’s “flood pulse” resulting from the river’s seasonal flooding triggered by the annual monsoons. Diminishing the flood pulse could result in declines in biodiversity and volumes of fisheries by altering spawning and migration cues could affect its transfer of nutrients, and could limit the drift of eggs larvae and juveniles to the floodplain habitats. It could also impact rice harvests as 80% of rice production in the lower basin depends on water, silt, and nutrients from Mekong flooding. It might also cause increased salinization as seasonal flooding flushes delta areas, constraining sea water intrusion. The countries downstream are also concerned that the effective powering of their own dams will be dependent on China to discharge sufficient water. Impacts to water levels and fisheries have already been recorded in the lower Mekong basin which is one of the world’s biggest sources of fish. Indeed as water levels reached 50-year lows in 2010 in the Mekong River Basin, China’s dam building along the upper Mekong was blamed as a significant contributor to the drought.

Building Dams Abroad

In addition to damming trans-boundary rivers, China has also stepped up its dam building internationally. As China has absorbed and copied complex hydro-engineering technology initially supplied by the West during the 1980s and 1990s, it is now able to export its own domestically produced turbines, generators and other hydro-equipment to countries abroad, along with its dam building expertise. These exports are supported by a set of schemes known as the “Going Out” strategy introduced in 2001. This strategy encourages investments, exports and subcontracting in overseas engineering projects. Specifically, the government has aided China’s hydro-engineering companies with country-specific research, financial subsidies, and cheap credit. These advantages have helped Chinese companies to position themselves as low-cost competitors. This cost advantage has also been aided by the fact that Chinese construction companies often import cheap, highly productive labor from home to staff all or at least part of their workforce. Their extensive hydro-engineering experience has also allowed them to gain real efficiencies not shared by their competitors. As a result, in 2012, it was estimated that China was involved in more than 300 dam projects in 66 different countries, including the construction of 19 of the world’s 24 largest hydropower stations.

It is not uncommon for these international hydro-engineering projects to help support Chinese strategic interests. Because of its relative isolation from international markets until the early 1980s, China has been late to develop international sources of raw materials, particularly oil, timber and mineral resources. Yet, its position as “the world’s factory” has meant that its demand for natural resources has significantly increased over recent decades. As a result, China has implemented a strategy of retrieving resource deposits which had not heretofore been developed because they have been deemed insignificant in size, geographically remote or politically risky. In many cases, accessing these raw materials has obliged China to invest in secondary infrastructure such as pipelines, roads, railways, dams, power plants and transmission lines. For instance, the Belinga Dam in Gabon is being constructed by China to power a Chinese-built and financed iron ore mine whose output is destined almost exclusively for China’s construction industry. The dam is located in the Invindo National Park, and was planned by China with no public environmental impact statement. Myanmar recently decided to halt the massive China-backed the Myitsone Dam project, which has been opposed by green groups and opposition parties because of its significant environmental and social impacts. The dam was to generate some 6000 MW of power, most of which was to be exported to China, while creating a reservoir the size of Singapore with the depth of nearly a 70 story building, displacing tens of thousands of people.

China’s flurry of rapid international dam building has been driven in large part by its ability to self-finance its projects. This has allowed it to fast-track projects that the World Bank and the European Investment Bank, for instance, have been less quick to consider because of their environmental and social risks. China’s Exim Bank, the official export credit agency of the Chinese government, has delivered vital funding for many controversial large dams, including the Merowe Dam in Sudan, which resulted in a ruinous deterioration of living conditions among displaced people. The state-owned China Export and Credit Insurance Corporation, the China Development Bank, and the China-Africa Development Fund are all also increasingly involved in financing energy projects overseas. In some cases, hydro-engineering companies provide their own financing to their international customers. Sino Hydro, for example, a large state-owned company involved in at least 42 major dam projects, often invests in many of the projects it builds as does China’s International Water and Electric Corporation, China’s National Heavy Machinery Corporation and China Southern Power Grid. For the period 2010 to 2012, Sino Hydro directed over $1 billion towards dam-building and related projects in Zambia. In 2014, the total value of contracted projects in Africa was estimated at $70.8 billion. This self-financing has put increased pressure on Western financial institutions and construction companies to also circumvent internationally recognized – but unenforced – social and environmental standards when designing and building infrastructure abroad, so that they can compete with Chinese banks and construction companies.

China remains wary of Western-dominated environmental norms circumscribing its investment and construction activities abroad. China does not accept any country imposing on it their values, social systems or ideology, nor, as stated in its ‘principle of non-interference in the internal affairs of another country’, does it feel that it should impose its value systems on other countries. China has also defended its approach to overseas investments by insisting that developing countries should not operate at the same standards as developed nations; developed countries also polluted first and then cleaned up after as its economy and technology developed. China has argued that it is unwilling to impose environmental policies on foreign countries which might slow their growth.

Yet, recently there is some evidence that China’s leaders have started to reassess the long-term costs that can come with a no-strings-attached approached to construction overseas; reckless practices, in some cases, have prevented Chinese companies from growing business internationally. The ecological destruction that some of China’s dams have wrought have aggravated anti-Chinese sentiment at several sites in Asia, Africa and Latin America. For instance, in 2006 violent protests broke out at the $2 billion dollar Merowe Dam in Sudan resulting in three dead and dozens injured. Ultimately 15,000 people were displaced, often forcibly, by the reservoir. Protests renewed in 2011 when 1000 people staged a sit-in to protests the government’s failure to compensate them as promised.

China’s frequent policy of employing a Chinese workforce to build dams and other projects abroad reinforces the perception that it is engaged in exploitative practices. To counter this criticism, in 2006, the China’s State Council issued nine principles which should guide the work of firms working abroad. These principles included safeguarding environmental protection, protecting the livelihoods of local communities and peoples, obeying host laws and regulations, and employing local workers in a friendly and fair manner. The principles, while lacking specificity as to who should regulate overseas construction companies, and as to what domestic regulatory tools should be applied to Chinese companies operating overseas, do indicate the Chinese leadership’s desire to avoid future high-profile disasters such as those occurring around the Merowe dam in Sudan. However, without specific regulatory control or penalties for breach of standards, these principles remain mostly theoretical. Some Chinese companies have begun to establish their own environmental policies; China’s Exim Bank and China’s Development Bank, for example, both have environmental policies which are to guide their lending practices, but again these policies lack detail, and do not appear to be well enforced.

Trends

At present, 3,700 dams with greater than 1 MW capacity are currently planned (83%) or under construction (17%). These projects are spread across several continents, but focused mainly in Brazil, Argentina, Central Africa, and China. Even if all of these dams were constructed and realized their anticipated electric output, China would remain the world’s hydropower hegemon with an annual potential of nearly 1.8 million GWh (gigawatt-hours). While China’s position in the hydroelectric field may not be challenged in the coming years, its share within that sector is expected to diminish from 31% of world hydropower produced to around 25%.

China’s 12th Five Year Plan prioritizes the continued development of China’s hydro-power capacity so as to maintain its lead in production. Indeed, China’s National Energy Agency plans to increase China’s installed hydropower from approximately 200,000 MW to 380,000 MW by 2020. While greater efforts will certainly be made to better resettle those displaced by dams in the coming decades, environmental concerns regarding the impacts of China’s large hydro-engineering projects are unlikely to stop their future construction, particularly given the corporatization and increasing power of China’s hydro-power industry.

China’s construction on trans-boundary rivers is also likely to continue even in the face of growing international concern. China will continue to follow a “carrot” strategy to blunt the criticism of these dams, providing downstream countries with infrastructure and other needs where possible in order to get them on-side with China’s actions. China has the construction ability and the finance to proceed with the construction of many of these dams quickly. There is some argument that China plans to get the dams in place before the international community can rally effective support to pressure China to reconsider its actions.

The speed of China’s dam-building has helped many of its projects, both domestic and national, bypass international environmental standards and impact studies. Though hydropower is not an exceptionally high-emission source of energy in the long run, it has been shown to be rather carbon-intensive during initial phases. In 2014, the Intergovernmental Panel on Climate Change stated that short-term emissions from damming and dam-related activity might be ten times the emissions that could have been saved if governments reduced fossil fuel usage via other means. The short run emissions are largely a result of the large reservoirs that form behind newly constructed dams. As these young bodies of water undergo various hydrological changes, they often emit larger quantities of greenhouse gases.

Over many years, however, total hydropower-associated emissions are nearly 30 times lower than coal, which is currently China’s most dominant energy source. In 2013, coal accounted for 73.8% of China’s total 5,396 TWh generated, while hydropower ranked second with a 16.9% energy share. Despite the prevalence of coal as an energy source, coal usage decreased 1.2% through October 2014, and this trend is likely to continue into the future as northern China feels the strain of dwindling local water sources. Coal mining and processing requires an extraordinary amount of water that China can no longer afford to divert, given the drinking water demand of its citizens in northern urban centers like Beijing and Tianjin. If anything, the decline of coal will lead to an increase in the dominance of hydropower, which is already well-established in China. Dams may well supplant coal entirely, and become the primary source of Chinese energy.

In July 2014, China reaffirmed its commitment to pursue further hydroelectric projects on the Jinsha River (the upper Yangtze), Yalong River, Dadu River, and the Lancang Cascade (the Chinese portion of the Mekong River). It will also continue to aggressively pursue the international dam market, both to meet its own energy needs abroad and to create renewable, clean energy infrastructure for other countries. China’s commitment to Africa remains steadfast, with water conservancy and electric power as two of four key focus areas (the other two being communications and construction of ports, bridges, and railways). With these developments and even more plans in place, China is quickly becoming the largest, most experienced and most competitive dam builder in the world.

China’s Challenging Environment

Introduction

The state of Chinese environment today must be placed in the context of the extraordinary development that it has accomplished and of the continuing challenges it will face in the upcoming decades. Since 1981, China has lifted approximately 500 million people out of absolute poverty, an unprecedented achievement. Yet, in 2008, 172 million Chinese citizens still lived on less than $1.25 a day and about 400 million earned less than $2 a day. China’s population continues to grow, and is expected to peak at 1.4-1.5 billion people by 2030. Inequality in China has increased significantly both within the population, between rural and urban residents, and between different regions within the country. Those Chinese moving into the middle classes are demanding a better diet, modern housing, and the consumer goods which have long been common in the West.

China has raised the per capita income and standard of living of its citizens by providing an export-led, average GDP growth rate of over 8% over the last several decades. Much of that growth was fuelled by high- sulphur coal, with lax environmental regulation. The result has been a massive degradation of China’s environment. In 2006, China surpassed the United States to become the world’s largest source of carbon dioxide emissions. An estimated 70% of China’s rivers and lakes are currently contaminated, and 300 million Chinese people drink tainted water.

In part, China has achieved its unparalleled economic growth since the launch of its 1980 market reform through a policy of greater decentralization. The central government today has less of an ability to impose absolute control over provinces than it had previously. Environmental law has also been slow to develop and has not been aggressively enforced. Moreover, China’s “Century of Humiliation” has caused it to be protective of its sovereignty, and suspicious of foreigners and their environmental agenda. Indeed, China has opposed the monitoring of its greenhouse gas emissions as it views this as excessive intervention in its internal affairs. Partly as a result, China has not been transparent about environmental data. Its citizens, even its scientists, and the international community often lack the information needed to understand the full impact of China’s development on Chinese and international eco-systems. The basis of the Chinese Communist Party’s legitimacy has also shifted during the last three decades. Though it cannot ignore issues that threaten social stability, CCP power is now more dependent on its ability to continually deliver improving living standards than it was previously.

This has led China to follow a “grow now, clean-up later” approach to development. In international negotiations, China has vigorously opposed any binding, monitored agreement to reduce global emissions of greenhouse gases, although more recently it has pledged voluntarily to improve its own energy efficiency relative to economic output. Until recently, China’s calculation has been that short-term mitigation is more costly to the regime than adapting to a changing climate later, particularly given development’s immediate financial, political and social benefits. China’s 12th Five Year Plan seems to marks a shift in this attitude. Unlike previous plans, climate change and energy are featured prominently, and a strong emphasis is placed on targeting a more sustainable average annual GDP growth of 7%. The 12th Five Year Plan also adopts as binding domestic law the voluntary climate pledges China first made before the Copenhagen 2009 United Nations Framework Convention on Climate Change. More recently, in a joint announcement with President Obama in November 2014, Chinese President Xi Jinping announced a target of peaking carbon dioxide emissions around 2030 with a goal of reaching that target earlier, and an intention of increasing the share of energy coming non-fossil fuel sources to 20% by 2030.

That said, China’s 11th Five Year Plan also called for a slower average GDP growth rate of 7.5%, which China significantly exceeded. Ambitious local officials often consider Five Year Plan objectives as targets to be exceeded. GDP growth is a way for provincial officials to compete with rival regions and get promoted. Indeed, historically the performance evaluation system of government officials in China stresses the economic indexes while ignoring environmental protection indexes. This incentivizes local officials to prioritize GDP growth. As environmental protection can hamper GDP growth, environmental protection indexes have previously only constituted a small part of performance evaluation. After the 11th National People’s Congress in March 2011, Premier Wen Jiabao acknowledged this when he noted that GDP-oriented criteria for evaluating performance and government officials was an obstacle to achieving the environmental goals laid out in China’s 12th Five Year Plan. As a result, the central government would work toward adopting new performance evaluation criteria for local governments they gave more weight to the efficiency of economic growth, environmental protection and living standards improvements. Yet it will remain difficult to deter business leaders and officials who are profiting handsomely from rapid development.

Ultimately, many factors will influence China’s environmental policies in coming decades, not all of which are under central government control. Factors which encourage sustained pollution include: the continued need to provide economic growth to ensure political and social stability; the difficulty in implementing national environmental policies at the regional level; the ineffectiveness of MEP (China’s Ministry of Environmental Protection); and general corruption. Factors which are acting to protect the environment include the increasing recognition by Beijing of China’s limited bio-capacity, the increasingly vocal demands of its citizens to protect the environment, China’s significant investments in green technologies, and China’s opportunity to lead the world in green markets. It is still unclear which combination of factors will ultimately have the greatest influence on China’s short, medium and long-term environmental policies, or the state of its environment. That said, there is an undeniable trend toward recognizing the importance of environmental protection in China.

The State of China’s Environment

China’s environmental statistics are grim. In 2009, for instance, China surpassed the US to become the world’s largest energy user. While China’s average per capita emissions remain below those of the US, they have overtaken the global average, and are rising rapidly. Despite efforts by China to improve its energy efficiency, its CO2 emissions from fossil fuels rose by almost 80% during the past decade. The Chinese government recently conceded that only 3 of its 74 major cities met national air quality standards during 2013. Indeed, the Beijing-Tianjin-Hebei area had an annual average levels of PM2.5 – tiny pollutants smaller than 2.5 microns – at 106 micrograms per cubic meter, more than 10 times the World Health Organization’s safety level of 10.

This pollution is affecting countries worldwide, and not just because of the consequences of global warming. An analysis of air in places as disparate as San Francisco and Kyoto found chemical signatures of coal-fired Chinese power plants, smelters and chemical factories. Additionally, China’s water is also both in short supply and highly polluted. Growing urbanization is increasing both China’s air and water pollution and exacerbating its water scarcity since urban dwellers consume three times more water and energy than do rural residents. Moreover, an estimated 70% of China’s rivers and lakes are now polluted. In 2009, 57% of the 7 monitored river basins had pollution levels of I-III, suitable for drinking, swimming, household use, and able to support aquatic life. 24% of the water in China’s rivers had levels of IV-V, water unfit for swimming, but suitable for industrial purpose. 19% had V+, meaning that the water is considered useless, unfit for industry or agriculture. 23% of China’s key lakes and reservoirs had water grades of I-III, 42% IV-V and 35% V+. 2.3% of groundwater in 8 regions was rated I-II, 23.9% was graded III, and 73.8% ranked IV-V.

Stresses to China’s environment will continue to grow in the future. By 2030, three quarters of the 11 gigaton projected increase in energy-related global CO2 emissions is expected to be generated by China. By 2030, an estimated 390 million vehicles are projected to fill China’s roads, an almost 3 fold increase from today. Urban floor space will need to double to accommodate the approximately 350 million additional people moving into cities. At the same time, an expanding number of Chinese will rise into the middle classes, increasing demands on the environment further. Even with its aggressive development of alternative fuels, by 2030, it is still estimated that China will need to burn almost 200 million more tons of coal than in 2005 to provide sufficient heating and electricity for its new urban citizens. Indeed, overall coal-based power generation capacity is projected to triple between 2005 and 2030. Proper desulfurization of coal plants will require sizable capital investments and extensive regulatory monitoring. Urbanization and rising living standards will also increase demand for greater varieties of food. China will need to control desertification, overgrazing, the overuse of fertilizers, and over-logging in order to preserve the productivity of its arable lands. Moreover, managing the growing amount of urban waste will be a major challenge.

China’s Position on International Climate Negotiations

Yet, despite pollution levels which are increasingly having consequences for both China and the world, China aggressively defends its right to develop and thus pollute. In 2007, China’s National Development and Resources Commission reiterated China’s past position that “developed countries should take the lead in reducing greenhouse gas emissions as well as providing financial and technical support to developing countries. The first and overriding priorities of developing countries are sustainable development and poverty eradication.” In other words, as a developing country, China must give priority to economic development over environmental protection. Domestic environmental issues take precedence over global concerns. As developed countries are responsible for the large part of historical degradation, they must limit their emissions first, and pay for and transfer technology to developing states to address their environmental problems. These payments are not loans but compensation for the developed world’s historical environmental damage. Developed countries must also take a lead in the reduction of greenhouse gases, and the implementation of signed agreements. The sovereignty of the country’s national resources must be respected. There should be no linking of aid or the implementation of sanctions to any formal agreement to change environmental practices. Environmental considerations should not be used as a reason to interfere in the international affairs of a developing country, or as a reason to impose trade barriers.

China has expanded its position in recent years by noting that population control is one of the most successful strategies to curb emissions. China argues that given its effective population control since 1970, China should be given credit for this key mitigation effort. Additionally, as China has four times more people than the US, China should have a higher emissions quota. China has also advanced the argument that having a modest but dignified level of well-being – which some reason to be about $7500 annually – is a basic human right which takes priority over environmental concerns. China argues that those below this development should be exempt from any requirement to pay for climate policy which indeed includes a large part of its citizens. China contrast this argument with the fact that the richest 20% of the world use over 75% of global resources and emit 51% of global CO2 emissions to maintain their way of life. The Chinese also point out that the ownership and responsibility for emissions is a nuanced discussion; approximately 33% of China’s domestic 2005 CO2 emissions, for example, resulted from the production of exports, raising the question as to whether consumers also bear responsibility for these emissions because of their purchasing decisions.

To bolster its negotiating position, in the past China has formed an alliance with developing and very poor nations. In 1991, for instance, in advance of United Nations Conference on Environment and Development, China convened a forum attended by 41 developing countries which resulted in a unified negotiating position largely reflective of China’s views. During 1987 negotiations for the Montréal protocol to protect the ozone layer, China joined India and Brazil to insist that without significant financial support and transfers of technology from the international community, neither country would sign the Montréal Protocol on Substances that Deplete the Ozone Layer. This resulted in the establishment of the multilateral fund to offer developing countries assistance in the form of both financial compensation and technological transfers. The international community agreed to establish the fund because China and India’s emissions would cancel out the positive impact of the other signatories if they did not participate. That said, China was quick to sign the 1993 Convention on Biodiversity as it was not a threat to its economic growth. With funding in hand, China has worked to meet its commitments under the Montréal Protocol. For instance, in December 2011, China’s Ministry of Environmental Protection announced its HCFC Phase-out Management Plan (HPMP), a US$270 million project to cut consumption of Hydro chlorofluorocarbons (HCFCs) by 1 January 2015 by 17%. As China is the largest producer, consumer and exporter of HCFCs in the world – more than 70% of global HCFC production, and 50% of total consumption of developing countries – its current campaign is essential for the successful implementation of the Montreal Protocol. The plan is aimed at halting the 11% annual growth in Chinese HCFC production that has occurred in the last three years. Christophe Bahuet, United Nations Development Programme (UNDP) Country Director of China expressed optimism that China would reach its targets. Recently, China’s climate stance alongside developing and very poor countries has shifted. During the 2009 Copenhagen conference, for instance, China joined forces with the large, increasingly wealthy so-called BASIC developing states – Brazil, South Africa, India and China – to refuse binding limitations on greenhouse gas emissions, despite entreaties from extremely vulnerable poor countries, especially small island states, whose very existence is at threat by global warming. To this extent, China is no longer an unqualified defender of the developing world.

