History of China's energy sector – Part II – 3 decades of changes: From Deng Xiaoping to Hu Jintao

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Zdjęcie: Chińska polityka energetyczna (82)

Written by Ernest Szymala, Joanna Mazurkiewicz

Introduction

In 1978, power in China was taken over by Deng Xiaoping, noticing the urgent request for economical modernisation and the country's exit from backwardness and global isolation. His approach to reforms was pragmatic and flexible, which perfectly reflects the celebrated Chinese proverb he followed: Mozhe shitou guo he “To cross the river, you must sense stones under your feet.” In turn, his words “Whether the cat is white or black, it is crucial to catch mice” symbolize the readiness to cross ideological divisions of the Cold War, emphasising efficiency and practicality. Deng stressed that the efficiency of the strategy is important, not its ideological label, thus beginning the way for economical reforms in the spirit of a pragmatic compromise between communism and capitalism.

The major changes were initiated during the 3rd Plenary of the Central Committee of the Communist organization of China in December 1978. These reforms, known as ‘Four Modernisations’, included agriculture, industry, discipline and technology and defence [1]. It can besides be summarized in 2 key slogans: gaige – economical reform, and kaifang – Open to the world, trade and abroad capital [2]. As a result, China has developed a unique model called "Chinese-specific socialism". It active combining an authoritarian political strategy with the introduction of market-based economical mechanisms that allowed for dynamic improvement while maintaining strict state control over key areas of social life.

Deng Xiaoping introduced China to the global arena as a new, changed player. Unlike the US and the USSR, which competed mainly through the arms race, China under its direction focused on macroeconomic indicators, proving, unlike the USSR, that the success and power of the state can be built on the basis of economical development, not just of military power. It was a strategy that not only turned China into a global economical power, but besides changed the world's power system.

Deng Xiaoping played a key function not only as the initiator of improvement and beginning China, but besides played a decisive function in appointing his successors – Jiang Zemina and Hu Jintao. Both leaders have successfully pursued much of Deng's policies, focusing on modernisation of the country and further economical growth. It was only during Xi Jinping's reign that broke this tradition, which introduced crucial changes in both the power structure and China's politics. In this article, we will look at the changes that took place in the mediate State during about 30 years of the regulation of 3 key figures: Deng Xiaoping, Jiang Zemina and Hu Jintao.

The expansion, improvement and beginning of China to the planet in the 1980s.

In the sixth five-year plan of 1982, the energy sector was identified as 1 of the key improvement priorities. It was decided to importantly grow and upgrade coal mines in regions specified as Shanxi, Hebei, Dongbei, East interior Mongolia, Shandong, Anhui, as well as in south-central, south-western and north-western China. The improvement of oil fields in the north-eastern and north-western basins of the country was besides supported and global cooperation was initiated in the field of offshore exploitation. The key step was to enact in 1982 the provisions of the PRC Exploration of Offshore Oil Resources in Cooperation with abroad Parts Regulations that opened the South China Sea to abroad investors [3].

As part of the restructuring of the Ministry of Oil Industry, 3 key organisations were created:

CNOOC (China National Offshore Oil Corporation), liable for the exploration, development, production and sale of crude oil in demarcated coastal zones and for coordinating global cooperation on oil extraction;
Sinopec (China National Petrochemical Corporation), to convert oil and natural gas into petroleum products and synthetic materials;
CNPC (China National Petroleum Corporation), concentrated on national exploration and exploitation of oil deposits on land [4].

Energy companies became “executors” of the central government gaining autonomy. They were empowered to take decisions on production management, personnel changes, wage and premium rates. However, government authorities were inactive under supervision. Under the fresh cultivation system, energy companies could sale overcapacity in the open marketplace in excess of the allocated amounts. Price differentiation has become a strong incentive to increase production

These changes were the beginning of the process of separating energy production and distribution from government administration. The oil manufacture has become the first sector undergoing this transformation, which has given energy companies broad autonomy. These companies have been given the chance to make their own decisions on production management, staff changes, as well as wage and premium rates, although they were inactive subject to government supervision. The introduction of the cultivation strategy allowed companies to sale surplus production on the open market, which, combined with the introduction of price differentiation, gave a strong incentive to increase productivity [5].