Increasingly, China has set forth voluntary, non-binding, and non-verifiable emission reduction targets as it did before Copenhagen, when it stated that it would “endeavour to lower its carbon dioxide emissions per unit of GDP by 40-45% by 2020 compared with the 2005 level; decrease its share of non-fossil fuels and primary energy consumption to about 15% by 2020; increase forest coverage by 40 million hectares, and forest stock by 1.3 billion m³ by 2020 from the 2005 levels.” Likely, China’s willingness to put forward these targets was because they were consistent with policies China was already adopting nationally. Indeed, China has many domestic policies related to climate change – to increase energy efficiency and to use more alternative energy, for example – yet these policies are often driven by objectives such as increased energy security, enhancing technological innovation and arresting desertification instead of outright greenhouse gas mitigation.

The Cost of Environmental Degradation to China

Despite its negotiating position in the international community, domestically, China recognizes that environmental protection is a pressing issue. In 2007, the World Bank assessed that China’s combined health and non-health cost of outdoor air and water pollution to be $100 billion annually conservatively estimated, or 5.8% of the country’s GDP. Four of the ten most polluted cities in the world are in China. The World Bank calculated that up to 400,000 people in China die each year from outdoor air pollution, 30,000 from indoor air pollution, and 60,000 from water pollution. An estimated 40% of all the global deaths linked to air pollution occur in China. This is reflected in greater rates of lung cancer and respiratory system problems. China’s water is also producing higher rates of various health abnormalities including liver and stomach cancer, stunted growth, miscarriages and birth defects. Polluted water is also exacerbating China’s severe water scarcity problems. It is conservatively estimated that urban water scarcity costs China about $14 billion annually in lost industrial output, and rural water scarcity generates an additional $24 billion in annual costs. In 2000, the Ministry of Agriculture related that almost 20% of agricultural and poultry products in major industrial and mining districts are irrigated with contaminated water. On China’s current trajectory, the health costs of air and water pollution could triple by as early as 2020, particularly as China’s population begins to age more rapidly.

Moreover, China’s 2011 “Second National Assessment Report on Climate Change” estimated that global warming will significantly impact China in the coming decades. In particular, the report predicted that China’s grain output could fall by between as much as 20% by 2050, putting greater pressure on food prices, and threatening China’s food security. The report also forecasted that global warming would lead to severe imbalances in China’s water resources within each year, and across the years. By 2050, eight of China’s provinces and provincial status cities could face severe water shortages (meaning less than 500 m³ per resident), and another 10 could face less dire chronic shortages. Additionally, since the 1950s, over 82% of Chinese glaciers which feed many of China’s major rivers have been in a state of retreat. With the report predicting that global temperatures will rise between 2.5 and 4.6°C above the 1961-1990 average, this rate of glacial retreat will increase. The report also estimated that sea levels will rise between 10 to 15 cm in the next 30 years, pressing up against China’s big coastal cities and export zones, making them more vulnerable to typhoons and flood tides unless China invests heavily in new coastal embankments.

Social unrest is also an increasing consequence of environmental degradation. The Chinese government received 750,000 environment-related complaints in 2008, a number that has increased approximately 30 percent annually since 2002. This environment-related social unrest risks threatening central authority. Moreover, it is estimated that by 2025 between 30 and 40 million more people may need to relocate due to environmental degradation. The environmental migrants are on top of the high numbers of Chinese citizens slated to be relocated as the result of China’s aggressive dam building.

Challenges to Implementing Environmental Policy in China

Yet while China recognizes the danger of its increasingly stressed bio-capacity, implementing effective environmental policy remains difficult. Perhaps the greatest challenge to implementing effective environmental policy in China is the sheer number of Chinese citizens still well within poverty levels, and the inequality of wealth distribution throughout the country. Until poverty and inequality eradication have been generally achieved, economic growth will be prioritized. Wu Shunze, Deputy Director General of the Chinese Academy of Environmental Planning noted this when he stated that China estimates its industrialization will be completed by 2030, that its use of resources and energy will peak between 2020 and 2030, and that between 2030 and 2050, China will then begin to see a greater shift toward a service-driven economy, and begin to repair environmental damage. China thus anticipates that until 2030, the relationship between the economy and the environment will be “in contradiction”, and will only become preliminarily “harmonious” by 2030.

Until then, China will look for win-win solutions where its environmental policies improve energy security, reduce production costs, promote job creation, and provide it with technological advantage in the world markets without impeding development at home. China’s belief in its ability to “clean-up later” is founded not just on western experience, but on its millennia old tendency to control and shape nature – uprooting forests, redirecting rivers, filling in swampland, building dams and dykes. Successive Chinese dynastic and now Communist governments have long pursued domination over ecological resources.

China’s growing focus on inequality is an increasingly key factor in its environmental discourse as inequality is potentially an existential threat to the Communist Party’s monopoly of power. As opposed to always approaching China as if it were monolithic, international engagement with China about the environment needs to be across multiple levels. What might be expected of China’s increasingly wealthy urban coasts can be an unreasonable demand for China’s poor western areas. Similarly, it is difficult for Beijing to set uniform, national environmental policy. Internal pollution mitigation will require strategies that address challenges at the global, regional, intraregional, city, small town and village levels. In 2009, President Hu articulated this by arguing that China’s wealthier eastern regions must take the first major step toward emissions mitigation, while poor western regions continue to catch up economically.

Since 1980, China has nevertheless implemented a flurry of environmental regulation. Decentralization after the 1980 market reform means that Beijing’s has increasingly imperfect control over its local governments. This exacerbates the environment’s “Tragedy of the Commons” principle. The problem of discharge into China’s rivers is illustrative. To enhance their competitiveness, each locality has an incentive for its factory to discharge its waste as cheaply (often illegally) as possible, with each factory’s waste seemingly inconsequential in relation to the river as a whole. Ultimately, the accumulation of its and other factories’ waste devastates the river. This effect is compounded by the fact that pollution fines are low and that natural resources are undervalued. Additionally, those most affected by river pollution do not always speak out against pollution when their livelihoods are dependent on the offending industry. While farmers, for instance, might suffer lower crop yields, sick animals, and deteriorating health because of polluted water, their income can nevertheless be reliant on the polluting factory which may be providing family members with jobs, investing in local infrastructure and purchasing farm produce, which in itself might be contaminated.

The ineffectiveness of local environmental protection bureaus compounds the problem. Numerous Chinese agencies are responsible for overseeing environmental protection depending on the pollution problem. These ministries often compete for international and domestic environmental funding. Their poor coordination and delineation of public duties creates conflicts of interest, especially at the local level. Nationally, responsibility for environmental protection in China rests primarily with the Ministry of Environmental Protection (MEP) formerly the State Environmental Protection Agency (SEPA). While elevation to a cabinet level ministry has enhanced its power, MEP still remains a relatively weak voice within China’s government. Historically, environmental funding has been low. China’s Environmental Protection Bureaus (EPBs) monitor environmental conditions at the local level. Despite MEP supervision and the bureaus seemingly large manpower – China’s roughly 2500 EPBs employ some 60,000 people – in general, the EPBs report to local governments for budget and resource support. This gives the local government leverage to protect local interests. A chronic lack of funding also hampers enforcement. Bureaus often have insufficient staff and cars for inspections. Factories are aware of these constraints and use this to their advantage by, for instance, discharging at night. Even when bureaus launch campaigns to close or sanction problematic companies, the companies often relapse into violation or reopen once the campaigns quieten down. Also, fines often cannot be applied to companies across administrative boundaries. Counties and cities have often shifted polluting enterprises near the border with downstream counties, so river discharge is carried quickly into the next province. Pollution fines also partly fund EPB activities. This can lead to perverse incentives where a bureau can encourage the persistence of pollution problems in order to pay its wages.

Courts are also often ineffective and enforcing environmental law. While China has an increasing level of environmental legislation, public awareness of environmental law remains poor. Given the poor availability of environmental data, when cases are brought to court, it is difficult for victims to provide conclusive evidence. Additionally, many polluting companies pay relatively significant levels of local taxes. As most courts are funded and staffed by local governments, there is an incentive to interfere with court proceedings in order to protect polluting companies and the taxes which flow from them. As a result, many environmental court cases are thrown out on the basis of flimsy reasoning.

Corruption is also a factor in China’s environmental degradation. In China, corruption can be seen as bribery and cronyism when developing environmental policy and when promoting harmful environmental practices, embezzlement of environmental funding, and bribery during environmental inspections and issuing of permits. Environmental corruption can also be connected to organized crime, particularly in mineral, timber and wildlife trafficking.

Trends

What is certain is that, even if it were to implement every environmental strategy discussed in China’s 12th Five Year Plan, China’s greenhouse gas emissions will continue to rise. What is uncertain is the level of that increase. Many factors influence the rate of environmental degradation within China, and its contribution to global warming. On the negative side, the decentralization that has occurred as China has transitioned to a market economy means that it has less absolute control over its regions than it did historically, so that enforcing national environmental regulation remains challenging. Moreover, courts and regional Environmental Protection Bureaus are often funded at the local level, reinforcing regional control over the implementation of environmental policy. Currently, most market and political incentives encourage local officials to continue to prioritize rapid economic development. While Beijing has indicated a move toward decoupling promotion from GDP growth, most local party officials will continue to be strongly incentivized by the financial benefits that accrue to their region and to themselves as a result of strong economic performance. Corruption will also continue to undermine environmental protection.

As the Chinese Communist Party’s legitimacy now rests in large part on its ability to provide a rising standard of living for its citizens, China will continue to need strong economic growth to raise its approximately 400 million citizens still living on $2 or less per day out of poverty, and provide them with a “modest dignified level of well-being”. In addition, growing inequality throughout the country is placing greater pressure on CCP leadership to provide opportunity for those regions, mainly in the west, that significantly lagged behind wealthier east coast provinces. While China increasingly speaks of the importance of sustainable development, and although it is increasingly investing in green technologies, it is unlikely that these technologies can come online rapidly enough to offset all the pollution that will be emitted as China works to provide a reasonable standard of living for the bottom third of its population. Additionally, China is racing against the problem of a rapidly aging population, trying not to grow old before it grows rich and before the competitive advantage of its huge inexpensive workforce begins to dissipate.

Given the challenges of China’s decentralization, and the pressures of poverty, inequality and a rapidly aging population, what is most likely is that China will continue to be the world’s largest contributor to greenhouse gas emissions and environmental degradation for at least the next two decades. Yet within this high greenhouse gas emission model, there will be an increasing trend toward bringing on line a rapidly growing level of alternative fuels, green technologies and pro-environmental protection policies such as environmental taxes and cap-and-trade pilot programs. Indeed, by the end of 2030, it is possible that China will be a world leader in many of the green technologies that will be most impactful on protecting our global environment going forward.

In international climate change negotiations, China will continue to refuse to be constrained by internationally imposed targets which can be monitored by outside countries. Yet, China’s growing implementation of environmental technologies at home will allow it to be a much more constructive player in international negotiations in the future. Increasingly, China is likely to hold up its environmental accomplishments at home as an example to other countries; for example, by 2015, China is expected to lead the world in installed hydro, solar, wind, and nuclear capacity. Thus, China’s future in the field of environmental protection will be, paradoxically, both world-leading but also internationally uncooperative.

Rising Income Inequality in China: A Price Worth Paying?

Introduction

J. Margolis

China, a country of continental scale, has experienced inequality in many shapes and forms throughout its 4000-year history. Part of this inequality is regional; attributable to China’s sheer size and the diversity of its geography. Lack of water, arable soil, and good links to transport networks significantly affect an area’s ability to prosper. Areas that suffered from such deficiencies in China 1000 years ago tend to be the same areas that struggle with limited resources today. For instance, China’s southeast, with its abundantwater resources and excellent access to international markets, continues to be one of the wealthiest parts of modern China. China’s western plateaus, sparsely inhabited, with poor arable land and water resources, limited transport and infrastructure systems, remain poorer areas of the country today.

Inequality during the Mao Era

During the Mao era, the Chinese government set income equality across China as an important goal, although it was never fully achieved. Topographical advantage remained determinative, even in the face of economic policies aimed at reducing it. The CCP enforced a hukou family register system, which eliminated the ability of China’s citizens to move about the country, limiting them to the area in which they were born and their family registered. What this meant in practice was that those born in regions that lacked resources, or those born in the countryside, had relatively less wealth than those born in more resource-rich regions or in urban areas. Thus inequality during the Mao era was principally between urban and rural areas, as opposed to between individuals in the same area. Nevertheless, high ranking party officials did enjoy more relative wealth than those who were not part of the Communist Party, yet the lack of consumer goods and isolation from the international economy meant there were not many opportunities for even high-ranking party officials to have conspicuous consumer advantages over rank-and-file citizens. In fact, until the Reform era brought more consumer goods to China, most Chinese citizens merely strived for the four “must-haves”: a bike, a watch, a radio, and a sewing machine.

Inequality in the Reform Era

J. Margolis

In 1978, this all began to change with the implementation of the Dengist reforms. Deng explicitly declared that some should be allowed to ”get rich first”, with the implicit understanding that others can get rich later. This was a significant alteration in policy; for a communist government to accept, and even encourage, societal inequality was certainly groundbreaking. As China began to make the transition from planned- to market- economy – a journey that has, by no means, been completed – income inequality increased in measure with its transition towards capitalism. However, the early years of the reforms, at the beginning of the 1980s, were marked by a fall in overall inequality, driven by the loosening of restrictions on rural areas selling their excess produce for profit. This allowed those rural producers of food to close the income gap with their urban counterparts. Chinese official statistics struggle to provide an accurate picture of Chinese incomes today; the wealthy often under report their earnings and the very poor can be underrepresented as their geographical isolation and high illiteracy rates can make them difficult to track. Yet even those official figures that can be produced, which may try to disguise large disparities, have shown income disparity to be increasing. China’s Gini coefficient – the most commonly used measure of inequality under which an entirely equal society would have a coefficient of 0 and one that is entirely unequal would register as 1 – stands today at 0.47. This is considerably above both the World Bank’s ‘critical threshold’ of 0.4 and the US Gini of 0.41, and shows signs of reaching the extreme levels that plague Latin America. This statistic becomes even more alarming when viewed against the levels of inequality at the outset of the economic reforms: in 1980 the Gini coefficient was 0.28. In essence, inequality has risen in China by over 50% in thirty years. While this is in line with the Dengist policy of ‘letting some get rich first’, it is evident that continued increases on anything approaching this scale over the next thirty years would cause difficulties for the CCP both in terms of potential social unrest, something that is already a growing problem, and of its ability to undermine the CCP’s legitimacy base. The CCP has begun to recognize this rhetorically as well as in policy with speeches from Wen Jiabao and Hu Jintao peppered with references to the need to address income divisions.

Regional Inequality

BartlomiejMagierowski / Shutterstock.com

Today, the biggest discrepancy of incomes can be seen between regions. China began its capitalist experimentation in the Pearl Delta region of Guangdong province, where its workers sewed piecework for Hong Kong textile manufacturers. As more and more of China’s GDP began to be generated by international trade, this and other industries spread northwards along its coast. Consequently, China’s east coast is now its most developed area, with income levels at purchasing power parity (PPP) approaching those of countries such as Saudi Arabia or Singapore.

In the first 12 years of economic reform, growth in China’s interior regions was driven by a re-introduction of private markets in the agricultural sector, as well as increased productivity during the ‘green revolution’. This increased productivity allowed peasants to move into rural industry, such as the manufacturing of farming equipment, further driving rural GDP and income growth. Although this did initially cause the income gap between urban and rural areas to fall in the early 1980s, geographical inequality has since been rising and shows little sign of reaching a plateau.

TonyV3112 / Shutterstock.com

When it comes to inequality between coastal provinces and their poorer inland neighbors, differences in income have been rising ever since the start of the reform era, as the coastal east has benefited from China’s export driven economic growth. Apart from the obvious geographic advantages for trade, coastal provinces have benefited from government initiatives such as favorable tax and financing regimes. As a result, through much of the 1990s, coastal growth rates were three percentage points higher than those of inland regions and China’s coastal provinces remain more affluent than its interior regions. There is, however, some evidence that the phenomenon of coastal GDP growth outpacing the interior is starting to change, as rising wages in coastal areas and the consequent reduction in international competitiveness, has driven some industries inward in search of lower costs. One notable example is Foxconn, the giant consumer electronics manufacturer that produces goods for companies such as Apple and Sony, which has relocated part of its production line to the interior. That said, China’s interior western provinces still have a long way to go. In 2011 Guizhou, China’s poorest province, had a GDP per capita of 16,000 RMB (approx. $2,400), while Tianjin’s was 84,000 RMB (approx. $13,000). The three provincial-level cities in the east – Beijing, Tianjin, and Shanghai – have the largest incomes per capita by some distance, each with a per capita GDP of in excess of 80,000 RMB, while Tibet, Gansu, Yunnan and Guizhou – all in the far west of the country – are all under a quarter of this total.

Although huge differences in income between regions evidently remain, the central government has shown an increased interest in resolving this inequality. In 1999, President Jiang Zemin announced the “Develop the West Program”. As well as addressing ecological and security concerns, the “Develop the West Program” was intended to stimulate development in China’s least prosperous provinces and to soften the blow to China’s interior as China entered the World Trade Organization in 2001. This policy has had reasonable success; in particular, it has encouraged significant infrastructural investment in China’s western provinces. However, though it may have slowed down the rate of increasing inequality between east and west, the pattern has continued throughout this time, leaving those in the west relatively poorer than they ever have been.

Getting Rich First?

ValeStock / Shutterstock.com

Within any one region, individual income inequality is also now evident. Economic development tends to lead to income inequality in every society and China has been no exception. In June 2012 it was reported that the number of dollar-millionaires in China had reached 1.4 million, while the number of billionaires has been placed at between 100 and 600, second only to the US; at the same time there are still 400 million Chinese who live on less than $2 a day, and around 172 million on less than $1.25. Many workers have seen great returns on their education and skill levels; those with higher levels of education, experience, and skills were rewarded with increased incomes. Some were well positioned during privatizations, having party and other connections which allowed them to win contracts or acquire state assets at significantly reduced prices. Studies show that CCP membership is positively correlated with income. A report in 2009 said that around 90% of China’s billionaires are so-called “princelings”, the sons or daughters of leading Communist Party cadres. China does, however, have a long history of entrepreneurship and many Chinese have embraced this tradition. Some were just plain lucky, had a good idea, or were in the right place at the right time. Zhang Yin, for example, rose from humble roots to become China’s first female billionaire. She earned her fortune by buying scrap paper from the US, importing it to China where she turned it into cardboard before selling it back to US manufacturers.

Gender Inequality

project1photography / Shutterstock.com While one can point to stories of women such as Zhang Yin as examples of the relative freedoms and opportunities offered to Chinese women, nevertheless there remain real income differences between the sexes even within the same geographical area. Though Mao declared, “women hold up half the sky,” meaning that women were to be freed from the subordinated expectations of dynastic China, and to work as equals with men, this is seen by many not as demonstrative of his opinions surrounding gender equality, but rather his obsession with increasing the Chinese labor force. The male communist worker was still, on average, better compensated than his female compatriot. Yet the income-earning opportunities of women in the Mao era were unimaginably better than those of their ancestors, many of whom were confined to the house, teetering on 3 inch feet. Today, the pay gap between male and female workers shows no signs of decreasing. This is by no means confined to the elder generation; female graduates earn on average 13% less than their male contemporaries. Still, opportunities for women in China are often strong when compared with those of many other countries. For instance, 19% of Chinese companies employ female CEOs, compared with 9% and 5% in the EU and North American markets respectively.

Ethnic Inequality

Ola Lundqvist / Shutterstock.com

Another group that has consistently been at China’s lower income levels is China’s ethnic minorities. Part of this inequality may be caused by the fact that most Chinese minorities live in the western fringes of the country which often suffer from water scarcity, short growing seasons, and difficult access to transportation systems and international markets. The minority populations living in these areas often suffer from lower wages and living standards than those who have made their way to the east and the gap between Han and ethnic minorities can, to some extent, be explained in these geographical terms. Still, it is also true that the average Chinese ethnic minority suffers at least some discrimination regardless of where location, and often does not have the same opportunities as the average Han Chinese.

Inequality at what cost?

China has tolerated its growing inequality in order to achieve the rapid rates of economic growth that is has experienced since the 1980s. The CCP’s fear is that once economic growth starts to slow, which grows more likely given the continuing financial and economic challenges of the west, then the unequal distribution of wealth at various levels will cause major social unrest. The Tiananmen Square incident of June 1989 was partly caused by high levels of income inequality and in reaction to high levels of inflation that were squeezing the living standards of the poorest in China. Beijing is wary of the possibility of the reoccurrence of such an event, especially given the recent events taking place in the Middle East in what has come to be known as the ‘Arab Spring’, itself partly driven by dissatisfaction with levels of inequality. Additionally, as the poorest provinces in China are generally those with the highest percentage of ethnic minorities, China fears that their social unrest may exacerbate feelings of resentment towards Beijing and stoke ethnic tensions within society. Violence directed towards Han Chinese has already occurred in several parts of Chin, notably among the Uyghurs of Xinjiang, the Tibetans in Lhasa, and the Hui in Henan.

Chinese intellectuals today debate whether economic growth at all costs should be tolerated. Many propose a more “socialist” or European model of social development, where the state shares some of the responsibility for ensuring that all its citizens reach a basic level of economic prosperity. This prosperity would be significantly aided by the re-creation of China’s health and pension systems, which were often commune-based and largely dismantled when China privatized many of its state-owned industries. Developing its national healthcare and pension systems would also help China shift its economy from being largely export driven to being one that relies on much greater domestic demand. Currently, the average Chinese citizen saves aggressively in anticipation of future healthcare and pension costs that will need to be self-funded. A first attempt at providing a very basic social security was launched in 1999 with China’s creation of the Minimum Living Standard Guarantee Scheme (Dibao) designed to aid those most in need in the form of a very basic welfare package. The income limit for becoming eligible to this however is incredibly low. In urban areas, the average level is just over 200 RMB ($30) per month, while for rural areas it is below 100 RMB ($15) per month.

Future Trends

The persistence of inequality in China today is a thorn in the side of the CCP. Having largely moved away from its communist ideological base, the CCP’s legitimacy is largely based on nationalism and the promise of economic prosperity. China is faced with the double challenge of not only ensuring that its economy continues to grow, but of trying to see that its wealth is shared out as equally as possible. The potential for friction in society – and the threat that might pose to the CCP – is implicitly acknowledged in Hu Jintao’s drive for a ‘harmonious society’, the principle tenet of his ideological musings. It is important to note that despite the rise in relative inequality, the absolute living standards for almost every single Chinese person have increased since the economic reforms were implemented. Since the reform era began, China has lifted around 400 million people out of absolute poverty, an achievement unmatched anywhere in the world and throughout human history. This should not be underestimated even as the problem of relative wealth disparity is, correctly, addressed as a pressing issue.

It is of course impossible for any nation to be completely equal and most developed countries have their own problems with unequal distribution of wealth. China, with its vast size, enormous population, and varied geography, will always struggle with inequality. Inequality persists throughout China. While it is true that the west is poorer than the east, there are pockets of abject poverty even in the richest provinces and rich parts in the poorest areas. From the Communist Party’s perspective, its key task is to prevent income inequality from rising to such levels that widespread social unrest threatens its control of power. As China’s wealth grows, and as it invests large parts of its enormous surplus within its own borders, more government initiatives are expected to be designed to develop the prosperity of provinces and sectors of society that lag behind the rest. Nevertheless, in the short term, income inequality will continue to increase as China’s rapid economic development lifts its population from poverty at varying rates. The mammoth task for the CCP will be to ensure that inequality doesn’t rise at a faster rate than GDP growth. While the living standards of the majority are being raised it is likely that increases in inequality will not prove perilous for the authority of the CCP, especially as much of this inequality is between areas that are thousands of miles apart. The next 30 years will prove very difficult for China to maintain the balance between consistent economic growth and raising the living standards of those at the very bottom of the income ladder, although this can be managed as long as China continues to move towards a domestic demand-led, and not export-driven, economy.

Water in China: A Thirsty Country

Introduction

paul prescott / Shutterstock.com

China faces severe water shortages. Its current water per capita is one quarter of the world average, yet its overall per capita usage is still low by international standards but this will increase over the coming decades. The water that China does have is often badly polluted and is inefficiently used. Moreover, China’s water is unequally distributed with the Yangtze River basin and areas to the south enjoying 80% of China’s naturally available water compared with just 20% in China’s north.

China’s water scarcity will challenge its future economic expansion. Already, agriculture, industry and China’s growing cities all compete for scarce water resources, as do China’s different regions. Decades-old economic priorities such as food self-sufficiency will be increasingly difficult to maintain because water used in industrial output creates more economic value than it does in agriculture. Water scarcity could also test China’s political stability. Increasing illness caused by polluted water is driving up healthcare costs and generating more internal dissent. In 2005, the Chinese government acknowledged that 50,000 environmentally related “mass incidents” (a euphemism for protests) occurred, many of which were sparked by water degradation.

Population, Ecology and Water Scarcity

Right from China’s earliest dynasties great attention was paid to agricultural productivity. The Chinese bureaucracy mobilized the Chinese masses to construct irrigation systems and to clear land. This created a feedback loop, where increased agricultural productivity led to a rise in population, requiring further hydro-engineering and agricultural innovation to maintain China’s swelling numbers. In this way, China has remained the world’s most populous country for thousands of years. Yet, until the 1978 market reforms, China remained a largely agrarian society. China never achieved sufficient per capita economic growth to drive down a natural reduction in the country’s birth rate. Instead, large families of many sons offered rural parents security both in terms of providing labor for farming and care in old age. After the establishment of the People’s Republic of China in 1949, peace and improvements in nutrition, sanitation and healthcare saw Chinese mortality rates plummet. Moreover, until 1970, Mao Zedong encouraged population growth. As a result, China’s population doubled in less than thirty years from approximately 550 million in 1950 to a little over 1 billion in 1982. China’s population stands at 1.35 billion today, and is expected to peak at between 1.4 and 1.5 billion by 2030.

Impact on the Hydrological Cycle

In order to feed its enormous population, since the 1950s, China has increased efforts to create new agricultural and grazing land through the clearing of forests, the filling of lakes, the draining of swamps and wetlands, and the creation of large irrigation projects. This process has impacted China’s hydrological cycle. When land is cleared of plant life through unsustainable farming and grazing methods, the local hydrological cycle is disrupted, and desiccation – the drying out of the environment – occurs. Instead of catching precipitation which then permeates the soil, areas that are deforested, over-grazed and over-farmed allow surface water to run immediately into streams, instead of returning repeatedly to the region as rain through the process of evapotranspiration. China’s areas of desert or deforested land have increased significantly since the 1950s. Today approximately 27%, around 2.5 million km², of China’s land is desert or suffering desertification, although China’s deserts have begun to shrink since 2005 due to a massive reforestation campaign launched by the government. In the north and northwest of China, it has been estimated that the average annual precipitation has decreased by one third between the 1950s and the 1980s; overall China has 350 billion m³ less water than it had at the start of the century, equivalent to the amount of water that flows through the mouth of the Mississippi River in nine months. Desertification and deforestation have also caused sediment levels to significantly increase in all of China’s river systems due to severe soil erosion. Soil erosion has forced Chinese peasants to constantly seek new, often less suitable, land for farming and animal husbandry, in what has become an environmentally destructive feedback cycle.

Water Scarcity

As China’s population has swelled over the millennia, its per capita water has decreased. China now has an estimated 2,029 m3 of water per capita per annum, one quarter the world’s average. This per capita water figure is expected to decline further as China’s population peaks. This water scarcity is exacerbated by China’s uneven water distribution. China’s precipitation patterns are heavily affected by the East Asian monsoonal climate. Its mountainous geography drains the monsoonal rains as they move from the southeast into the northwest of the continent. In 2000, for instance, southern China, the Yangtze River basin and areas to its south, received approximately 80% of China’s naturally available water, yet the areas supported 54% of its population, 35% of its arable land, and 55% of its GDP. Northern China collected only 20% of China’s water to maintain 46% of the population, 65% of the arable land and 45% of its GDP. In some northern areas, strains on water resources are even worse. Beijing’s and Tianjin’s Hai River basin, for instance, receives approximately 1.5% of China’s water to support 10% of its population and 11% of its arable land.

Approximately 400 of China’s cities currently face water shortages, and over 300 million people drink water contaminated with pollutants including arsenic, excessive fluoride, toxins from untreated factory wastewater, agricultural chemicals, leaching landfill waste and human sewage. Moreover, China’s per capita water footprint is growing. China will not only have more people competing for its finite water resources in the coming decades, but each person will individually demand more water. Today, China’s overall water footprint per capita is still about half that of the US, but is expected to grow by between 40% and 50% by 2030. Factors such as higher living standards, increasing urbanization and further industrialization are driving water demand. China’s rising wealth has meant, for instance, that its citizens are eating substantially more meat. The production of one kilogram of beef requires 600 liters of water compared with the 100 liters required for a kilogram of wheat. This shift in diet can be seen in China’s food footprint numbers. In 1961, China used 260 m³ of water per capita to grow food; by 2003 this figure had more than trebled to 860 m³.

Agricultural, Urbanization, Industrialization, Water Wastage

Currently, 62% of China’s water is used for agriculture, a sector which is responsible for approximately 13% of the country’s GDP. In the agricultural sector, demand for water for irrigation is currently about 400 billion m³, but this is projected to reach 665 billion m³ by 2030. Yet agriculture water usage is extremely unproductive, with 45% of agricultural water lost before it even reaches crops. Water used for industrial output is 70 times more productive in terms of financial value than that used in wheat production. As water becomes increasingly scarce, the agricultural sector risks losing water resources to industrial production, especially if China increases the price of water to better reflect its true scarcity.

China’s growing urbanization is also requiring more water per capita. 70% of Chinese citizens are projected to be living in cities by 2030, up from 51% today. This is significant because urban dwellers consume three times as much water and energy as rural residents. Between 2000 and 2010, for instance, the World Bank estimated that China’s urban water consumption increased by 60%. Moreover, it is estimated that 25% of China’s future electricity growth needed to power its cities will be generated by coal plants. Coal mining, processing, combustion and coal-to-chemical industries are responsible for 22% of the nation’s total water consumption, second only to agriculture. By 2020, the coal sector is expected to consume about 27% of China’s total water. Moreover, China’s urban water distribution networks are particularly leaky. These leaks equal 18% of total urban water supplies on average, or about 1.5% of China’s total water withdrawals.

Overall, the industrial sector uses 23% of China’s water. China’s major industrial water ValeStock / Shutterstock.com users are the metallurgy, timber processing, paper and pulp, petroleum and chemical industries. Water productivity in Chinese industry is also low by international standards. Only 40% of its industrially-used water is recycled, compared with up to 85% in developed countries. Indeed, China’s overall water productivity is poor, estimated to be $3.60 per m³, lower than the average of $4.80 per m³ for middle-income countries, and $35.80 per m³ for high-income countries. The one positive aspect of all of this inefficiency is that there is ample room for improvement with relatively simple measures.

Depletion of Aquifers and Lakes

Extensive irrigation has always been essential to China’s agricultural productivity. Indeed, massive irrigation works built during the Maoist era enabled food production to keep pace with the rapid population growth of the time. China draws on both its rivers and large underground aquifers to irrigate its crops. Irrigated land produces nearly 75% of China’s cereals and more than 90% of its cotton, fruits, vegetables and other agricultural commodities on around half of the farmlands throughout the country. Yet, according to the Ministry of Water Resources, China now uses as much as 60% of the water running in many of its rivers, including the Liao and Yellow Rivers, and as much as 90% of the Huai River. China has increasingly turned to aquifers and lakes to meet water demands no longer satisfied by rain and river water alone. Groundwater now provides potable water for nearly 70% of China’s population and irrigation for approximately 40% of its agricultural land. Nationally, groundwater usage has almost doubled since 1970, and now accounts for 20% of China’s total water usage.

Aquifers are especially important in China’s north, where farmers have been relying heavily on groundwater resources to increase agricultural yields. Yet China is now draining its aquifers at an unsustainable rate. At current rates of depletion, the World Bank estimates that China’s northern aquifers could effectively run dry in as little as 30 years. China’s northern megacities now rely on underground water sources for two-thirds of their needs. For example, in Hebei province, which surrounds Beijing, aquifer levels are dropping by approximately 3 meters annually, forcing the digging of ever deeper wells which increases the risk of both saltwater and arsenic intruding into the water supply, as well as increasing the likelihood of land subsidence. With aquifers and rivers suffering from overuse, lakes are also diminishing. The province of Hebei has already lost a staggering 969 of its 1052 lakes.

Water Pollution

Despite China’s efforts over the last three decades, water pollution has spread from the coastal to inland areas and from the surface to underground water resources. An estimated 70% of China’s rivers and lakes are now polluted. In 2009, 57% of the 7 monitored river basins had pollution levels of I-III, suitable for drinking, swimming, household use, and able to support aquatic life. 24% of China’s rivers had levels of IV-V, water unfit for swimming, but suitable for industrial purpose. 19% had V+, meaning that the water is considered useless, unfit for industry or agriculture and unsafe for human contact even after treatment. 23% of China’s key lakes and reservoirs had water grades of I-III, 42% IV-V and 35% V+. 2.3% of groundwater in 8 regions was rated I-II, 23.9% was graded III, and 73.8% ranked IV-V.

Only a year later (2010), party officials outlined their goals for the future in the 12th Five Year Plan, which aimed for 60% of water between grades I and III, with no more than 15% in the Grade V and V+ categories. As of 2013, 44.3% of the water in the Songhua River Basin was classified as Grade IV and below. In the Huai River and Hai River Basins, 40.4% and 60.9% of all water fell into the Grade IV or worse category, respectively. Though these numbers are still relatively high, they are on track with China’s goals set forth in the 12th Five Year Plan.

Township and village industrial enterprises, in particular, often do not treat their waste water. These small-scale enterprises have little environmental monitoring and are frequently engaged in all manner of heavily polluting production, such as the operation of paper mills, tanneries and breweries. Similarly, townships and villages often inadequately treat their domestic waste. About 80% of China’s 7500 most polluting factories are located on rivers, lakes, or in heavily populated areas. These factories frequently release untreated waste and chemicals into China’s waters either intentionally or by accident. A recent example was the 2012 cadmium spill in Guangxi which polluted an approximately 100 km stretch of the Longjiang River at a level of more than five times the official limit, contaminating water supplies for Liuzhou, a city of 3.2 million people. Cadmium is poisonous and can cause cancer. The same factories also release dangerous airborne pollutants that are absorbed into groundwater or contaminate rivers by way of urban runoff. Some of the most harmful are categorized as polycyclic aromatic hydrocarbons (PAHs), and an estimated 90% of water located in sources near Chinese cities is now dangerously polluted because of their presence.

Rural areas have also seen an increase in water pollution due to chemical pesticides and fertilizers seeping into groundwater sites. For millennia, China’s farmers produced agriculture through “organic” farming methods. Farmers collected every bit of organic waste to ferment for fertilizer. Nothing was wasted, and even human waste, or “night soil”, went into “honey buckets” to transport to the fields. Every winter and spring farmers dredged nearby rivers and canals to add sediment to the fertilizer. Particularly in the south, dense grass at the water’s edge was added to pig fodder, which, after being digested by the pigs, produced manure and helped keep the rivers and lakes clear from vegetation. The entire process of recycling was labor-intensive but efficient. The rivers and lakes remained relatively clean despite thousands of years of intensive farming.

Yet, since 1978, fertilizer applications in China have increased fivefold. In general, animal and human feces are no longer collected for fertilizer, and instead are discharged untreated into rivers. Chemical fertilizer runoff has significantly accelerated eutrophication of many of China’s lakes such as Dian Chi in Yunnan Province, Chao Hu in Anhui Province and Tai Hu in Hubei Province where algae blooms absorb a significant portion of the lake’s oxygen, choking off fish and other aquatic life. Large algae blooms also broke out right before the 2008 Olympics, forcing Beijing to launch a massive emergency clean-up to ensure the sailing events could go ahead as scheduled in Qingdao, in Shandong.

Economic and Health Cost

The World Bank estimated that China’s water crisis is reducing China’s GDP by pcruciatti / Shutterstock.com approximately 2.3% annually, with 1.3% attributable to water scarcity, and the other 1% caused by the cost of water pollution. These estimates do not include the costs of ecological deterioration caused from the drying up of lakes and rivers and from eutrophication. Nor do they reflect the economic cost of disease caused by water pollution, conservatively estimated at an additional 0.5% of GDP. In 2002, the WHO reported mortality from water-borne diarrhea-related illness in China at 108.4 per 100,000, compared with 11 per 100,000 in Vietnam and 5 per 100,000 in Thailand. In 2007, the OECD estimated that 30,000 rural children die each year from diarrhea because of water pollution. In China’s most polluted areas, water has also been blamed for the recent high rates of various health abnormalities including liver and stomach cancer, stunted growth, miscarriages and birth defects.

Regional and national food supply has also suffered due to water pollution. A study in Xingang Village in Jiangsu Province showed that rice yield dropped 77% from 9,750 kg per hectare to about 2,250 kg per hectare. The remaining crop is also of dubious quality, often showing signs of heavy metal leaching from polluted local water. In 2011, it was estimated that up to 10% of China’s rice crop might contain unsafe or nearly unsafe levels of cadmium as a result of widespread irrigation with cadmium-poisoned water.

China has also seen a stunning rise in cancer rates, often localized to certain villages located near areas of heavy industrial activity, where the air and water are both extremely polluted. These villages have become colloquially known as Aizheng Cun, which literally translates as “Cancer Village.” In 2010, the annual death rate for Chinese citizens as a result of blood, bone, breast, liver, and lung cancers was estimated to be 1.2 million lives lost per year. By 2014, that figure doubled with The Lancet Oncology estimating that 2.4 million premature deaths in China as a result of various cancers.

Sanitation also remains a key issue with regard to China’s water supply. In 2008, 327 million Chinese did not have direct plumbing access to drinking water and 535 million were without properly sanitized water. This led to an estimated 62,800 deaths, mostly affecting young children. By 2011, the number of people lacking proper sanitation decreased to 471 million, but the number of Chinese lacking piped-in drinking water increased to 401 million. This sanitation improvement comes on the heels of annual US$10.8 billion government-driven investments from 2006-2010 in domestic sanitation. Water-borne disease, however, is still a major economic drain for China, costing around US$11 billion annually.

Flooding – Yellow River and Yangtze River

Not only are desertification and deforestation exacerbating China’s water scarcity, they are also aggravating China’s flooding challenges. The Chinese Minister of Water Resources, Chen Lei estimated in 2007 that China has lost 2% of national GDP annually to flooding since 1990, and a recent study placed the total costs of floods from 2000 to 2012 at 105 billion RMB annually (US $17 billion). Flooding has challenged Chinese rulers for millennia. From 602 BCE to 1938 AD it is estimated that major collapses of Yellow River dikes occurred once every two or three years. Then, every hundred years or so, the river would change its course. Many of the resulting floods were some of the deadliest natural disasters ever recorded. For millennia the Chinese constructed dikes along the lower reaches of the Yellow River trying to contain its torrents, yet constant ecological destruction along the upper reaches increased erosion which intensified river silting. The silting raised the river bed above the countryside. This “suspended” river greatly increased flood damage when the river inevitably breached its dykes. After 1949, the CCP built almost 3000 dams on the Yellow River, and heavily reinforced its levees and embankments. These hydro-engineering projects involved the equivalent of 500 million workdays and 1.4 billion m³ of reinforced concrete – enough to build 13 Great Walls. Yet many of the Yellow River’s dams have fallen short of physical and economic targets, and have resulted in huge losses of forest lands, wildlife habitat and aquatic biodiversity. Global warming has also increased evaporation at many of the dam sites.