Beijing's motivation to carry out major reforms in the energy sector was clear: oil exports would become 1 of the key sources of backing for the modernisation of the country.

China benefited importantly from the oil shock and the sharp emergence in oil prices between 1979 and 1980, which resulted in crucial revenue. Encouraged by this success, the government intensified its operations in the field of oil extraction and exports, reaching almost twice the export growth – from 275 000 barrels a day in 1981 to 601,000 barrels a day in 1985 [6].

The urgent request to get a hard currency has caused that despite the immense interior energy demand, China has decided to usage a large part of home oil production for export. The government artificially maintained the difference between oil prices in the interior marketplace and export prices, allowing advanced profits to be generated. In 1985, China sold almost a 4th of the full oil production on planet markets, which accounted for as much as 36% of the full Chinese export value [7].

Figure 1 Exports and imports of crude oil from 1971 to 1993 (thousand barrels per day)

From the 1970s to the early 1990s, the Asia-Pacific region experienced fast economical growth, whose dynamics exceeded 4 times the increase in activity. This economical boom, driven primarily by Japan and Asian tigers – South Korea, Taiwan, Hong Kong and Singapore – importantly increased regional oil request [8]. For the Chinese oil industry, this was a period of prosperity. In 1989, more than half of China's exports of oil went to Japan (51.6%), and the remainder mainly to the US (17.2%), Singapore (15.1%), South Korea (4.5%) and North Korea (4.3%). Only around 7% of Chinese oil exports were fed by another countries [9].

However, since 1993 the increasing request for energy in China has changed the nature of the oil sector. Although China remains the 5th largest oil maker in the world, its production is incapable to meet national demand. Between 1965 and 2008, Chinese oil production increased seventeen times, but consumption increased as much as 37 times [10]. As a result, China was forced to import oil on an expanding scale, making it the world's largest importer of this natural material.

Second wave of decentralising reforms

The second wave of energy sector reorganisation from 1985 to 1988 brought fundamental changes, eliminating direct control of the central government over production and replacing erstwhile ministries with recently created enterprises. For example, the Ministry of Coal manufacture Ministry of Coal Industry) was divided into 4 separate organizations: China National Coal Corporation, Northeast interior Mongolia United Coal manufacture corp (in 2 separate units) and China National Local Coal Mine improvement Corporation. During the same period, Huaneng corp was established to accelerate investment and electricity production. In the atomic sector, the Ministry of atomic manufacture Ministry of the atomic Industry) transferred its administrative functions to China National atomic manufacture corp [11].

Despite these changes, energy companies remained mostly dependent on the central government during the period 1979-1993, especially in terms of funding. A large part of their capital was straight controlled by the State. For example, Huaneng corp utilized a peculiar substitution fund whose budget in the 1980s was between 1 and 1.5 billion yuan per year and the funds came from the sale of oil. [12].

As a consequence of the liquidation of the Ministry of Energy, the Ministry of Energy was created. Ministry of Energy), which served as a coordinating function towards the recently formed corporations. However, its competence was limited to developing an energy strategy, planning long-term production and overseeing major energy infrastructure improvement projects. Despite these tasks, energy corporations maintained certain administrative powers of their erstwhile ministries, which undermined the efficiency of central supervision.

Some researchers point out that the Ministry of Energy in fact was mainly active in the area of electricity, not fulfilling the function of coordinator of the full sector. As a result, between 1980 and 1992 there was no institution capable of effective management and integration of individual energy subsectors. This was a key problem for the further improvement of the Chinese energy sector, which required a more coherent and comprehensive strategy[13].

Figure 2 improvement of energy institutions between 1980 and 1992.

How decentralization fueled investments in the Chinese energy sector of the 1980s.

The introduction of "Chinese-specific socialism" importantly changed relations between central and local authorities, redefining the responsibilities and autonomy of local government administration. As part of the erstwhile central planning system, local initiatives frequently interfered with top-down improvement strategies. 1 of the key objectives of economical reforms was to improve these relations by introducing a more flexible financial model.