Similarly, parts of the Yangtze River have flooded continually for millennia. Yet, as deforestation and reclamation of land has increased, floods have become more frequent and more destructive. The CCP attempted to solve the flooding by increasing the height of 3600km of embankments and more than 30,000km of levies. The work required more than 4 billion m³ of dirt and stone, or enough material to put a wall around the globe three times. Yet these raised structures could not offset the loss of water absorption capacity caused by the rapid deforestation and agricultural land reclamation that occurred during the same period. As a result, the Yangtze experienced a series of significant floods in 1980, 1981, 1983, 1991 and 1996. Then in June 1998, China suffered one of its worst floods in 40 years, leaving 3,700 people dead, 15 million homeless and causing $26 billion of economic damages. The reinforced embankments and levees proved largely ineffective, with approximately 9,000 of them collapsing. As well as providing hydropower and improved navigation, the controversial Three Gorges Dam was built in large part to control the Yangtze’s flooding, although many scientists believe that the Yangtze is still vulnerable. Additionally, after the 1998 flood, China began to place greater importance on the role of ecology in flood prevention, and has begun an extensive campaign of reforestation and forest preservation.

Drought

Because of the variability of the monsoonal rains, like flooding, drought has plagued the country for millennia. Yet desiccation in many areas has significantly increased China’s drought challenges. Overall, droughts have become more severe, prolonged and frequent during the past 57 years, especially for northeastern and central China. China has been essentially self-sufficient in grain for decades. This self-sufficiency camouflages the fact that China produces one-sixth of the world’s wheat output and one-fifth of global corn. China is thus enormously important to the world’s food supply. If drought forces China to import large quantities of food, it significantly impacts world food prices. Yet, in every year since 2005, drought placed China’s grain crops at risk, and the government was forced to spend billions of dollars digging wells and cloud seeding to encourage rain. Most recently, in 2010-2011, northern China suffered its worst drought in 60 years, impacting most of China’s wheat producing regions. At its peak, it is estimated that 36% of China’s northern wheat fields were affected, and that 2.57 million people and 2.79 million livestock suffered from a lack of water. The water shortages also affected around 161 million people, with an economic cost estimated at $2.8 billion.

Drought has not been restricted to China’s drier north. In western Sichuan, for example, rapid deforestation caused Sichuan’s forest cover to fall from 3.6 million hectares in in 1985 to 2.34 million hectares in 1995. In the 1950s, serious droughts hit Sichuan about once every three years. In the 1960s, this became once every two years and by the 1980s, drought troubled Sichuan counties annually. In 2010, more than 20 million people in Yunnan, Guangxi, Guizhou, Sichuan and Chongqing were left without adequate drinking water and a 2011 Sichuan drought affected almost 8 million people.

Guangxi provides another of the many examples throughout the country where drought conditions have worsened in recent decades. Historians have written that from 1618-1943, major droughts hit the region once every 33 years. From 1946 to 1972, the interval fell to every six years, and in the 1980s, it fell to every two years. There were four major droughts in the three-year period from 1989 to 1991. Since 2000, drought has plagued Guangxi annually. In 2004, for instance, 1100 Guangxi reservoirs went dry, and hydropower generation was cut dramatically. In 2007, one million residents in Guangxi and 250,000 in Guangdong faced water shortages during the worst regional drought in more than 50 years. In 2009, Guangxi, which produces 60% of China’s sugar cane, had a 10% drop in its production due to drought conditions. In 2010, 12 of the 14 cities in Guangxi were affected by water shortages.

Climate Change

How climate change will impact China’s water scarcity is still being studied. However, global warming is having an undeniable effect on the Qinghai-Tibetan Plateau, which is the source of both the Yangtze and Yellow Rivers. An estimated 80% of Tibet’s 46,377 glaciers are now melting more quickly than originally thought, at an average rate of 7% per year. Himalayan glaciers release water steadily throughout the year, most critically during the hot, dry sunny periods when water downstream is most needed. Complete disappearance of the glaciers could eventually cause China’s Yellow River to flow only during the rainy season. Greater melting rates could also increase short-term runoff from the plateau, worsening soil erosion which in turn could lead to greater desertification. Already, recent glacial retreat and desiccation has impacted the local ecosystem. Over a third of the Tibetan grasslands has transformed into semi-desert conditions, which has forced approximately 700,000 Tibetan nomads to abandon animal husbandry. Global warming also seems to be aggravating the evaporation of Qinghai-Tibetan lakes and wetlands.

Power Outages and Reduced River Navigability

China’s water scarcity has also resulted in lower water levels of many of China’s major river systems. For instance, Chinese researchers have discovered that the volume of water entering the Yangtze River at its source on the Tibetan plateau has dropped by 15% over the last four decades. Persistent low levels in China’s rivers mean that the country will be challenged by power outages due to inadequate flow through its hydropower dams. Hydropower accounts for approximately 22% of China’s total installed capacity. It is estimated that the lack of water to run hydropower dams has cut hydroelectric power production by 20% and China may be forced to burn 1 million more metric tons of coal a week to cover the shortfall.

Low levels of water also mean that parts of China’s rivers will continue to become periodically unnavigable, disrupting inland shipping routes. In May 2011, the water level of the Yangtze was so low that officials closed a section of the river from Wuhan to Yueyang. More than 60% of goods transported on inland rivers in China travel down the Yangtze, with shipping volumes at 910 million tons in 2010.

Trends

Serious water scarcity looms in China’s future. This scarcity is likely to increase conflict and competition between regions, sectors of the economy and between urban and rural residents. It will also raise tensions between the government and parts of society that lack access to adequate, clean water sources. Moreover, the Qinghai-Tibetan Plateau is a source of rivers that reach India, Bangladesh, Burma, Bhutan, Nepal, Cambodia, Pakistan, Laos, Thailand and Vietnam. China’s damming, polluting, and use of international rivers is likely to increase tensions with these countries. Many of these countries, especially India, are already facing their own severe water crisis, which will only be exacerbated if China diverts river water that needs to be shared internationally. Additionally, China’s rapid industrialization and poor waste treatment systems now threatens to export China’s pollution and water-borne disease to its neighbors downstream. Political relations could be further stressed if water shortages cause mass migrations of people. In fact, some analysts suggest that the so-called “oil wars” of the 20th century could be replaced by “water wars” in the 21st. China’s food supply is increasingly vulnerable to water shortages. In the future, it is likely that China will need to turn to global food sources to meet its future nutritional needs. This in turn will increase food prices around the world.

China’s immediate water solution is to use water more conservatively, and to improve pollution control. Historically, China has solved growing water demands through the construction of massive hydro-engineering projects such as theThree Gorges Dam and the South-North Water Diversion Project. In the future, China will increasingly need to solve its water deficit through ecological conservation, pollution management, more efficient water usage, and a redistribution of economic output by raising the price of water to reflect its scarcity and true economic value.

China’s Geography: The Physical Story

Introduction

With a total area of nearly 9,600,000 square kilometers, China’s landmass is slightly smaller than that of Europe. It stretches about 5,000 km from east to west, and about 5,500 km from north to south. China has land borders with 14 nations including Afghanistan, Bhutan, Myanmar, India, Kazakhstan, Kyrgyzstan, Laos, Mongolia, Nepal, North Korea, Pakistan, Russia, Tajikistan, and Vietnam.

Mountains, hills, and highlands cover about 66 percent of the nation’s territory. China’s surface slopes down in steps, starting from the Tibet plateau at 4000 m. China’s second geographical step averages 1-2000m and includes the Mongolia, Loess, and the Yunnan-Guizhou plateaus, and the Tarim, Junggar and Sichuan Basins. The third step, with an average elevation of 500- 1000 m, begins roughly at the edge of the Greater Hinggan, Taihang, Wushan and Xuefeng mountain ranges, and continues east to the coast.

Descending these geographical steps, China’s major river systems wind their way from west to east. Its largest river systems include the Yellow River in the north, the Yangtze River in central China, and the Pearl River in the south, all of which flow from the higher plateaus to the eastern Oceans. Along China’s east runs a 14,500 km coast.

Much as any other nation, the development and the history of the Chinese civilization have been profoundly influenced by its geographical setting. As early as 400,000 BCE, cave dwellers lived in China. Beginning in approximately 8000 BCE, people in north and central China began domesticating animals and growing food, especially millet in the Yellow River valley of the north and rice in the Yangtze River valley to the south. A warming climate aided agricultural innovation. The surplus food production allowed more populous and complex societies to evolve. By 5000 to 4000 BCE Neolithic settlements were scattered throughout China. By 2000 BCE these village settlements saw people begin to specialize in different kinds of productive occupations. By 2200 BCE, China’s first dynasty was formed. By 1500 BCE, the Han Chinese had developed a sophisticated civilization with character writing, bronze technology, the world’s most productive agriculture, walled cities and towns, and a powerful, national army.

Once China was established, it mountains, deserts, empty steppe lands and uninviting coast provided natural barriers that helped China to maintain remarkable continuity in language, cultural values, and social and political institutions, making China the world’s longest continuing civilization. China has historically been an inward looking country, content to develop within the confines of its vast continent. That said, it has also been shaped by a continual stream of outside influences, such as the arrival of Buddhism from India, the periodic invasion by Mongols from the north, and the trade of goods, most famously along the commerce networks of the renowned Silk Road.

China’s Western Lands

The western land of China is characterized by high plateaus and multiple mountain ranges which are broken by vast basins and deserts. This land is arid and cold, and suffers from constant drought. The lack of water has limited the number of people living in the region. Only 6% of China’s total population lives in the western half of the country.

Most of China’s mountains, including its five main mountain ranges, trend west-east. In southwestern China, the Himalayas and the Kunlun Mountains enclose the Tibet Plateau, which encompasses most of Tibet Autonomous Region. The Tibet Plateau with an area of 2.5 million kilometers, is China’s highest and largest plateau, about four times the size of France. Mount Everest is part of the Himalayan range and is located on the China-Nepal border. The Gangdise range parallels the Himalayas to its north. The Tien range crosses between the massive Tarim Basin to the south and the Junggar Basin to the north. Rich deposits of coal, oil, and metallic ores lie in the Tien Shan area. Between these two basins lies Turpan Pendi, which at 154 m below sea level, is the lowest point in China and the second lowest place in the world after the Dead Sea.

To the north of the Tibetan Plateau lies the Gobi and Taklamakan deserts, which stretch from the extreme northwest eastwards through Mongolia. The Gobi is the largest desert in Asia, covering parts of northern and northwestern China and Mongolia. The Gobi was part of the Mongol Empire and was traversed in part by the ancient Silk Roads. It is a cold desert for much of the year, and it is not uncommon to see frost on its dunes. Northeast of the Gobi, the Heilongjiang or Black Dragon River flows for 3,101 kilometers.

South of the Gobi lies the Inner Mongolian Plateau, an average of 1,000 m above sea level. The Yin mountain range, averaging elevations of 1,400 m, extends east-west through the plateau’s center. To its south is the largest loess plateau in the world, covering 600,000 km. Loess is a yellowish soil originating from the Inner Mongolian deserts. The soil is carried easily on the wind, and through the centuries, it has choked the Yellow River with silt. The Loess sand also plagues Beijing and its surrounding areas with dust storms, which turn the sky yellowish-gray and force people indoors or into protective gear. A March 2011 sandstorm, for instance, affected about 250 million people over an 808,000 sq. km area. China is planting thousands of acres of vegetation to stop spreading desertification, but the work will take decades to finish.

Along an arc that roughly outlines the southern edge of Inner Mongolia, the Great Wall of China extends approximately 8850 km, including 6260 km of actual wall, as well as trenches and natural defensive barriers such as hills and rivers. The wall was built to protect the northern borders of the Chinese empire against invasions by various nomadic tribes.

Eastern China

The eastern part of China is divided north-south by the Qinling Mountains, an extension of the Kunlun Mountains. This boundary is both physiographic and cultural. To its north flows the Yellow River, travelling through the North China Plain to the Yellow Sea. Home of Beijing, the Yellow River basin is called the “Cradle of Chinese Civilization.” It was the most prosperous region of early China, and has been the center of Chinese expansion and influence since ancient times. The North China Plain is vulnerable both to flooding and earthquakes. Over the last 3000-4000 years, the Yellow River has flooded over 1500 times often with catastrophic effect. For example in 1931, the flooding of the Yellow River, in combination with the Yangtze and Huai rivers, is estimated to have caused between 1 and 4 million deaths.

South of the Qinling mountain range are the heavily populated and exceedingly developed lower and middle plains of the Yangtze River and, on its western reaches, the Sichuan Basin. Crossing 6,300 km through the heart of the country, the Yangtze is China’s longest and most important waterway. It is navigable over much of its length, and has a vast hydroelectric potential. The Three Gorges Dam, for instance, spans the Yangtze at the town of Sandouping in Hubei province. Connecting the Yellow and Yangtze Rivers is the 1776 km long Grand Canal, one of the greatest engineering projects in China, and the longest artificial river in the world. Constructed between the 5th century BC and the 7th century AD, it is the only major Chinese waterway running from north to south.

Second only to the Qinling range as an internal boundary is the Nanling mountains, the southernmost of the east-west mountain ranges. South of the Nanling mountains is the Pearl River and its many tributaries which all flow into the Pearl River Delta. The Pearl River – used as a catchment term to refer to the watersheds of the Xi, Bei, and Dong (West, North and East) Rivers – is China’s third longest river after the Yangtze and Yellow Rivers and second largest by volume after the Yangtze. The Pearl River takes its name from all the Pearl colored shells which lie at the bottom of the river in the section which flows through the city of Guangzhou.

West of the mountains of the Pearl River, the Yunnan-Guizhou Plateau rises in two steps toward the mountain regions of the eastern Tibet Plateau. In Yunnan province, the plateau averages 2000m is characterized mountain peaks as high as 3700 m. In the Guizhou range, the plateau averages 1200 m in height, and is characterized by rolling hills, deep river-carved gorges and mountains marked with geological faults. Karsts – distinctive geological features caused by water eroding the limestone underlying the plateau- dominate the landscape. Such karst features include sinkholes, caves and natural bridges, and large underwater aquifers. The Yunnan-Guizhou plateau is the source of the Yangtze and Yellow Rivers.

In spite of the 14,500 km coastline fringed with offshore islands, China has traditionally oriented itself not toward the sea but inland, developing as an imperial power whose center lay in the middle and lower reaches of the Yellow River on the northern plains. The southern part of the coast is rugged and mountainous so that its good harbors provide poor access to the inland regions. The north coast is low and swampy. The Yellow, East China, and South China Seas are all part of the larger Pacific Ocean.

Arable Land

Because of the mountainous and arid nature of its geography, only about 15% of China’s total land area is suitable for farming, almost all of which is under plow. The lack of and the nature of its arable land has also led to one of the most labor-intensive agricultural systems in the world. Farming in the arid north along the Yellow River has required much coordinated effort, both to create irrigation systems and to build dykes to prevent the Yellow River from constantly flooding. Similarly, in the south, rice cultivation has always been extremely labor-demanding. From creating the clay-bottomed rice plots that trap water, to laying the muddy ground into which the pre-grown rice shoots are planted, to the intricate fertilization and pest removal that each shoot requires, to the rapid harvest of the ripe rice and quick re-planting to ensure two and sometimes three crops per year, wet rice production in the south is one of the most labor intensive crops in the world. Rice cultivation is also one of the most efficient in the numbers of people it can sustain. In fact, for much of its history, China has been one of the most populous countries of the world.

It has been argued that the demands of China’s irrigation, water and agricultural management have caused the Chinese to be a collective minded rather than individualistic people. What is true is that the Chinese have historically shown a great ability to organize its people to undertake tasks on a large scale such as the building of roads, dams, canals and defensive walls as well as the large scale production of iron and porcelain. It has also been argued that the nature of rice agriculture has caused China to develop a tradition and culture of hard work which is manifest in China’s work ethic today. What is indeed true is that the Chinese rice farmer works significantly more hours per year than a farmer sowing other crops such as wheat and corn.

China’s most important food crops are rice and wheat. Due to its high water and warmth requirements, most of China’s rice crops are planted in the south. This region also produces tea, sugarcane, and the mulberry leaves which feed the silkworms. Wheat is the chief crop of the north. Other northern crops include millet, maize, kaoliang (sorghum) and soya beans. In a few areas, cotton and peanuts are grown. Cattle, sheep, and horse ranching are limited to the grasslands of Inner Mongolia, Xinjiang, and Tibet. Ranching is rare in China proper because there are not the wide open plains necessary to maintain large herds. The optimal use of land is for cultivation of crops and animal husbandry, and most farmers keep chickens, ducks and pigs. This land constraint explains why there is a large-co-habitation between foul, swine and people in China, and why it has proved to be an effective breeding ground for such viruses as SARS and Swine flu.

China is currently losing arable land due to desertification and rapid urbanization. Currently, approximately 400 million people live in towns and cities, and China now has over 160 cities with populations greater than 1 million people, the largest being Shanghai and Beijing. By 2050, China expects 1.1 billion of its citizens to be in urban settings.

Climate

China’s climate is as varied as its topography. China’s climates range from the cold-temperate north to the tropical south, with subarctic-like temperatures in the Himalayan Mountains. In the winter, there is little rain or snow anywhere in China. In the summer, the warming land draws tropical sea air saturated with moisture into southern China. As the air encounters mountains and cooler inland air masses, rains fall plentifully in southern China. As the summer monsoon moves northwest, it brings less rain, meaning that overall China’s north is dry and its south is verdant. In bad years, the monsoons are too weak to cross into the Yellow River Valley, and become stuck over the central mountain belts, causing drought in the north and flooding in the south. In 2011, for instance, large floods in Southern China killed 132 people and displaced 800,000.

Nevertheless, overall, China is an arid country and is facing an increasingly severe water crisis. In 1997, for instance, the downstream stretches of the Yellow River ran dry for 226 days. In a project reminiscent of the Grand Canal, China has plans to build a vast new aqueduct – the South-North Water Diversion Project – which will divert at least six trillion gallons of water each year from the Yangtze River to satisfy the water needs of the North China Plain. The project has been likened to diverting water from the Mississippi River in the United States to meet the water requirements of Boston, Washington and New York and is projected to cost $62 billion, twice the cost of the Three Gorges Dam, the world’s largest hydroelectric project.

People

Around 1.3 billion people, or approximately a fifth of the world’s population, live in China. The Han Chinese, the native Chinese-speaking people, comprise approximately 90% of the population. 55 different ethnic groups, including the Uighurs, Mongols, and Tibetans account for the remaining 10%. China has seven large language groups each of which contain hundreds of dialects. Mandarin, based on the Beijing dialect, is China’s common language, and can be spoken by most Chinese people who have completed primary education.

Although the Communist regime has discouraged the practice of religion, temples and pagodas are found in most Chinese cities. For millennia, Chinese life has been influenced by the teachings of Confucianism, China’s major belief system. Buddhism and Taoism are also significant religions in China, and Islam is practiced by many of China’s ethnic minorities.

China’s Geography Today

The geography of China today has been altered over thousands of years by human habitation. The cleverness that enabled the Chinese to to support a population that exceeded 100 million people as early as the 12th century has extracted a real ecological toll on the country. One of the great tests facing China today is whether it can protect its natural resources during its current rapid development.