A fresh taxation policy based on quota agreements was introduced in 1980. Local governments were required to transfer a fixed amount of income to the central government and the remaining funds could be allocated to their own projects. In turn, the 1985 taxation laws further increased the competence of local authorities to manage funds, which contributed to strengthening their position in decision-making processes[14].

The fresh regulations allowed local governments to carry out more ambitious projects in the energy sector. The maximum cost of a single task increased from 10 to 50 million yuan[15] and local authorities could build fossil fuel-fired power plants up to 800 MW and hydroelectric plants up to 100 MW. This gave local governments greater freedom to implement their initiatives, which rapidly translated into a crucial increase in their commitment to energy investments.

The results of these reforms were impressive. The share of local governments in full investments in power plants increased from 1% in 1983 to 17% in 1990. In absolute terms, this meant an increase from 57 million to 4.6 billion yuan[16].

Back to Control: Reorganization of the energy sector in the 1990s.

The 1990s brought a return to centralization in the Chinese energy sector. State economical and Commercial Commission State economical and Trade Commission(SETC) is equipped with policy coordination powers in all energy subsectors. This was a reaction to the ineffectiveness of the Ministry of Energy, which failed to effectively control energy production and consumption in 1980-1992 due to a deficiency of organization capacity. As a result, the ministry was disbanded and its tasks were taken over by the SETC.

The central government strengthened control over investments, which resulted in restructuring investment firms in 1994. A State Energy Investment corp was established. State Energy Investment Corporation, SEIC), which took over most investment activities. The exception was the Energy Investment Company. Energy Conservation Investment Company, ECIC), which remained under the supervision of the State Planning Commission State Planning Commission, SPC).

During this period, the central government re-established ministries to facilitate the management of the energy sector, although the problem remained the appropriate demarcation of competences between ministries and state enterprises. An example of specified a division was the oil and gas sector, where various aspects of the activity were distributed among many actors:

Ministry of Geology and Natural Resources {C:$00FFFF} Ministry of Geology and Natural Resources) engaged in technology,
CNPC was liable for production,
Sinopec for refining and marketing,
CNOOC for offshore mining,
China National Chemicals Import and Export Corporation and Sinochem for import and export.

Coal mines owned by the central government were again managed by the Ministry of Coal. Ministry of Coal), while average and tiny mines remained in the hands of local authorities or even private individuals. The production and transmission of electricity were transferred to the Ministry of Electricity. Ministry of electrical Power), while the atomic energy sector remained in charge China National atomic manufacture Corporation [17]

These changes brought the desired government control in the energy sector, but, on the another hand, created difficulties in effective coordination between agencies. A peculiarly large disadvantage of change was the unclear separation of statutory actions between the entities involved.

The breakthrough of centuries brought another wave of reforms to adapt the energy sector to China's fresh dynamic economical and geopolitical situation. The 1998 restructuring importantly reduced the number of ministries and agencies operating within the State Council. State Council) – reduced from 40 to 29. The next step was to join China in the planet Trade Organisation. World Trade Organization, WTO) in 2001. Integration into the global marketplace has forced the implementation of more market-oriented reforms to increase the efficiency of the energy sector.

Rapid economical growth and the inflow of massive infrastructure investments in the 1990s and early 21st century importantly increased electricity demand. Energy consumption statistic in China show the scale of these changes. In 1985, China accounted for 20.7% of global coal consumption, 3.2% of oil consumption, 4.6% of water consumption and just 0.7% of gas. In the early 2000s these proportions increased to 31% for coal, 7.6% for oil, 10.7% for water and 1.2% for gas[18].

Figure 3 Primary energy consumption in China from 1990 to 2010 per capita in kg oil equivalent.

Figure 4 taxation National Product in China from 1990 to 2010 in billions of dollars.

SASAC and NDRC: Supervision in the shadow of corporate empires

Since the early 1990s, the energy sector in China has faced a immense challenge of adapting to dynamic economical growth on an unprecedented scale. Since Deng Xiaoping's beginning reforms began, the Chinese economy has grown almost 20 times per US dollar, with an average yearly GDP growth rate of 10%. This amazing improvement resulted in a crucial increase in the profitability of state-owned enterprises, which began to play an increasingly crucial function in the country's economy.