At the heart of this challenge is China’s scarcity of water. With 20% of the world’s population, but only 7% of global water resources, China faces severe water challenges. Mainland China has a per capita share of water of 2700 m³ per day, or one quarter of the world’s average. Moreover, the area south of the Yangtze River, which accounts for only 37% of China’s physical land, has 81% of China’s total water supply, while the 63% of land north of the Yangtze has only 19% of China’s water. Northern water demand is depleting underground aquifers. Drilling deeper to gain new water access has caused naturally occurring arsenic pockets to be reached, increasing the presence of arsenic in some water supplies. The World Bank predicts that by as early 2020, there may well be as many as 30 million environmental refugees within China due to lack of water and desertification.

The fresh water that China does have is often heavily polluted. 90% of the city’s groundwater and 75% of rivers and lakes are contaminated, and it is estimated that 700 million people drink polluted water daily. Water pollution occurs from industrial and municipal emissions, pesticides and fertilizers, and acid rain. Additionally, industrial pollution incidents, such as Songhua River toxic chemical spill in November 2005, have become more common.

The diversion to China of more of the water resources of major trans boundary rivers such as the Brahmaputra River and the Mekong River, risks being an increasing source of tension between China and countries such as Vietnam, Laos, Cambodia, Thailand, India and Bangladesh. For instance, China has built two dams on the Mekong, and has plans to build three more, inciting anger in Vietnam, Laos, Cambodia and Thailand. In the book Tibet’s Waters Will Save China, Chinese ex-officials have looked at ways for China to keep more of the Brahmaputra River to meet China’s growing water needs.

Another water related issue is China’s rapid building of dams to capture its hydro-electrical potential. Projects such as the Three Gorges Dam have not only raised environmental concerns as ecosystems are disrupted, but they have caused increased social unrest as millions of people are uprooted, sometimes without fair compensation. Environmental and social concerns around dam building will remain key points of debate in China in the near future.

There is a high correlation between the fertility and resources of its various areas and the wealth of its populace. Most of the wealthiest Chinese live in China’s southeast, where water is abundant, where as many as two to three rice crops can be harvested each year, and where easy access to export markets caused the region to lead China’s re-integration into the global economy. Similarly, the east coast of China is wealthier than its hinterland as it has better access to global trade. The poorest Chinese live in the arid north-west where deserts, mountains, and high-elevation plateaus prevail. Increasing inequality, caused in no small part by China’s geographical diversity, is an important concern for Communist party leaders. Growing social discontent at the increasing difference of wealth between regions and between people is a real risk to the Communist Party’s control of power.

Tectonically, China remains one of the most active seismic regions of the world. The country has a long history of being hit by deadly earthquakes. The largest earthquake occurred in 1556, where it was estimated that over 800,000 people died. Since 2005, China has experienced four deadly earthquakes in 2011, 2010, 2008 and 2005. According to official figures, the 2008 Sichuan earthquake killed over 69,000 people, and left almost 5 million people homeless. These earthquakes will continue to generate debate not only about Chinese construction standards and Chinese compliance with building codes, but also about the quality of China’s public health care system. Many of the 2008 Sichuan victims, for instance, had little or no health insurance, and poor access to healthcare facilities.

Flooding will also remain an issue for China. The summer monsoon draws tropical sea air saturated with moisture into southern China. In bad years, the summer monsoons become stuck over China’s central mountain belts and fail to reach the Yellow River Valley, causing drought in the north and flooding in the south. In 2011 it was estimated that floods caused $1.2 billion in losses, disrupted the lives of approximately 5.7 million people and damaged or destroyed more than 7000 homes. Areas most vulnerable to flooding include Zhejiang, Sichuan, Chongqing, Hubei, Anhui, Jiangxi, Hunan and Guizhou.

Agriculture and Food Security: A Long-Term Priority

Introduction

Ensuring food security in China has been both a priority and a challenge for Chinese leaders throughout the ages. With China currently supporting 20% of the world’s population on approximately 10% of the world’s arable land, today is no exception. Historically, China has met its food needs through a policy of agricultural self-sufficiency. China continues this policy of grain independence today. This policy of grain self-reliance is driven in part because China’s leaders continue to distrust the intentions of other nations, particularly as China’s rising power status threatens to disrupt the existing international order. Drawing lessons from history, today’s leadership believes it is better not to risk being vulnerable to food markets outside of its control, or to chance having food be used as a weapon against it.

That said, China’s ability to maintain continued growth in agricultural output is under threat unless there is further reform in the agricultural sector. Increased urbanization, plateauing yields, water shortages, small farm sizes and uncertain property laws are all making it difficult for China to continue to increase agricultural production. China’s 12th Five Year Plan (2011-2015) recognizes these challenges. Investing in hybrid seed research, repairing irrigation infrastructure, reclaiming rural land that has been lost to environmental degradation, and improving land contract law have all been stated as clear priorities. The plan also recognizes the continued need to invest in rural areas of the country, so that China’s remaining farmers can earn a reasonable living and adequately invest in their children’s future within and beyond the farm sector. What China’s 12th Five Year Plan does not discuss is its growing agricultural footprint in Africa. To date, China has developed agricultural aid projects in more than 40 African countries and recently large Chinese agricultural companies have been employed to help sustain Sino-African agricultural aid initiatives.

China’s Agriculture under Mao Zedong

Paddy Field Plougher near Inle Lake Myanmar (Burma)

When the PRC was founded in 1949 its new leaders continued to support a policy of agricultural self-reliance. This agricultural policy was driven by Mao Zedong’s view that the post-World War II order, with its corresponding American ascendancy, was potentially aggressive and imperialistic. Under this view dependency on grain imports risked making China vulnerable to having its food needs being turned into a weapon against it. In addition, Mao wished to use his country’s limited foreign exchange resources to purchase industrial plant and equipment rather than food, aiming for rapid industrialization. Indeed, until the famine caused by the Great Leap Forward (1958-1961), China exported grain to the Soviet Union in order to purchase plant and heavy equipment, at the expense of providing adequate per capita calories for its citizens at home.

Agriculture thus became the basis on which China’s planned economy was built. As China transitioned to a planned economy, the Communist planners began to under-price farm products relative to heavy industrial goods. This was because the planners were trying to ensure that the industrial sector produced high profits which could be plowed back into industry. To keep industrial profits high, costs had to be kept low; the most easily affected cost was labor. In order keep wages low, food needed to be cheap. Thus, farming became the key to the success of the entire Chinese planned economy. To achieve China’s goals, soon after he took power in 1949, Mao orchestrated the largest act of expropriation in world history. Approximately 200 million acres of land were taken from wealthy landowners and redistributed to nearly every peasant family in China. An estimated two million landlords lost their estates, sometimes through violence and almost never with compensation. Mao soon undercut this mass creation of private land ownership by implementing socialist policies of collective agriculture. The launch of the First Five Year Plan in 1953 saw farmers organized into cooperatives where they pooled their land and shared the proceeds. Under the collective structure, each farmer kept title to his land and was paid both labor wages and a dividend based on the value of the land contributed to the collective. After some success under the cooperative model, Mao began to move farmers into communes in 1958 in order to gain greater control of agricultural output. Mao believed that communes would generate greater farm output as it allowed an increased usage of irrigation and mechanization. Surplus farm labor could be redeployed into the rural and urban industrial sectors. Healthcare and education for the rural citizens could be more easily delivered. Just as importantly, communes would be an effective platform for mass political indoctrination. Mao’s communes pursued a “grain first policy” in which basic crops such as rice, wheat, and corn were planted regardless of the suitability of the soil and other conditions. The shift to communes eliminated household farming, except on small family plots, and all land ownership transferred to the state.

As a result of Mao’s policies, from 1952 to 1978, China increased industrial production as a percentage of national income from 19.5% to 49.4%. Grain production rose by 86%, an average annual increase of 2.5%. However, grain production increased at a rate similar to population growth, meaning that average grain output per capita was little change during this period. China also increased the production of cash crops by 16%. Up until 1960, China exported grain, peaking at 5 million tons in 1958. After the famine of the Great Leap Forward, China began to import grain, yet these imports averaged 1.6% of total consumption, meaning that China was almost completely self-sufficient in food under the planned economy.

However, these numbers are deceptive. Much of Mao’s industrial development was inefficient. Poor economies of scale, inadequate transport, and poorly skilled labor meant that China’s huge industrial investment generally failed to effectively build upon China’s existing industrial base, although its development of human capital skills and rudimentary infrastructure did lay the foundations for broader industrialization during the Reform Era. Throughout the socialist period, Chinese consumers remained on strictly rationed diets consisting primarily of coarse grains. Most consumers were deprived of daily access to cooking oil, sugar, meat, and vegetables for extended periods. In the 1970s, despite increases in grain production, urban residents ate an average of 2,328 calories per day, while rural intake was even lower at 2,100 calories daily. Average grain output per capita remained virtually unchanged and the absolute poverty rate hovered between 30 and 40%.

The primary weakness of communes was the absence of incentives. Farmers did not keep produce from their lands, which undermined their work effort. Instead, commune members were given work points based on particular tasks; these points were converted to grain and cash pay-outs at the end of each crop year. Free riding and an inability to monitor agricultural labor became endemic. Output also suffered because decision-making was concentrated in the hands of collective leaders who themselves were frequently following dictates from above, stifling any prospect for innovation. The pricing during this era also did little to encourage the efficient production or allocation of goods and services. Additionally, agricultural inputs such as fertilizer were in constant short supply. Because of the hukou housing registration system (which, while more relaxed, remains in force today), farm labor had no opportunity to move from agriculture to industry. This entrapment of Chinese villagers effectively designated them as second-class citizens.

Agriculture during the Reform Era

After 1978, a series of reforms was introduced into the rural sector to improve its economic performance. One step was to de-collectivize Chinese farmers into what was termed the Household Responsibility System (jiating lianchan chengbao zerenzhi), where the government leased agricultural land to households. The government then raised the prices that farmers would receive for any farm output they produced above mandatory quota deliveries, by 41% for grain and by around 50% for cash crops. Initially, the state purchased all grain sold by farmers above quotas. Eventually, private agricultural markets were re-established. Greater freedom of choice was allowed in terms of the types of crops cultivated. Fertilizer and new high-yield seed usage became more widespread. The result was a surge in agricultural output. Grain output swelled from 304.8 million tons in 1978 to 501.5 million tons in 2007. This growth reflected a significant rise in crop yields as grain sown area decreased from 120.6 million hectares in 1978 to 101.6 million in 2004. Additionally, agricultural output became significantly more diversified as farmers moved into labor-intensive cash crops such as aquaculture, cotton, edible oils, fruits and vegetables. Between 1978 and 2007, for instance, crop farming went from 80% of agricultural gross value output to 50.4%, while animal husbandry and fisheries increased from 16.6% to 42.1%. Between 1990 and 2004, China’s vegetable output expanded so quickly that China added the equivalent of California’s vegetable industry every two years, and orchards now cover over 5% of China’s farmed area, double the share of any other major agricultural nation. Grain prices also fell in real terms. Between the late 1970s, maize prices decreased 33% and wheat 45%. Coupled with rising incomes, these decreases meant that grain, as a percentage of rural and urban household consumption, fell from 40% and 20% respectively in the late 1970s to about 14% and 3% in 2004. Households also began to consume a more varied diet adding meat, poultry, fish, eggs and dairy produce. China now produces in excess of 3,000 calories per capita per day. Moreover, the government no longer plays a significant role in agricultural production. Aside from restrictions on land ownership, China today has one of the least distorted domestic agricultural economies in the world. The majority of grains, oilseeds, and fiber crops, and all horticultural and livestock products are sold to small private traders who compete in efficient and integrated markets with minimal regulation.

Maintaining Grain Yields in the Future

Throughout this period of reform, China maintained its policy of grain independence, never importing more than 5% of its grain needs. Maintaining this independence in the future, however, will become increasingly difficult. With 20% of the world’s population on approximately 10% of its arable land, China does not have a comparative advantage in land intensive products, such as grain. Furthermore, the amount of China’s arable land is continuing to shrink due to rapid urbanization and environmental problems such as flooding, soil erosion and desertification. Moreover, China’s population will continue to rise until around 2030. It is estimated that by 2050, the total demand for arable land will outstrip supply by more than 12%.

Additionally, part of the reason that China achieved such high grain production over the last two decades was yield improvements driven by the use of new high-grade seed varieties and by massive inputs of chemical fertilizer. Yet further benefits from these inputs are beginning to diminish. In 1975, total fertilizer usage was 5.5 million tons, but this rose to 47.7 million tons by 2005. China’s per hectare fertilizer usage was second only to Japan in the 1990s. Fertilizer saturation is such that previously good or excellent soils are cresting, hardening and becoming devoid of organic material such that further application of fertilizers is leading to diminishing crop yields as well as causing considerable environmental problems. Yield benefits from the extensive use of plastic are also plateauing. Finally, large-scale deforestation has led to soil erosion.

Water shortages and water pollution may also limit future yields unless China is able to implement significant reforms in its water management. China’s freshwater resources of 2304 m³ per capita are less than one third of the world average. Water shortages are expected to worsen as current water demand is still relatively low at 461 m³ per capita, compared with the world average of 645 m³, but this is projected to reach 665 billion m³ by 2030. Water shortages will be worse in the arid and semi-arid areas in China’s northern plain from which much of the future grain output growth will be generated. In addition to water shortages, problems with irrigation system will also stymie yield growth. During the Mao-era, irrigated area tripled. Since de-collectivization, the irrigation system has deteriorated. Additionally, with the reversion to family farming, control of the irrigation system has fragmented, and it is harder to mobilize mass labor for maintenance and construction. The introduction of water fees in the 1980s was designed to encourage more efficient water usage, but the fees were not sufficiently high to have the desired effect. This remains a problem today and increasing water charges is an essential part of dealing with China’s water shortages.

Currently, 62% of China’s water is used for agriculture, a sector which is responsible for approximately 13% of the country’s GDP. Yet agriculture water usage is extremely unproductive, with 45% of agricultural water lost before it even reaches crops. Water used for industrial output is 70 times more productive in terms of financial value than that used in wheat production. As water becomes increasingly scarce, the agricultural sector risks losing water resources to industrial production, especially if China increases the price of water to better reflect its true scarcity.

Extensive irrigation has always been essential to China’s agricultural productivity. Indeed, massive irrigation works built during the Maoist era enabled food production to keep pace with the rapid population growth of the time. China draws on both its rivers and large underground aquifers to irrigate its crops. Irrigated land produces nearly 75% of China’s cereals and more than 90% of its cotton, fruits, vegetables and other agricultural commodities on around half of the farmlands throughout the country. Yet, according to the Ministry of Water Resources, China now uses as much as 60% of the water running in many of its rivers, including the Liao and Yellow Rivers, and as much as 90% of the Huai River. China has increasingly turned to aquifers and lakes to meet water demands no longer satisfied by rain and river water alone. Groundwater now provides potable water for nearly 70% of China’s population and irrigation for approximately 40% of its agricultural land. Nationally, groundwater usage has almost doubled since 1970, and now accounts for 20% of China’s total water usage.

Aquifers are especially important in China’s north, where farmers have been relying heavily on groundwater resources to increase agricultural yields. Yet China is now draining its aquifers at an unsustainable rate. At current rates of depletion, the World Bank estimates that China’s northern aquifers could effectively run dry in as little as 30 years. China’s northern megacities now rely on underground water sources for two-thirds of their needs. For example, in Hebei province, which surrounds Beijing, aquifer levels are dropping by approximately 3 meters annually, forcing the digging of ever deeper wells which increases the risk of both saltwater and arsenic intruding into the water supply, as well as increasing the likelihood of land subsidence. With aquifers and rivers suffering from overuse, lakes are also diminishing. The province of Hebei has already lost a staggering 969 of its 1052 lakes.

Future yield growth will also be hampered by the small area plowed by each farmer, averaging less than a hectare. While de-collectivization initially led to a surge in output growth, the segmentation of large communal plots will hamper growth in grain yields in the future. Small farm sizes restrict growth by preventing farmers from capturing economies of scale that could be derived from greater mechanization, the more efficient dissemination of new seed technologies and the improved maintenance of irrigation structures. It has been estimated that improving fragmentation could increase grain output by as much as 70 million tons annually.

The fact that farmers lease – as opposed to own – their land has also worked to constrain grain yield by discouraging long-term investment. While lease times have extended to between 30 and 50 years, many villages continue to be awarded comparatively short lease contracts of 5 to 10 years. The reality is that China’s land rights are complicated and quickly changing. China recently passed the Rural Land Contract Law which took effect in 2003. The law endeavors to improve the security of land tenure, to clarify the transfer and exchange rights of contracted land, and to permit family members to inherit land during the contracted period. Above all, the law reflects the government’s attempts to allow those staying in farming to gain access to additional cultivated land and to increase their incomes and competitiveness. It strives to encourage farmers to use the land more efficiently. Working against government efforts to improve plot size is the belief by some leaders that family farming provides at least nominal proof that China is still communist as its land is not privately held, and as its land is relatively equally distributed. Many Chinese leaders also believe that agricultural land provides a social security system for its population, as every rural family is theoretically only one season away from being able to feed itself. In the five years following the implementation of the law more than 50,000 land disputes were raised and the government responded with a new draft law in 2009, though this was never passed.

Despite these challenges, grain independence remains one of the primary goals of China’s agriculture policy. In China’s 12th Five Year Plan released in March 2011, the government states that it expects grain production capacity to remain over 540 million tons per annum, and that overall, it seeks to increase grain production by 50 million tons by 2015. To produce more grain than economic efficiency dictates, China will need to invest in agricultural infrastructure, seed research, and organic fertilizers. It will need to provide greater agricultural credit availability, increase plot size, and improve water management.

GuoZhongHua / Shutterstock.comUltimately, as China continues to develop, the priority of its agricultural policy should be less grain self-reliance and more the continued transformation from an agricultural based economy to one that is industry and service based. To join the ranks of the developed world, China will need to promote policies that continue this structural change. Already, agriculture’s share of GDP has fallen from 40% in 1970 to under 10% in 2008. Going forward, China’s real challenge will be whether it can release large numbers of families to live and work in urban areas, leaving a smaller number of farming families that control sufficient land and other resources to make a decent living from farming. It will need to provide these remaining farmers with enough income to invest in their children’s human capital, thus raising their capacity to respond to future economic opportunities within and beyond the farm sector.

Additionally, China will need to better integrate into the economy those workers released from the agricultural sector. Figures from the 2010 census put temporary migrants – that is, those living more than one municipality away from their registered home for a period of more than six weeks – at almost 250 million, or nearly 19% of the overall population. These temporary migrants are projected to grow to 400 million by 2025. Despite the significant increase in rural migrant workers to urban areas, there are still fundamental barriers that discourage permanent migration of individuals and families from rural to urban environments, the most important of which is the hukou resident registration system. Without official residence papers, migrants have poor access to housing, health facilities, and education for their children. It is not uncommon for migrants to work long hours in poor safety conditions and for little pay.

China’s Growing Presence in African Agriculture

 

Increasingly, China’s agricultural policies no longer revolve around just its domestic market. In particular, its agricultural footprint in Africa is growing. According to research conducted by Deborah Brautigam, China has developed agricultural aid projects in more than 40 African countries. Historically, these aid projects were characterized by “quick starting, quick results and quick decline”. Between 1965 and 1986, approximately 50% of Chinese African rural development projects failed. This low success rate has driven Beijing to find ways to make its African agricultural aid projects more sustainable. In particular, China is increasingly engaging Chinese agro-businesses as partners in its agricultural aid projects. In the 1980s, for instance, China began to experiment with trading African debt for equity and lease arrangements in former Chinese aid projects which it then passed to Chinese agricultural companies. By 2002, the Minister of Foreign Trade and Economic Co-operation was stating that Chinese agricultural investment in Africa should be “conducted by enterprises and should be market oriented”, supporting the 1990s policies of making Chinese agricultural investment mutually beneficially for both China and the African countries in which it invested. What this has meant in practice is that the government has increasingly brought in Chinese companies to sustain agricultural initiatives in Africa once these projects are up and running. This “mutual benefit” policy has the additional advantage of finding new markets for its agricultural technologies such as hybrid seeds, and of allowing its agricultural companies to gain international experience.