In 2003, the fresh administration led by Hu Jintao attempted to strengthen central control over the increasing state enterprises. To this end, a National Surveillance and Property Administration Commission was set up. State-owned Assets Supervision and Administration Commission, SASAC), which has received management powers of 189 key state-owned enterprises[19]. At the same time, the function of the National improvement and improvement Commission increased. National improvement and improvement Commission, NDRC), which gained more competence in national infrastructure spending and the approval of abroad investment, especially after the 2008 financial crisis.

Despite these actions, the fast improvement of state-owned enterprises in 2000-2010 exceeded the capacity of the central government to monitor them effectively.

The average number of state-owned companies increased more than twice between 2003 and 2010, making SASAC incapable to control their transformation into powerful corporate empires. Similarly, the NDRC had difficulty overseeing abroad purchases of energy and natural resources[20].

As a result, despite attempts to strengthen central power, Hu Jintao's period of regulation became a time erstwhile state enterprises not only grew stronger but besides gained expanding political and economical autonomy. Many companies and their leaders operated in practice independently of the central government, frequently going beyond sanctioned legal or political autonomy. This phenomenon points to the evolution of the state sector, which, although under formal supervision, was increasingly independent of the central power structures.

Figure 9 improvement of energy institutions between 1993 and 2008

China and climate change: Ambitious plans and organization challenges

What was significant, the Hu Jintao and Wen Jiabao period of regulation was distinguished by expanding awareness of the request to defend the environment and crucial steps in this direction. In 2007, China became the first developing country to make and print a national strategy for global warming – the National Climate Change Programme[21]. This strategy was a signal that the mediate State had begun to consider climate change as a key challenge in its improvement policy. In parallel, the five-year plans stressed improving energy efficiency and expanding the share of renewable energy in the national energy mix. In 2008, the rank of the erstwhile State Environmental Administration was raised, transforming it into a ministry, which further highlighted the precedence nature of environmental issues.

These changes took place against the background of massive economical growth and the expanding importance of state-owned enterprises, which was like the dynamics of Deng Xiaoping's years. However, the organization structure of the energy sector inactive left much to be desired.

For example, in 2007, the National improvement and improvement Committee (NAP) was the European Union’s largest associate of the European Union. National improvement and improvement Commission, NRDC) employed only 750 people. For comparison, the U.S. Energy Information Agency Energy Information Agency, EIA) – an organization focused mainly on data collection, analysis and education – employed 620 people in 2004, while the full U.S. Department of Energy had 14,713 employees[22].

The decentralisation of the energy sector in China has made many decisions on the main issues in this area not by central authorities in Beijing, but by quasi-public and quasi-private companies. In this context, US experts recommended that the US energy policy towards China should not be limited to dialog with central policy makers only, but besides included those companies that played an increasingly crucial function in shaping the real energy policy in the country.

Summary

The period 1978–2008 was a time of continuous change and reorganisation which reflected a distinctive pattern of improvement of the Chinese organization system. This model, known as the cycle Fang-Shou (Chinese: 放 fang – relax; 收 shou – tightening), shows alternate stages of liberalisation and centralization[23]. erstwhile the central government recognizes that control is besides extended and inhibits development, it delegates greater powers to local governments and citizens. But erstwhile he feels that he is losing control of key areas, he rapidly moves on to consolidating power.

Cycle Fang-Shou reflects tensions within the Communist organization of China (KPCh), where 2 schools of thought are abrogated: reformers, striving for greater openness and decentralisation, and conservatives who fear losing control of key sectors. Although this concept is usually utilized in political and historical analysis, it can besides be successfully applied to the energy sector, which has undergone a number of transformations over this period reflecting a akin cycle.

Examples discussed in the first 2 parts on the INE website show that both the liberalisation stages and the centralisation periods were crucial to the evolution of the Chinese energy system. Ultimately, the energy strategy that took over Xi Jinping was a hybrid in which modernisation aspirations were combined with a profoundly rooted tradition of centralised management.