For their part, there is concern among some in Africa that China is developing agricultural projects so it can ship food to China at the expense of the African consumer. Evidence to date suggests, however, that most of the agricultural products produced on Sino-African agricultural initiatives are sold to local African markets. That said, increasing the overall global food supply is beneficial to China as that helps to reduce food prices for products that it does purchase in the international markets. Of course, this does not just benefit China as ever country that imports foods would welcome downward pressure on food prices. In the longer term, it may also help to create potential new food sources.

Future Trends

There will be four trends to watch for in the Chinese agricultural sector in the coming years. Firstly, China will make every effort to maintain or increase its agricultural yields through greater investment in agricultural research, improvement of agricultural irrigation networks, reclamation of land for agricultural use, and the support of contract land arrangements that provide both security as well as flexibility for farmers to trade their leasing rights. Secondly, China will also support growth in cash crops such as vegetables and fruits, animals, and aquatic products, including investing in fishing ports, fish farms and coastal harbor centers. Thirdly, China plans to heavily invest to improve the standard of living of those citizens remaining in rural areas, including increasing rural access to electricity, roads, quality housing, education, and healthcare. While not actively stating that there are immediate plans to overhaul the Chinese resident permit system, China’s 12th Five Year Plan does affirm that it will, “adapt to the new situation of the rural population migration”, tacit acknowledgement that the hukou system needs further reform. Finally, China’s presence in African agriculture will continue to expand. This expansion will take many forms, but underlying its growth will be the creation of new opportunities for China’s large agricultural companies.

What’s Holding the Chinese Consumer Back?

Introduction

Both Western and Chinese commentators have documented the real increase in Chineseshutterstock_113568136 living standards and consumption levels. Since market opening in 1978, GDP growth averaged 10.2%. Per capita income has risen from $400 in 1978 to $5,414 in 2011, the most recent year for which data is available. Per capita income is to exceed $8000 by 2020. Chinese citizens now have access to a wider range and a higher quality of consumer goods and services than ever before, and many now enjoy a better quality of life than they did during the Maoist era. Yet these benefits are far from equally distributed. The increasing marketization of the Chinese economy has had the consequence that Chinese citizens can no longer be as reliant on the Communist Party for education, healthcare and pensions. For the 400 million or so Chinese citizens who still earn $2 or less per day, this has meant that, in many ways, their life is less secure today than it was during the Mao era.

Since 1978, shifting levels of fixed investment (buildings, plant, machinery and infrastructure such as roads, railways systems, ports, etc), net export (export minus imports), government expenditure (social services, infrastructure) and domestic consumption (purchases by households) have driven China’s economy. Since 2001, China’s fixed investment has increased significantly. In 2011, China’s fixed investment rose to 48% GDP, while household consumption hovered at 35%, and savings remained close to 50% GDP. These figures are out of line with international norms. Generally, a country’s consumption comprises two thirds or more of GDP, and investment one third or less.

China is now increasingly recognizing the need to rebalance the economy. China’s 12th Five Year Plan has made boosting domestic consumption a priority. Indefinite high fixed investment rates puts an economy at risk in many ways. Each additional capital expenditure has an increasing chance of being wasteful because of the law of diminishing returns. Unneeded excess industrial capacity can undermine corporate profitability. High fixed investment can also be inflationary and risks creating asset bubbles. It also causes trade frictions as it depresses domestic import consumption and encourages exports.

China’s 12th Five Year Plan lays out a variety of economic tools to generate higher consumer spending, including improving the social welfare system, boosting wages, and increasing consumer goods imports. Increased outlay on social welfare is especially important as without more spending on education, healthcare, pensions and affordable housing, Chinese consumers will continue to save to provide for their future.

What Drives China’s Economy?

Interesting research by Andong Zhu and David Kotz has shown that since the 1978 launch of market reform, shifting levels of domestic consumption, fixed investment and export growth have driven China’s economy. Zhu and Kotz break these shifts into four time periods: 1978-1988, 1988-1991, 1991-2001 and 2001-2007. Between 1978-1988, domestic and government consumption were the strongest drivers of China’s economy, with household consumption accounting for roughly 50% of China’s GDP. Income inequality climbed. China’s Gini coefficient – a number between 0 and 1 where 0 corresponds with perfect equality and 1 corresponds with perfect inequality – worsened from approximately 0.29 in 1978 to 0.38 in 1988 (though it actually improved slightly immediately after the reforms of 1978 were introduced) .

Between 1988-1991, in an effort to control 18% inflation and the social discontent that was beginning to accompany it, Beijing temporarily cut government fixed investment spending. Household income grew more slowly as well, resulting in lower private consumption. Instead, average 7.1% GDP growth during this period was driven by government consumption and by an export surge. Exports increased 50% between 1988-1991, spurred in large part by the 1990 devaluation of the RMB.

shutterstock_41537107In 1992, Deng Xiaoping’s now famous southern tour cemented as the way forward the country’s experimentation with market reform. As a result, between 1991-2001 GDP growth averaged 10.3% and household income grew almost at pace, although rural income lagged, while urban income surged rapidly ahead. Overall, between 1991-2001, total private and public consumption accounted for 61.4% GDP and generated almost 85% GDP growth. An initial 1992-1993 surge in fixed investment of 30% caused the GDP growth rate to spike to 14.2%, but also rekindled inflation. As a result, Beijing reduce government fixed investment spending to 8.2% in 1994 and 6.3% in 1995. Yet, by 2001, fixed investment was back up to 34.7% GDP. Net exports played a relatively small role in economic growth between 1991-2001. While total exports reached 20.7% of GDP by 2001, imports also rose rapidly.

The 2001-2009 period saw China transition into the high fixed investment and export model that characterizes its economy today. After China’s 2001 entry into the WTO, exports grew at an average annual rate of 20.9% a year while imports increased at an average annual rate of 17.8%; by 2007, net exports accounted for 10.9% GDP. Between 2004 and 2009, China’s fixed investment accounted for approximately 41.2% GDP, while net exports were 8.6% GDP, government expenditure 14.7% GDP and private expenditure 35.5% GDP. The 2009 savings rate rose to 49.7% GDP. In 2011, China’s fixed investment increased further to 48% GDP, while household consumption hovered at 35%, and savings remained close to 50% GDP. These figures are out of line with international norms. Generally, a country’s consumption comprises two thirds or more of GDP, and investment one third or less.

An important factor that led to the high fixed investment was the privatization of many state-owned enterprises (SOE) starting in 1996. This resulted in SOEs shedding of approximately 50 million jobs, and handing back to the government their “iron bowl” responsibility of providing social services such as housing, healthcare, education and pensions for their workers. As a result, SOE profitability rose rapidly. SOEs put their profits into fixed investment. Rapid economic growth was a key political and therefore managerial objective. Low borrowing costs and minimal dividend payments supported the high fixed investment rate. In 2010, SOEs still distributed just 5-15% of profits. The government also directed their spending toward huge infrastructure projects, and less so to provision of social services.

The large unemployment caused by SOE privatization corresponded with a simultaneous expansion of the Chinese workforce. During the 1980s, China’s working age population increased 2.5% annually; coupled with high rural-to-urban migration, this has meant that since 1980, China’s overall urban labor force grew 4% annually. Work force productivity rose by over 9% annually. Production that had needed 100 people in 1990 required less than 20 people in 2009. The millions of newly unemployed, the labor force growth and rural-to-urban migration all have worked to push wages down. At the same time, the cost to households of housing, healthcare, education and pensions increased. Rising costs coupled with lower wages and greater economic uncertainty caused the Chinese savings rate to rise rapidly as Chinese consumers began saving for retirement, housing and medical expenses. Additionally, total taxes on labor income rose by 2.5% GDP, partly due to higher income tax payments, but mostly reflecting mandatory contributions to new pay-as-you-go pension system managed by the government sector that is being phased in across the country. Household interest payments also rose to about 1% GDP, as increased home ownership has led to an associated rise in mortgage related debt. High savings rates also reflected credit constraints and a greater incentive to save for business opportunities. Savings rate have also remained high as most of it large pool of depositors have no other place to rest their money.

Yet return on savings has remained low. Interest payments paid to these household savers have remained capped by the government, and have often been eroded because of inflation rates above the rate of interest. Households have thus not earned much interest income to supplement wages. Moreover, government capital controls and the lack of other investment and savings vehicles has meant that depositors have had few choices other than deposits in which to store their hard-earned money until enough accumulates so that they can purchase an investment asset such as a house or a car. By capping interests rates paid to depositors the government in effect has been quelling household consumption in favor of producers, many of which are state owned and benefit from the large savings rate by being able to access cheap loans. As a consequence, Chinese banks enjoy enormous reserves of cheap deposits. Moreover, by keeping is currency devalued, imports remain expensive and exports stay cheap, thereby discouraging the consumption of foreign goods, and encouraging the production of exports for foreign customers.

Government savings also increased during this period. Government revenue consistently exceeded government noninvestment expenditure. High government saving reflected a policy favoring government financed investment over government consumption. In large part, freedom from democratic pressures has enabled the Beijing to take a long-run view about the nature of its expenditure as it expects to remain in power for many years.

Private enterprise savings has also been high since 2000. This high savings rate can be explained in part by the imperfect credit market. Chinese bank lending and the Chinese equities market continues to favour SOEs, forcing private enterprises to rely on retained profit for future investment.

As a result of all these factors, GDP growth averaged 10.9% between 2001-2007 while the growth rate of household income was just 8.7% and rural income was only 3.4% per year. The ratio of consumption to household income also fell at a 2.2% per year. Income inequality also increased. By 2006, China’s Gini coefficient rose to 0.46 and in 2011, it had reached 0.48.

Despite China’s high fixed investment rates, overall capital expenditure has remained profitable. This is due to several factors including the fact that China started at such a low fixed investment base, particularly in terms of infrastructure; China experienced a rapid growth in its human capital over the same period; and China keeps shifting its production into new markets which opens up new investing opportunities. Moreover, China’s overall capital stock is still small relative to its population, and medium-sized relative to its economy. That said, it is hard to sustain such high fixed investment rates indefinitely without waste and bad investments. This risk increases as China’s capital stock accumulates. The modern “ghost” city of Kangbashi, Inner Mongolia has oft been cited as an example of excessive investment where local officials designed a city and infrastructure for 1.5 million residents, yet less than 150,000 people have come to fill it.

The constraints on consumption and the prioritization of fixed investment and exports has resulted in a significant imbalance in the structure of China’s GDP. Research by John Knight and Wei Wang show that these figures made China an outlier compared to other economies. Indeed, China’s investment ratio far exceeds that of other industrialized countries, and even that of Japan – 32% GDP 1960-1985- and Korea 30% 1970-1995 during their rapid growth periods.

In 2011, China’s fixed investment rose further to 48% GDP, while household consumption hovered at 35%, and savings remained close to 50% GDP. Part of the reason that fixed investment as a percentage of GDP rose after 2009 was because of the RMB 4 trillion or $586 billion 2008-2009 Chinese Economic Stimulus Plan that China launched in response to the breaking 2008 financial crisis. The government directed the majority of this stimulus into fixed investment. RMB 1.5-trillion was dedicated to infrastructure construction including railway, road, irrigation networks, and airports. RMB 1 trillion went to reconstruction works in regions hit by the 8-magnitude Sichuan earthquake. RMB 370 million went for rural development including building public amenities, resettling nomads, supporting agriculture works, and providing safe drinking water. RMB 370 million also went to technology advancement programs mainly targeted at upgrading industrial sector technology. The Chinese government allocated some RMB 210 billion to improving energy saving, cutting gas emission, and building environmental engineering projects. RMB 150 billion was allocated for educational, cultural and family planning purposes. Other funds were invested funding for social welfare plans, including the construction of low-cost housing, rehabilitation of slums, and other social safety net projects.

Rebalancing China’s domestic consumption is a key theme of China’s 12th Five Year Plan. Yet a key difficulty to boosting domestic consumption is the fact that Chinese citizens now face higher education, healthcare and pension costs due to the dismantling of educational and social security systems that existed under the planned economy. Premier Wen Jiabao recently recognized this challenging by noting that the government must increase spending on healthcare and social services to free up more Chinese disposable income.

Social Security: Education

China’s current educational system is undoubtedly in a better position now than it was during the Maoist era. This is specifically true during the Maoist era’s final years when the Cultural Revolution convulsed China. Launched between 1966-1976 the Cultural Revolution was to strengthen socialism in China by reducing capitalist, traditional and cultural elements from Chinese society, and to impose Maoist orthodoxy within the party. To achieve this end, in June 1966, middle schools and universities throughout the country were shut as students devoted all their time to Red Guard activities. The government sent many educated youth to the countryside in order to engage in manual labor. When schools and universities reopened in the early 1970s, students often won places at university not by being the most academically able, but by having good political credentials, and by being recommended by their work unit. As a result, by the late 1970s, the quality of Chinese university education declined sharply. In 1975, Deng Xiaoping reportedly complained to Mao Zedong that university graduates were not even able to read a book in their area of study by the time their university education was completed.

After the government launched market reform in 1978, renewed emphasis was placed on scientific training, and the overall quality of Chinese education began to improve. Since that time, China has undergone a major expansion in the quality and availability of education throughout the country. The number of university and doctoral degree graduates has risen fivefold between 1995 and 2005. Chinese government spending on education has risen approximately 20% per year since 1999, now reaching $100 billion annually. The results from this investment have been outstanding. The best Chinese students now lead the world in math, science and reading. There were 33 million Chinese in higher education in 2010, up from 12 million in 2000. 82.5% of all Chinese children now complete secondary education, up from 21.9% in 1990, and more children than ever are having the opportunity to gain a formal education. On average, Chinese students spend 40 when more days a year being educated than their US counterparts, although western educational analysts criticize the rote learning system employed in Chinese schools.

Much as with all social services, the quality of Chinese education varies greatly throughout China. There is still a large discrepancy between urban and rural education and between education standards in the eastern and western provinces, in terms of quality and quantity of education, including progression to higher education. It is indeed the cities, as opposed to rural areas, that receive the highest percentage of government spending, as well as having the highest quality of education at all levels. The exact numbers are hard to come by, as spending is split at various levels down the bureaucratic chain, but it has been suggested that spending per primary school child in Beijing and Shanghai was 18 times that of the poorest Chinese provinces.

J MARGOLIS 33Yet, those Chinese citizens migrating to China’s prosperous cities in search of better opportunity are often not allowed to take advantage of superior urban teaching for their children. The Mao-era Hukuo residential permit system means that local governments refuse school access without official documentation. This is a subject of huge contention for the almost 250 million migrant workers (a figure that is projected to grow to 400 million by 2025) who must leave their children behind in their towns and villages. For those that do choose to bring their children with them, many are forced to send their children to sub-standard private schools, which have no state funding. Fees can run as high as $165 year, the equivalent to several weeks’ wages. In 2011, local authorities closed several schools for the children of migrant workers, as they did not meet official safety standards, leaving an estimated 14,000 children without access to schooling. Notwithstanding the social injustice that this may present, needing to save for education costs reduces domestic consumption. Many Chinese senior-level middle schoolers must also pay tuition, as after completing the compulsory nine years of education, students who wish to continue on to senior-level middle school, must pay a small tuition fee. University students are also required to pay a part of their education. There is growing pressure within China for reform to this hukou system, though no significant changes have been enacted.

The Chinese government is taking increasing initiatives to reduce the gap in educational standards throughout the country. In 2011, the Chinese government announced a 20% increase in rural education spending. Yet, improving rural education and education availability generally will take time. Until then, being born in an urban environment gives the average Chinese child a far better chance at a decent education. Until then, migrant workers bringing their children with them to the city, and parents of those students wishing to pursue higher education will need to save in order to finance future education costs.

Social Security: Healthcare

Like education, China’s healthcare, today faces many challenges. After 1949, CCP created the Ministry of Public health to take charge of all healthcare activities in China. The new system provided healthcare in both rural and urban areas through a three-tiered system. The first level of healthcare comprised China’s “barefoot doctors” that practiced in the village medical centers. These doctors focused on hygiene, preventative health care, family planning in the treatment of common illnesses. The barefoot doctors were primarily farmers who received minimal medical and paramedical training to serve rural areas that urban-trained doctors could not reach. The next tier of healthcare was the township health centers that were primarily outpatient clinics, each with a capacity of serving up to 30,000 people. Assistant doctors were the primary healthcare providers at these clinics. These two rural collective healthcare tiers comprised the majority of China’s Communist healthcare. The third tier, county hospitals, treated only the sickest rural patients, and was staffed by senior doctors trained at medical schools.

In urban areas, neighborhood health centers delivered the first tier of healthcare. These were staffed by personnel with minimal training and focused predominantly on hygiene and preventative medicine. These urban caregivers sent sicker patients to district and municipal hospitals. Often, however, connected employees could get medical care directly from district or municipal hospitals, bypassing neighborhood medical clinics.

Overall, Mao’s Communist China provided a good basic medical care for its rapidly expanding population. Average life expectancy increased from 36 years in 1949 to 68 years in 1980. While this increase in life expectancy was also due to improved nutrition and other factors, the focus on hygiene, preventative medicine, and the nationwide eradication of epidemics such as cholera, plague, typhoid, and scarlet fever certainly contributed significantly to China’s improved longevity during this period.

The de-collectivization of agriculture in the 1980s, and the privatization of SOEs in the 1990s, caused fundamental changes in the way that healthcare was delivered throughout China. While in urban areas, most Chinese citizens with residential permits still have relatively inexpensive access to medical coverage for themselves and their families. Additionally, they have often also taken out some form of medical insurance. Nevertheless, an estimated 36% of the urban population finds healthcare costs prohibitively expensive. Workers that lose their jobs also lose their medical insurance coverage. Migrants relocating into China’s growing cities have no medical care coverage as they lack a residential permit. The government has recently tried to respond to this challenge by creating the Urban Employee Basic Medical Insurance System (UEBMI) to include the non-state owned sector and self-employed workers. In 2008, UEBMIs covered an estimated 200 million people.

Those citizens in China’s rural regions face even greater healthcare challenges. By 1984, for instance, only 40-45% of the rural population was covered by an organized cooperative medical system, down from 80-90% in 1979. The number of barefoot doctors decreased. Authorities monitored village water and sanitation supplies less frequently, while a still rapidly expanding population created greater waste treatment challenges. Moreover, the cost of even the most basic medical treatment increased, forcing citizens to save more to pay for medical care, and often to forgo medical treatment.

Partly spurred by the SARS epidemic scare, in 2003, the Government established the New Rural Co-operative Medical Care System (NRCMCS). NRCMCS costs about $7 per person annually, half of which the government provides. As of September 2007, 80% or approximately 685 million rural Chinese citizens had signed up for the new initiative. Like China’s old health delivery system, the care is tiered. The plan covers the cost of small hospitals or local clinics to 70-80% and county hospitals to 60%. Yet specialist hospitals in modern system cities are only reimbursed 30%.

Despite these efforts to provide greater coverage for all its citizens, China’s healthcare system still faces enormous challenges. As doctors are paid low wages, and as hospitals are responsible for covering a significant portion of their operating costs through revenue-generating services, over prescription of drugs and x-rays and other tests is rife. China’s new rural and urban health care initiatives still only cover a part of the drug and testing prescriptions, meaning most patients still face high out-of-pocket costs – some estimate as high as 60% of their total medical care. Additionally, most doctors still have minimal basic training. This is particularly true in rural areas. A 2001 study of 46 counties and 781 village doctors in 9 Western provinces found that 70% of the village doctors had no more than a high school education, and had received an average of only 20 months of medical training before beginning to practice. China’s healthcare system is also struggling to balance the delivery of Western versus traditional Chinese medicine. As China’s population begins to age rapidly in coming decades, even more strain will be placed on a medical system already struggling to cope with the citizens it is currently treating. Finally, like all countries today, China will need to find the right balance between spreading scarce medical resources as widely as possible versus providing each of its patients with the most advanced medical care available.