Bibliography

[1]Bogdan Góralczyk, 4 stages of Chinese reform, https://www.observatorfinance.pl/thematics/macroeconomics/trend-economics/four-stage-Chinese-reforms/,

[2] Bogdan Góralczyk Great Renaissance Chinese transformation and its consequences, Dialogue, Warsaw, 2018, p. 70

[3] Paul Yuan China’s Offshore Petroleum Resources Law – A Critical and Interpretative Analysis, The global Lawyer, 1982 pp. 647 – 669 self-translation.

[4] Jimin Zhao Reform of China’s Energy Institutions and Policies: Historical Evolution and Current Challenges, Kennedy School of Government, Harvard University, p. 5 own translation.

[5] Michael Arruda, Ka-Yin Li China’s Energy Sector: Development, Structure and Future, China Law&Practice, No.17(9) 2003, pp. 12-17 own translation.

[6] A part a day.

[7] Wang Haijiang China’s impact on the planet crude-oil market, The diary of Energy and Development, Volume 19 no. 1, 1993, p. 83 own translation.

[8] Wang Haijiang China’s impact on the planet crude-oil market, The diary of Energy and Development, Volume 19 nr. 1, 1993, p. 82 own translation.

[9] Wang Haijiang China’s impact on the planet crude-oil market, The diary of Energy and Development, Volume 19 nr. 1, 1993, p. 85 own translation.

[10] Zhang Jian China’s Energy Security: Prospects, Challenges, and Opportunities. The Brookings Institution Center For Northeast Asian Policy Studies, 2011. p. 8 own translation.

[11] Jimin Zhao Reform of China’s Energy Institutions and Policies: Historical Evolution and Current Challenges, Kennedy School of Government, Harvard University, p. 5 own translation.

[12] Jimin Zhao Reform of China’s Energy Institutions and Policies: Historical Evolution and Current Challenges, Kennedy School of Government, Harvard University, p. 5 own translation.

[13] Yang Fuqiang, Duan Ning, Huan Zhijie, Mark Levine, Nathan Martin, Jonathan Sinton, Wang Qingyi, Zhou Dadi, Zhou Fenqi, Zhu Chengzhang A Review of China’s Energy Policy, Lewrence Berkeley National laboratory Report, 1995, p.8 own translation.

[14] Jimin Zhao Reform of China’s Energy Institutions and Policies: Historical Evolution and Current Challenges, Kennedy School of Government, Harvard University, p. 7 own translation.

[15] About $5.5 million.

[16] Yang Fuqiang, Duan Ning, Huan Zhijie, Mark Levine, Nathan Martin, Jonathan Sinton, Wang Qingyi, Zhou Dadi, Zhou Fenqi, Zhu Chengzhang A Review of China’s Energy Policy, Lewrence Berkeley National laboratory Report, 1995, p. 14,15 own translation.

[17] Jimin Zhao Reform of China’s Energy Institutions and Policies: Historical Evolution and Current Challenges, Kennedy School of Government, Harvard University, p. 8 own translation

[18] BPStatistical Review of planet Energy – all date, 1965 – 2019

[19] Wendy Leutert Firm Control: Government the State-owned Economy Under Xi Jinping, China Perspectives, 2018, p. 27 own translation.

[20] For more information see Xu Yi-Chong Sinews of power: the politics of the State Grid corp of China Oxford University Press, 2017 and Xu Yi-Chong, China’s Giant State-Owned Enterprises as Policy Advocates: The Case of the State Grid corp of China, The China diary (79), 2018 pp. 21-39.

[21] Karl Hallding, Guoyi Han, Marie Olsson China’s Climate – and Energy – safety Dilemma: Shaping a fresh way of economical Growth, Journal of Current Chinese Affairs, 2009 (38), pp. 119 – 134 Own translation

[22] Edward Cunningham China’s Energy Government Perception and Reality, The Audit of Conventional Wisdom, MIT Political Science, 2007, p. 3 own translation.

[23] Jimin Zhao Reform of China’s Energy Institutions and Policies: Historical Evolution and Current Challenges, Kennedy School of Government, Harvard University, p. 8 own translation.