Social Security: Pension

As it has with education and healthcare, the Chinese government has taken real steps towards combating the ticking time bomb of the Chinese pension system, which is poised to come under enormous strain as China’s population rapidly ages over the coming decades. Currently, China has an estimated 160 million citizens over the age of 60. By 2050 that figure is likely to increase to almost 400 million, which will represent more than a quarter of the population. Part of the reason that the country is ageing so rapidly is that China’s “One Child Policy” has meant that fewer young people have been born since the 1980s. In 1975, there were six Chinese children for every one elder. By 2035, there will be two Chinese elders for every one child.

Before market reform in 1978, urban workers at China’s state owned enterprises received generous pensions upon retirement. Yet, these workers always constituted a minority of the total Chinese population. In the 1990s, the privatization of state owned enterprises has meant that these companies no longer fund their employees’ pensions. The government tried to launch a basic pension system for urban workers to replace the state owned enterprise funded system, yet as of 2007, just 65% of the urban workforce earned any benefit from the basic pension system. Coverage is highly concentrated among workers at SOEs that account for dwindling share of total employment. Much of the fast-growing private sector workforce, including China’s rural migrants, remains uncovered. Indeed, if urban employers made social welfare contributions on behalf of their migrant workers, their payrolls could rise by an estimated 35-40%.

Additionally, the basic pension systems inherited from SOEs have large unfunded pension liabilities. This means those workers contributing to the plan must do so at high rates, often causing workers to try to avoid payment. In addition, a lack of portability of the pension plan has meant that workers often need to choose between job mobility and losing their retirement savings. While private pension systems are beginning to take shape in China, in 2007, only 9.3 million employees contributed to “enterprise annuities”, or just 1.2% of the total Chinese workforce.

As for the countryside, in 2006, formal retirement protection was still virtually non-existent  Indeed, all told, just 31% of China’s total workforce is estimated to be earning a public pension benefit of any kind. Part of China’s challenge is that its population is ageing at a much earlier stage of economic and social development compared to developed countries. This means that China will have to support its elderly with a fraction of the per capita income and wealth of developed nations. Despite high savings rates, the majority of Chinese workers are not accumulating sufficient financial assets to support themselves in retirement.

Traditionally, the young have cared for you old in China. In the coming decades, the great majority of workers will have to continue to rely on their children for financial support. Indeed, in 2006, an estimated 56% of elders lived with their grown children or other relatives. Even those who do not reside with their children often depend on their extended family for financial support. The importance of this safety net was reinforced when the government passed a 1996 law obligating children to care for their ageing parents. By 2050, the average pension burden supported by each Chinese worker is estimated to quadruple from today’s levels.

Yet, as more workers migrate to cities in search of opportunity, as China’s birth rates decline, and as China’s population begins to rapidly age, this traditional informal safety net is facing new strains. Indeed, while multigenerational families are still the norm, there are less common than they were a generation ago. Older workers will also need to remain in the workforce longer. While in the countryside, 76% of men aged 60-64 and 38% men aged 65 or older continue to work, in the cities, older labor force participation is much smaller. Only 34% of men aged 60-64 and 13% work past the age of 65. This low urban elder work participation rate is a result of the fact that SOEs downsized its obsolete workforce in part by offering them early retirement.

The government will continue to be under enormous pressure to introduce initiatives to provide minimal Social Security for the ageing population, so the majority of worker disposable income is not funnelled into carrying for ageing parents future worker disposable income is not spent solely on the care of grandparents.

Trends

China’s domestic consumption was expected to have grown 15% through 2012, a rate shutterstock_102510107double that of China’s projected GDP. Indeed, in a recent speech in 2012, Premier Wen Jiabao confirmed the government support of this trend by noting that boosting domestic consumption will be crucial to China’s future as it rebalances its economy. China’s 12th Five Year Plan reinforced the importance of domestic consumption. Future growth in consumption will be driven not only by rising per capita income, but also by continued government domestic consumption subsidies. Recent subsidies have included programs for rural households to buy electric appliances and automobiles. The government will also support more paid vacation, expand consumer credit, and increase agricultural subsidies. Specifically, the VAT on cars and a number of other items has been reduced, and vouchers for certain durable good purchases by the rural sector have been provided.

The government is also taking steps to moderate the high household savings ratio and support consumer growth over time. The government’s 2011 spending on education increased 14.6%, on social security and unemployment 14.2%, on medical and healthcare 13% and on public housing spending 9.6%.

China’s central government is also developing policies to stimulate the growth of small and medium-size enterprises. These policies include providing guarantees on their borrowing, reducing small and medium-size enterprise taxes reductions and offering subsidies. Small and medium enterprises are typically a large share of total employment in other countries. Their expansion, especially in the retail and wholesale sectors currently dominated by SOEs, could significantly boost both employment and household income over time. The government is also considering the increase in dividend distributions from SOEs so that they might help finance higher government social spending and reduce the level of retained earnings in these enterprises that can be plowed back into investment. It also plans to raise the minimum wage.

The government is also considering raising interest rates on savings accounts. Market level interest rates could increase Chinese consumption. Chinese households are generally saving toward a goal such as a down payment on a house or the cost of potential medical emergency. Increasing disposable income by creating investment income in the form of bank interest could allow households to meet their savings objectives more quickly, and thus could encourage increased discretionary spending.

TonyV3112 / Shutterstock.com

Population Power: China’s Shifting Masses

Introduction

China’s enormous population is one of the country’s most defining features. With the largest population in the world, almost one-fifth of the global total, it factors into nearly every significant issue facing the country including employment, consumption, the environment, and migration. In the 1970s, faced with the prospect of its population outstripping its economic and agricultural output, Beijing reversed early Maoist policies encouraging population growth. It has since spent the last three and a half decades trying to bring this growth under control. China’s aggressive fertility education programs of the early 1970s, and its 1980 “one-child policy” succeeded in reducing births per woman from their peak of 5.8 at the beginning of the 1970s to below the replacement level of 2.1 today. A success of its population control policy has been its ability to feed its people, a key Chinese objective. Nevertheless, China’s large population still poses significant challenges. These challenges include a rising dependency ratio as the population ages, generating sustainable economic opportunity for its people, rapid urbanization, large internal migration and continued regional inequality.

Post-1949 Demographic Background

TonyV3112 / Shutterstock.com

By the 1800s, China had already been the most populous country in the world for the best part of two millennia. Yet high death rates caused by disease, crop failure, natural disasters, and war restrained China’s population growth between 1850 and 1950, with an average annual growth of 0.3% per year. When the Chinese Communist Party (CCP) consolidated its power over the country in 1949, peace and stability favored the country for the first time in decades. Early CCP policies led to improvements in nutrition, sanitation, and increased access to healthcare. Chinese mortality rates, especially those of infants, plummeted. Yet, the CCP failed to achieve enough per capita economic growth and educational reform to drive a natural reduction in the country’s birth rate as it developed. Moreover, Mao, and those on the far left, considered a large population to be a positive asset, both as an aid in economic development and a resource in national security. Mao believed that Malthusian theory – in essence the principle that exponential population growth would inevitably lead to an inability to feed the population – was a capitalist paradigm, and did not apply to Marxist production methods where more people inevitably created more economic output.

As a result, the majority of China’s population continued the tradition of seeking to have as many sons as possible. According to official statistics, China’s population almost doubled in less than thirty years, from just over 550 million in 1950, to just over 1 billion in 1982. Officials in China were well aware of China’s exploding population in the early decades after 1949. Yet, any talk of population control or family planning was labeled as defeatist and was quickly silenced during the many anti-rightist campaigns of the 1950s and 1960s.

By the end of the 1960s, concerns regarding China’s exploding population began to be more publically discussed. In 1970, Beijing decided to implement a voluntary birth control system. It spread information about the benefits of having fewer children, made contraceptives more widely available, and educated the public on family planning with slogans promoting later marriages, longer birth intervals, and fewer children. The program was largely successful. China’s total fertility rate, which measures the average number of births per woman, plummeted from 5.8 in 1970 to 2.7 in 1978. Nevertheless the 2.7 rate was still significantly higher than that in surrounding regions, including South Korea, Taiwan, and Hong Kong. A 1980 study, undertaken to estimate what China’s ideal population would be in 2080, assuming significant modernization and economic growth, concluded that the optimum population level would be between 650 and 700 million. China’s actual population in 1980 was already roughly one billion and still growing rapidly.

The ‘One-Child’ Policy

In September 1980, it was decided that China would implement what is often labeled as the ‘one-child policy’ (the Chinese name, jihua shengyu zhengce, translates better as ‘family planning policy’) with the goal of limiting its population to 1.2 billion by the turn of the century. Family planning was written into the constitution two years later. It is worth noting that the policy has not been blanketed uniformly across the country. Most ethnic minorities are permitted to have two children and many Han living in rural areas have been allowed to have a second child when the first child is a girl. Additionally, parents whose first child is disabled are allowed to have a second child and more recently it has been determined that parents who are both only-children themselves are now allowed to have two children.

The one-child policy was implemented relatively easily in the cities, where both spouses often worked and where living conditions were cramped. Resistance in the countryside was greater. The rural desire for larger families and many sons is deeply rooted, not least because more hands make easier agricultural work for all. In general, there has been a high correlation between income and the willingness to accept the one-child policy.

One result of the policy has reportedly been a series of forced sterilizations and abortions, an issue that the well-known activist Chen Guangcheng, who fled to the US in May 2012, was keen to expose. Additionally, couples defying the regulations were subject to fines, loss of jobs, reduced wages, loss of work unit benefits, or, in some cases, loss of bonuses for the entire workgroup. In some areas, wealthy families who worked in the private sector simply paid the fines imposed in order to have a second, or even a third, child. Those working in the public sector did not have this freedom as a second child would mean an inevitable loss of employment. The one-child policy also led to an imbalance in the sex ratio of the population. The preference for sons, particularly in rural areas, led to selective abortion and sometimes infanticide. An April 1983 article in the People’s Daily reported that a survey of Suixi and Hanyuan counties in Guangdong and Sichuan respectively, showed that male births outnumbered female births by as much as 5 to 1. The 2010 Chinese census showed 118 boys per 100 girls in the 0-4 age group. Overall, however, the ratio of men to women in the population has, according to the UN Department of Economic and Social Affairs, peaked at 108 to 100 and is projected to fall steadily over the coming century. This discrepancy is partly explained by the underreporting of females at birth in order to circumvent the restrictions of the family planning laws. While allowing girls to go unregistered has allowed families to have more children, and to keep their girls while still striving to have a son, it has often put the unregistered girls at risk of losing access to many legal benefits, including education and other forms of social welfare. It is not clear exactly how many unregistered children have been born in China since the implementation of the family planning policies of 1980 but some estimates suggest that it could have exceeded 100 million.

Despite such aggressive family planning measures, China’s population reached 1.35 billion in 2011. Estimates on when China’s population will peak how big it will be at that point vary somewhat. China’s own figures suggests that this will happen in 2030 at 1.5 billion people, whereas the US Census Bureau has predicted that it will occur in 2026 at around 1.4 billion.

The Changing Structure of the Labor Force

TonyV3112 / Shutterstock.com

The current age structure of China’s population has provided China with an enormous competitive economic advantage. Specifically, China’s current population is both young and relatively free of dependents, whether they are children or elderly parents needing care. In 2011, approximately 72% of Chinese citizens were between the ages of 15 and 64. China’s current low dependency rate derives from the fact that Chinese ‘baby boomers’ born in the 1960s after the Great Leap Forward, and their children born in the 1980s, are now of working age. During the 1980s, China’s working age population increased 2.5% annually; this increase, coupled with high rural-to-urban migration, meant that the overall urban labor force has grown at about 4% per year since 1980.

The low dependency rate has created what has been termed China’s “demographic dividend”. The working age population has grown more rapidly than the population as a whole, a fact which has helped to drive rapid GDP growth. Low dependency rates have driven high savings rates, providing Chinese society with significant capital to invest; today’s workers save for old age, while today’s elderly spend savings accumulated earlier. China’s young, unencumbered population has also benefited China as it has been more adaptable to the rapid social and economic changes that have attended China’s transition to a market economy.

Yet, the growth of China’s labor force is now slowing as the last baby boom cohorts have been absorbed. After 2015, real working population growth is forecast to be zero. After 2015, future labor force increases will be driven by internal rural-urban migration. While easing some unemployment pressure, slower urban labor force growth will likely lead to lower overall GDP growth as well.

An Aging Population

TonyV3112 / Shutterstock.com

China will soon face a rapidly aging population. The number of Chinese over the age of 60 rose from 128 million to 178 million between 2000 and 2010 and is predicted to increase to 350 million by 2030, raising the senior dependency rate to 25%. Exacerbating the senior dependency rate is China’s mandatory retirement policy, which requires seniors to retire from work at the age of 60 in many sectors, though there is clear scope for adjustment to this policy should it be deemed necessary. China’s own figures suggest that its population over the age of 60 will peak in 2040 at around 400 million.

This rapidly aging population will place a great burden on the younger segments of society, as dictated both by Chinese culture and law, Chinese children are obliged to care for their retired parents. The strain of caring for the elderly will be worse in the countryside where the elderly are often not covered by the pensions that are more commonplace in urban areas, and where elders generally have had a lower overall income leading to lower, retirement savings. While most urban workers have some kind of pension, until the early 1990s China’s pension liabilities were unfunded, meaning that the pensions of currently retiring workers are supported by those currently working. Since the 1990s, the Chinese government has endeavored to establish a functioning and funded pension system. Its challenge will be to complete the work quickly so that the country does not grow old before it has the infrastructure in place to support its elderly. Consequently, although the one-child policy still remains in force, there have been calls from within China to address the challenge of its growing elderly by, among other policies, allowing couples to have more than one child. Indeed there has been some experimentation with the policy in some of China’s wealthier regions such as Guangdong.

Population and Food Security

One clear benefit of China’s one-child policy has been its continued ability to feed itself. In the 1970s, when population issues began to be discussed more openly, concerns regarding China’s growing population were borne out of classic Malthusianism – the theory that exponential growth would inevitably lead to an inability to feed the population. Balancing food and population has been the key economic issue facing China throughout its history. Historically, under normal agricultural conditions, farmers produced enough food to keep China’s population reasonably well-fed and productive, but the margin above subsistence was small. It took until the 1980s for agricultural output to sufficiently overtake China’s population so as to assure China’s food security. In the past, disasters such as floods and droughts often resulted in starvation.

Following the famine caused by the Great Leap Forward, the Chinese government determined that: “agriculture is the foundation of the economy; grain is the cornerstone of that foundation.” Beijing set itself a target of providing a minimum of 95% of its own grain requirements. China considers grain independence to be a matter of vital national security, and today, food independence remains a key Chinese objective. As recently as March 2011, Vice-Premier Hui Liangyu reiterated that China will maintain its goal of food self-reliance in order to both offset the risk of importing inflation due to rising global food prices and to reduce food dependency as a security risk.

Achieving 95% grain independence has not been easy for China. Despite having almost 20% of the world’s population, China’s geography is such that it is endowed with less than 10% of the world’s arable land. Moreover, as its population has grown, the amount of per capita cultivated land has continued to shrink. China has retained its food self-sufficiency through constant gains in agricultural productivity. Yet, many believe that it will be increasingly difficult for China to maintain such levels of agricultural gains in the future. Arable land will continue to decrease because of urbanization and environmental degradation. Additionally, China’s ability to increase harvests through the use of fertilizers and higher yielding grains is plateauing. There are further concerns over the availability of water.

Urbanization

Eddy Galeotti / Shutterstock.com

The rapid urbanization that has resulted from China’s industrialization has also posed significant challenges for the country. In the 1970s, urbanization was simply nonexistent. Beijing held tight control over any internal migration through its household registration system (hukou), and through the use of vouchers to acquire essentials such as food and clothing. Any movement was government allocated and almost exclusively from the city to the countryside as a way to reduce unemployment in the cities. This use of the countryside as an unemployment pressure valve exacerbated the pre-existing problem of redundant rural labor.

Today China’s urban population is rapidly rising. In 1978, only 17.92% of Chinese lived in cities. As of the 2010 census, 49.7% of Chinese were living in urban areas and it was reported that in January 2012 the total had reached 51%, making China a predominantly urbanized country for the first time in its history. Some of this urban growth has come as a result of reclassifying rural areas as urban areas, but most represents real changes in population patterns. By 2025, the number of Chinese city dwellers will rise to 926 million, up from 683 million in 2012, and may reach as high as one billion by 2030. Mind-boggling statistics accompany these figures. For example, over the next two decades, China is expected to construct as many as 50,000 new skyscrapers and to build mass transit systems in more than 170 cities.

Internal Migration and the Hukou System

One significant factor driving China’s urbanization is the large influx of migrant workers GuoZhongHua / Shutterstock.comthat come from the countryside. Internal migration is one of the most important phenomena in China’s demographics today. Figures from the 2010 census put temporary migrants – that is, those living more than one municipality away from their registered home for a period of more than six weeks – at almost 250 million, or nearly 19% of the overall population. These figures may be lower than the actual total as many migrants are thought to have avoided inclusion in the census. These temporary migrants are projected to grow to 400 million by 2025. Most migrants moved to the city either because of surplus labor problems in their hometowns, or in the hope of earning higher levels of income. This temporary urbanization has not exacerbated China’s urban unemployment as China’s economy has grown rapidly over the last several decades, and as migrant workers tend to take those jobs that urban residents are either unable or unwilling to do. Male migrants, for instance, dominate employment in sectors such as construction, while females work in cheap labor textile and other factories, where work is strenuous and often dull. Migrant employees are thought to send home an average of 50% of their income. More recently there have been reports of shortages of labor in some of the bigger cities, such as Shanghai, as opportunities open up closer to home for many migrants; the municipality of Chongqing recorded a higher number of returnees than those leaving in 2011 for the first time since the reform period began. Additionally, second generation migrant workers have begun to demand higher wages and better working conditions, reducing the benefit of employing them. Nevertheless, migrant workers remain a crucial aspect of China’s continued rapid development.

The overwhelming majority of migrant workers come from the poorer, western or interior provinces. 82% of these migrants head to just seven municipalities and provinces – Beijing, Tianjin, Shanghai, Zhejiang, Jiangsu, Guangdong and Fujian. Approximately 64% of all migrants are males, aged between 16 and 30. Only 10% have been educated beyond middle school.

While tolerated by Beijing as a means of reducing rural unemployment, and as a way of providing cheap labor for urban factories and construction, migrants have not been given explicit permission by the government to be in the cities in which they work. There are many reports of discrimination against migrant workers both by their employers, who may seek to exploit the vulnerability of these workers through non- or late payment of wages, and by the state, which denies welfare benefits to those not resident in their registered municipalities. Without official residence papers, migrants have poor access to housing, health facilities, and education for their children. It is not uncommon for migrants to work long hours in poor safety conditions for little pay. It is estimated that the majority of the 700,000 annual, serious, work-related injuries, claiming 130,000 lives, are incurred by migrant workers.

As migrant workers become a more permanent fixture of urban landscapes, there has been an effort to relax the hukou system in order to provide this population with greater rights. In 1997, for example, the State Council created a pilot scheme to allow certain migrant workers to transfer their registration to 450 selected towns and cities. To qualify, migrants needed to demonstrate a stable source of income, residence of over two years in the chosen city, employment in either secondary or tertiary industries, and that they own their own apartment. These requirements have made it impossible for the vast majority of migrants to qualify. In 2001, the State Council expanded the program to include all small towns and cities. Yet, as the value of the property was not specified, many city governments restricted large inflows of unskilled workers into their cities by requiring apartments to be of a value that often exceeded the means of the average migrant worker. This meant that, in effect, the government pilot scheme acted more as a means to attract talent and investment rather than a policy to promote the rights of those involved in internal migration throughout the country. More recently there has been increasing pressure to reform the hukou system, with 12 newspapers publishing a joint editorial calling for it to be modified in March 2012. To date, these calls have not resulted in any significant actions though the rhetoric from the government suggests that this may change in the future.

Future Trends

In the future, China’s large population will continue to provide the country with enormous challenges. As its population continues to age, China will be challenged by slower GDP growth and the need to create pension and healthcare systems that will help relieve the burden of the young to care for the old. This will be especially true as the changing global economy will look to China to generate more of its growth through domestic demand as opposed to through exports. Additionally, China’s growing population, which is predicted to peak by 2030 at approximately 1.5 billion people, will continue to put enormous demands on its scarce natural resources. Water management, in particular, will be a huge future challenge.

Employment will also remain a key concern for the Chinese government. Employment will remain a particularly acute problem in China’s western provinces. Provinces in which many of the ‘Made in China’ goods are produced, such as Guangdong, Zhejiang, and Jiangsu, enjoy unemployment rates as low as 4%. In other regions of China, especially in the west, unemployment figures are higher and seem set to remain so. China has developed its ‘Go West’ policy, encouraging surplus labor from the east to move into the more sparsely populated regions of the west. Yet, in areas such as Tibet and Xinjiang, this western migration of predominantly Han Chinese has contributed to increased ethnic tensions.

The challenges of China’s rapid urbanization are significant. Rapid economic growth will be necessary not only to the finance the enormous cost of this level of urbanization, but also to ensure that when centralized, urban populations do not protest government policy, as they did in Tiananmen Square in 1989. This could be a particular risk if long term migrant workers continue to be denied the same basic rights as registered urban residents, particularly as those urban residents will become an increasingly smaller percentage of the total urban population. Favoring the original urbanites with government services risks disadvantaging a large section of the population and creating a two-tiered system. Migrants relocating into China’s growing cities have no medical care coverage as they lack a residential permit. The government has recently tried to respond to this challenge by creating the Urban Employee Basic Medical Insurance System (UBEMIS) to include the non-state owned sector and self-employed workers. In 2005, UBEMIS was estimated to cover more than 129 million people.

Additionally, urban residents use, on average, 3.6 times as much energy as rural residents, creating greater demands on energy grids. Urbanization can also lead to greater motorization, taxing China’s new road infrastructure. Land available for agricultural use will decrease, testing China’s ability to be food independent. Greater urbanization will also generate higher levels of pollution, further exacerbating China’s already polluted air. Though China has demonstrated that it understands many of the challenges that its population will pose, it does not yet have all of the answers to them.

China and the European Union: Principles and Pragmatism

Introduction

One of the fundamental difficulties with assessing the relationship between China and the EU is one that is inherent in all analyses of the EU: that it is not a single entity. Constituted of 28 member states (since Croatia joined in 2013) ranging in size from Malta (with fewer than half a million inhabitants) to Germany (home to over 80 million people), the EU is linguistically, economically, culturally, and demographically incredibly diverse. While there has been a much increased pooling of sovereignty within the EU in recent years, each member state retains the right and ability to conduct its own external affairs. However, the EU has worked hard to increase its unity on the international stage. For example, in 2009 the EU appointed a President of the EU Council in order that its external relations are managed more coherently. Even before then, the EU negotiated numerous treaties with key partners in the international arena. These treaties play major roles in the relationships between these international partners and both the EU has a whole, as well as its constituent member states. Additionally, any state wishing to conduct high levels of trade with individual EU member states cannot realistically do so without dealing directly with the EU, alongside its dealings with the states in question. For these reasons, it is valid to speak of the relationship between China and the EU, though with the caveat that the China-EU relationship does not always supersede China’s bilateral dealings with particular EU member states.

Trade

Without question, the single most important factor of the China-EU relationship is trade. The EU, taken as a whole, is China’s largest trading partner accounting for more bilateral trade than even the US or Japan. It is the largest market for China’s exports and has been a significant source of China’s economic growth in the reform era. The importance of the relationship is not just one-sided; China matters to the EU just as much and it is its second largest trading partner after the US, and would be its largest if trade with Hong Kong were to be included in the figures.

As with the China-US relationship, there is tension within this economic success story, particularly in the form of a considerable trade deficit. In 2010, the total value of two-way trade reached its highest point to date at $527 billion, but this resulted in the EU stomaching a deficit of almost $225 billion. Preliminary figures for 2012 show a drop in trade of around 4%, probably driven by Europe’s economic travails, but the overall deficit remains fairly constant. While this represents a significant amount, it also demonstrates that the imbalance in the trading relationship is not as severe as exists in China-US trade; although the figures for absolute deficit are fairly similar (the figure for the US in the same period was equivalent to approximately $236 billion) the EU deficit was generated from a two-way trade figure that was more than one third larger than that of China-US trade, meaning it was proportionately much smaller. It is also important to consider that although this deficit is high, it is relatively stable as both exports and imports continue to grow at a similar pace. Thus, whereas the trade deficit in 2007 was $222 billion, only fractionally lower than it was in 2010, this represented more than half of the overall two-way trade for that year. In fact, across the last five years exports to China from the EU have grown at an average of 15% per year, making China Europe’s fastest growing market by some margin, while imports grew at just below 10%. A continuance of this trajectory will see the trade imbalance become even less of an obstacle to relations in the future.

There is, of course, imbalance within the EU regarding the importance of China as a trading partner. As outlined earlier in this article, while the EU often negotiates as a single entity on the international stage, it is an organisation that has 27 member states, each of which retains its sovereignty. The result of this is that the figures on two-way trade above perhaps give a skewed outlook on the relationship. Of the $527 billion in two-way trade in 2010, fully one third was between Germany and China, and the majority of the trade is with the EU’s four largest states (Germany, UK, Italy and France). When separated out this way and placed into the context of the global economy, the figures are not entirely surprising. It is to be expected that Germany is China’s largest European trading partner, both because of the size of its economy and the level of complementarity, as the majority of trade with Europe is in industry and machinery, sectors in which the German economy is strong. However, the significance of even smaller countries within the EU lies in the collective negotiating position that the EU has, allowing them to be part of a much larger negotiating team in dealings with China; this has the twin effect of increasing these countries’ relative leverage as well as to enhance the EU as a whole vis-à-vis China.

vpix / Shutterstock.comChina has taken on an even greater significance to the EU and its member states since the economic crisis of 2008 and the subsequent debt crises that have emerged in Europe, particularly in those countries that use the Euro. There have been some quite naked attempts from within Europe to woo the Chinese into buying up bonds to ease this situation. China has vested interests in ensuring the stability of the European market on which it relies so heavily for exports, prompting the leadership to issue broad statements of support and pledges to invest in Eurozone debt, especially from Italy, one of the countries most heavily in debt. However, these statements and pledges have also been augmented by warnings from China that Europe must do more to put its own problems right in this area and, most importantly, to protect Chinese investments in the EU. While it is clear that China holds most of the cards in this predicament – the Europeans cannot realistically solve the debt crises without Chinese investment – it is not in China’s own interests to exacerbate the situation and assistance is, therefore, likely to be forthcoming.

The European Debt Crisis

In order to join the European Union, potential member states had to sign the Maastricht Treaty which was to bind them into limiting their deficit spending and debt levels. Some European Union member states, Italy and Greece for instance, dodged this obligation by hiding their debt and deficit levels through the use of complex currency and credit derivative structures. Having entered the Eurozone, Greece and several other EU countries continued to run large deficits through the 2000s. In the early part of the decade, these deficits were less problematic as they were supported by economic growth. In Greece, this growth was driven by its shipping and tourism industries. With the 2008 financial crisis and the accompanying slowdown of the world economy, however, Greece’s debt, and that of other EU countries, began to rapidly build-up.

As government budget deficits and sovereign debts have increased sharply, a crisis of confidence has emerged which has resulted in Italy, Greece, Spain and Portugal’s credit ratings being downgraded, and in increased borrowing costs for those countries. These sovereign debt issues have become a perceived problem for the Eurozone as a whole, not the least because many of the struggling southern euro countries have received bank loans from France, Germany and other more solvent Eurozone members. France’s banks in particular have extensively lent to southern European governments. In September 2011, two of France’s largest banks, Societe General and Credit Agricole, were downgraded because of their exposure.

By April 2010, the EU and IMF agreed to an initial bailout package of €45 billion for Greece. In May 2010, austerity measures were proposed to reduce Greece’s deficit, as the country’s slow growth meant that it would be unable to repay its debt without significant cuts in spending. Many Greek citizens were unhappy with the severe austerity measures and have held national strikes in protest. A protest on 5th May 2010, for instance, was widespread and became violent, resulting in three deaths. Nevertheless, in the same month the IMF and the euro zone countries approved a €110 billion loan for Greece, conditional on the implementation of measures to reduce government spending. The Greek loan was followed by a loan of €85 billion for Ireland in November, and a €78 billion rescue package for Portugal in May 2011.

In May 2010, the 27 member states of the European Union agreed to create a €440 million European Financial Stability Facility, a legal instrument designed to maintain financial stability in Europe by being able to provide rapid financial assistance to European governments in need. These funds were to be made available in conjunction with €250 billion from the IMF. In January 2011, the European Union designed the European Financial Stabilization Mechanism, a €60 billion emergency lending program backed by all 27 European Union members. The idea is that EFSF and EFSM are to be replaced by the European Stability Mechanism due to be launched in mid-2013.

In order for Greece to be eligible for the next tranche of its bailout loan, in May 2011, the IMF proposed spending cuts amounting to €28 billion over five years. Greek citizens again took to the streets in protest. In October 2011, leaders of the 17 year zone countries met in Brussels to discuss a package aimed at addressing the crisis. A deal was reached in which it was recommended to write-down by 50% the Greek sovereign debt held by banks, to enlarge the European Financial Stability Facility to €1 trillion, to increase the mandatory level of bank capitalization, to ensure that Italy would make commitments to reduce its national debt, and to pledged €35 billion in credit enhancements to offset losses incurred by European banks. The package has yet to be put into effect, however, as Greek citizen resistance to continued austerity first caused Greek Prime Minister George Papandreou to propose a referendum on the package, then to withdraw the referendum, and eventually, to step down as the Greek Prime Minister. The Greek political situation currently remains unclear with voters apparently unwilling to sanction to agreement to slash public spending on which its bailout money depends.

Currently, the situation remains unresolved. Borrowing costs in Spain, Italy, Portugal, France and Greece have continued to rise up to the point where their debt levels could become unsustainable. In fact, bailouts for Irish and Spanish banks were issued in 2012. Part of the issue has been that the weaker economies of southern Europe have not been able to devalue their currencies in order to remain competitive as they surely would have done if they were single, sovereign entities, while Germany has enjoyed an artificially depressed currency allowing their exports to rapidly grow. Individually, the southern European countries could have more easily preserved their competitiveness through greater tolerance for inflation and corresponding regular devaluations. They would have had the ability to keep interest rates low and to engage in quantitative-easing and fiscal stimulus. They could have supported job-targeting economic policies, instead of introducing inflation- targeting policies as they are required under their current commitments.

This inability to make competitive adjustments through currency variations has created an imbalance of payments in the southern European countries. To correct this imbalance, without the ability to individually raise interest rates or to impose capital controls, the southern European countries have been borrowing to fund their deficits. As their deficits have reached unsustainable levels, they are now being asked to reduce their consumption in order to hike their savings rate and to reduce the capital outflows. This has come at a time when slower GDP growth rates have led to slower growth in tax revenues and higher social security spending, increasing deficits and debt levels further. The French May 2012 election of Francois Holland may mark a shift toward EU economic policies that emphasize growth instead of just austerity; certainly there has been a big upsurge in calls for simulative economic policies. In what form these policies take shape is still under negotiation.

Ultimately, the long-term sustainability of the Eurozone will require a common fiscal policy in addition to a common economic policy. Whether sovereign countries will be willing to let outsiders dictate their tax and government spending policies is yet to be seen. European economies, with high wages, large government social services and subsidies, and complex regulations and taxes are becoming increasingly uncompetitive in the global economy. These factors have been aggravated by Europe’s aging population, the growing use of technology to replace skilled labor, and globalization which has caused European manufacturing and services to relocate to lower-cost production centers.

What China’s role will be in the debt crisis remains to be seen. In the short term, Europe’s debt crisis is likely to be stabilized through financing from the EFSF, the IMF’s use of special drawing rights, or a combination of the two. Exactly how of if China contributes funds to this process is still an open question. Europe is China’s largest export market. If Europe derails, it also will drag down the global economy, which will negatively impact China’s own economic expansion. Although it is not known for certain, it is estimated that a quarter of China’s approximate $3.2 trillion in foreign exchange reserves are denominated in euros, so China has a vested interest in maintaining their value. China continues to need to diversify its foreign reserve holdings and Europe represents one potentially viable area for investing excess Chinese funds; China can only invest so much in its domestic economy without worsening inflation, creating asset bubbles or mal-investing. Playing a more active role in the European crisis might help solidify China’s positioning as a responsible power and enhance its clout on the global stage. It may also boost Beijing’s leverage with Brussels on issues such as gaining “market economy” status, increasing its role in international organizations such as the IMF and the World Bank, and on getting the US to stop pressuring it to ease its foreign currency controls.

That said, it is likely that bailing-out Europe would prove unpopular at home. On a per capita basis, China is much poorer than Europe; bailing-out Europe would give the impression that China is supporting rich foreigners at the expense of its citizens, especially given the widespread sentiment in China that Europe is in crisis in the first place because of its own profligate spending. The safety of EFSF issued bonds is also a concern for China. On numerous occasions, China has insisted that it cannot consider investing until Europe’s financial house is in order. Also, as China rises, disquiet in the West about China’s intentions intensifies. Depending on how China handles it, its efforts at assistance could be misconstrued as opportunistic mercantilism, especially if it invests in industries that it could later use as a springboard for further market penetration, as opposed restricting its investment to buying bonds.

Human Rights

pcruciatti / Shutterstock.com

The EU describes its core interests in the relationship with China as going beyond trade to incorporate matters of human rights and political reform. The way in which the EU seeks to alter China’s actions in this area is governed, as the rest of the relationship is, by the 1985 EC-China Trade and Cooperation Agreement (TCA). Although originally negotiated by a European Community that consisted of just 9 states, the TCA has since been updated and remains the bedrock of EU-China relations today. Under the terms of the TCA, the EU commits itself to engagement with China, particularly with regard to trade, in order that it may encourage the liberalization of China both politically and economically. The EU’s China policy, therefore, rests on a fundamental assumption that engagement is good and will encourage liberalization in China.

As part of the agreement the two sides hold regular summits on specific issues, including a biennial “Human Rights Dialogue” during which representatives of the EU offer assessments on the extent to which China has fulfilled previous human rights commitments and has the opportunity to raise individual cases of concern with their Chinese counterparts. This process is not entirely one-sided; the Chinese side frequently uses these meetings to point out what it considers to be issue of discrimination against people of Chinese origin within the EU, though the evidence produced for this is ordinarily quite unconvincing. The Europeans point to some limited successes from these dialogues, particularly in the release of political prisoners, such as Tibetan activists, ostensibly at the request of EU representatives. However, examination of the reports of these dialogues released by the EU shows that frequently the same cases are repeatedly raised, usually without any concrete action resulting. On the occasions where cases have been resolved there is little evidence that this has happened as a direct result of EU concern. However, it can be argued that a success of the EU’s approach is that it has institutionalized China’s acceptance of the discourse on human rights, allowing regular reporting to take place on its record in this area by an external party. Critics may see this as paying lip service to the idea, but others argue that this is just one stage in a long-term process of norm development.

The gulf in perceptions of human rights between Europe and China came to the fore in the run up to the 2008 Olympics in Beijing. Following the series of protests that occurred in Tibetan regions of China in March of that year, and the concomitant crackdown by Chinese authorities, many groups in Europe sought to register their anger and protest by targeting the Olympic torch relay as it passed through Europe. The reaction was strongest in France, where several protestors tried to grab, or even extinguish, the flame, while numerous pro-Tibet banners and flags lined the route. These scenes were mirrored in other EU countries, including the UK, and caused serious disquiet amongst both Chinese politicians and the general public, many of whom considered it to be an undeserved sleight on the Chinese nation. What followed was a period of particularly frosty relations, especially between France and China. A fairly widespread internet campaign, for example, urged the boycott of Carrefour, a French supermarket chain that has almost 200 stores in mainland China. After much speculation that he would boycott the opening ceremony of the games, the French president Nicolas Sarkozy appeared to back down and made public his intention to be present. This calmed the atmosphere at the political level, and the controversy now appears to have had no serious lasting impact on either Franco-Chinese or EU-China relations.

Arms Embargo

The biggest and longest running issue in China-EU relations, however, remains an arms embargo that was put into force in 1989 following the Tiananmen Incident. The embargo was the centerpiece of the European response to the crackdown which had been widely condemned among Western countries. It remains the only sanction imposed during that time not to have been lifted. What it means in practice is that no EU member state may sell weaponry to the PRC and this includes a responsibility to ensure that no third country acts as an intermediary. During a period of rapid modernization in the Chinese military, this has been a source of concern both to the Chinese government, who would like the freedom to purchase advanced military technology from EU suppliers, and also to some in the defense industry in Europe, which considers China to be a massive untapped market. It is an item that is on virtually every agenda at summits between the EU and China, but there is currently no realistic prospect of it being lifted. A groundswell of opinion did begin to form around lifting the embargo in the early years of the twenty-first century, with the then French president, Jacques Chirac, chief among those calling for at least a limited amount of arms sales to be permitted. While some countries supported this idea, it was opposed strongly by the US, a crucial ally of the EU. In direct response to US concerns BAE Systems, a British firm which is the largest manufacturer of arms in the EU, stated publicly that it would not countenance selling weapons to China even if the embargo were lifted. The debate came to an end in 2005 when China passed its Anti-Secession law, explicitly authorizing the use of force to regain sovereignty over Taiwan. Following this, even the most pro-Chinese European leaders realized that ending the embargo was a political impossibility. The question of lifting the embargo continues to be raised within Europe from time to time, most recently by the Spanish in 2010, but the prospects of it being lifted seem distant and unlikely. This is a continuing cause of irritation in China, where it is viewed, probably correctly, as more of a strategic decision than a statement on its human rights record.

Future Trends

All relationships that involve the EU are complicated by the fact that it is both a single entity and a diverse collection of 28 sovereign states. The diversity of the EU brings with it an incoherence in its strategy towards China. While all states value the increased and increasing levels of two-way trade and understand the centrality of China to future European economic growth, other aspects of the relationship are not dealt with in such a unified manner. The trajectory of economic expansion seems set to continue and the growth of exports to China within this expansion mean that any tensions that are caused as a result of the trade deficit will not be of great significance to the relationship. While the EU continues to define the issues of human rights and political liberalization as core to its China strategy, it could be argued that it is now taking a much more pragmatic approach in this respect. The policy of engaging with China in order to promote these aims rests on the fundamental principle that such engagement will help to bring about the desired changes in China, but this is not really borne out by the evidence. It seems unlikely that the EU will make serious inroads into its human rights and political reform agenda in China and, for their part, the Chinese seem willing to engage discursively in this process while continuing to place economic growth at the center of their strategy. With the core interests of both sides seemingly converging around trade, the issue of human rights seems likely to take more of a back seat. The exception to this will continue to be the arms embargo which is likely to remain in place for the foreseeable future, though this has now taken on more of a strategic importance, both to states within the EU as well as to key allies such as the US, rather than genuinely seeking to address issues of liberty in China.

In terms of the Eurozone debt crisis, it is hard to predict future outcomes given the incredible volatility of the current situation. Given all that China has at stake in Europe, it is unlikely that it will remain categorically on the sidelines. Given a choice, China has expressed a preference to buy European assets as opposed to government bonds, although it anticipates that Europeans may likely be more resistant to this idea. In such a case, it is likely that China will be more willing to provide funds for Europe through the IMF, especially if it’s increased funding buys it a greater voice in IMF policy making. Gaining greater clout in international organizations is a Chinese objective. Additionally, supporting the IMF will be easier to sell at home than investing in a strictly European-based financing mechanism. The IMF’s authority and experience at restructuring countries struggling with their finances will also provide China with additional comfort that its investments will not be squandered.