China's Resources Demand and Sustainable Development ...

Wooltorton, S. and Marinova, D. (Eds) Sharing wisdom for our future. Environmental education in action: Proceedings of the 2006 Conference of the Australian Association of Environmental Education

Chapter 38 China’s Resources Demand and Sustainable Development: Implications for Australia Jin Hong School of Humanities and Social Science, University of Science and Technology of China and Institute for Sustainability and Technology Policy, Murdoch University Dora Marinova Institute for Sustainability and Technology Policy, Murdoch University Dingtao Zhaoc Department of Management Science, University of Science and Technology of China 1. Introduction Over the last two decades China has been experiencing dramatic economic growth. The country’s GDP has quadrupled since 1978 and the estimated GDP growth rate is 10% in 2006 (National Bureau of Statistic of China, 2006). Correspondingly, resource and energy demand in China has increased tremendously. In 1978 the total primary energy consumption in China was 0.57 billion tons of SCE (standard coal equivalent), and in 2005 it increased to 2.22 billion tons of SCE. Twenty years ago, China was East Asia’s largest oil exporter, and now it is the world’s second largest importer. At present, China’s combined share of the world’s consumption of aluminum, copper, nickel and iron ore has reached about 20%. China’s economy could grow at 8-9% per year for the next 20 years. Along with this continuous expansion, China’s resource demands will also be escalating. These changes have greatly influenced China’s public policies, especially energy and resource policy, including foreign activities to strengthen cooperative relations with resource-intensive countries. Australia, and Western Australia (WA) in particular, is an ideal target for China. China can get a stable, quality resource supply from Australia, triggering commodity boom and financial benefits for Australia (and WA). However the effect (short-term and long-term) produced by this supply-demand relation is very complex with multiple implications particularly for sustainable development strategies. The boom is not without some risk as history has demonstrated for resource rich countries, such as Russia or Venezuela. How Australia handles this will have long-term implications for its future sustainability. 2. China’s Resource and Energy Demands China has a population of 1.3 billion and its gross domestic product (GDP) in 2005 was RMB18,232 (A$3,044) billion (see Figure 1), an increase of 9.9% over 2004 (National Bureau of Statistic of China, 2006). The biggest contributor for this increase was the secondary (i.e. manufacturing sector), which grew at 11.4% compared with 5.2% for the primary sector (i.e. resource based sector) and 9.6% for the tertiary industry sector (i.e. services). Consequently, China’s resource and energy demand increased drastically with the demands of its fast growing economy and manufacturing industries in particular.

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2.1. Structural analysis of China’s resource and energy demand Energy and resources have been playing an important and strategic role in China’s economy. According to BP World Energy Statistics 2005 (in Crowley, 2005), China is the world’s largest consumer of coal, copper, iron and steel. It is also the second largest consumer of oil and electricity. Figure 2 shows the change in total primary energy consumption during China’s 10th Five-Year-Plan (FYP) between 2001 and 2006, while Figure 3 shows the breakdown by source. China’s demands have become a critical factor in the world resource and energy market.

Source: China Statistics Report 2005

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Source: National Bureau of Statistic of China China’s own resource and energy production has also been increasing rapidly (see Table 1) but the gap between consumption and production has been significant in total primary energy, crude oil, iron ore and copper. Although China is self-sufficient as far as coal is concerned (it also represents its largest energy source at 67.7%), with the sustained rapid industrial development the demand for crude oil will continue to grow as will the demand for iron ore and copper. Table 1. Production and consumption of energy and resources in China, 2005

Total primary energy (SEC, 100 million tons) Coal (100 million tons) Crude oil (100 million tons) Natural gas (100 million m3) Hydroelectricity (100 million kWh) Iron Ore (100 million)* Copper (10000 tons)*

Production Growth Rate Consumption Growth Rate (%) (%) 20.6 9.5 22.2 9.5 21.9

9.9

21.4

10.6

1.81

2.8

3.0

2.1

500

20.6

500

20.6

4010

13.4

4010

13.4

3.1

22.5

5.19

29.1

206.1

14.88

330

11.9

Source: National Bureau of Statistic of China; * 2004 data

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2.2 Reasons for the rapid increase in resources and energy demand in China Firstly, economic growth stimulates demand for resources. In developing countries, energy demand is closely correlated with economic growth. A robustly growing economy, such as China’s, leads to high consumption of energy. Secondly, a large share of the increase in energy consumption is stimulated by nonproductive purposes. As living standards rise in China, people increase their spending on home appliances for air conditioning, refrigeration, cooking, and space and water heating, as well as on automobiles and other energy-intensive products. Urbanisation strongly accelerates this process. Thirdly, energy consumption is still inefficient. According to official statistics, energy used to generate every RMB10,000 (US$1,250) in GDP in 2004 and 2005 requires the burning of 1.43 tons of SCE. This figure was 3-10 times higher than for developed countries. Government statistics show that China's energy consumption per unit of GDP rose slightly, by 0.8%, in the first half of 2006. The rise represents a major challenge for economic planners, who envisaged a 4% reduction in the country's energy consumption per unit of GDP for the whole of this year. It also represents a significant concern to the global community with the strong reliance of China’s economy on fossil fuels and coal in particular, which generate large amounts of CO2 and other greenhouse gases. 2.3 Future development trends Predicting the accurate figure of China’s resource demands in the future is difficult, and a somewhat risky job. A report published in 1999 claimed that China’s total energy consumption is projected to increase from 1.32 billion tons of SCE (btce) in 2001 to 1.64 btce in 2005 and 2.22 in 2015 (Shi and Zhao, 1999). In fact, demand has already increased to 2.22 btce in 2005. However, some basic trends can be described. Generally China’s resource and energy demands will keep a high growth rate. According to a research report of the Chinese Academy of Geology (Wang, 2002), the combined amount of China’s demand for oil, gas, copper and aluminum in the coming 20 years is 2 to 5 times its present reserves. By 2020, oil imports by China will be 500 million m3, and its dependence on import will be 70% of demand; natural gas imports will be 100 billion m3 – 50% of demand. From 2012 to 2014, China will face resource consumption peaks. Annual iron consumption will be 240 to 260 million tons and the supplydemand gap over 20 years will be 3 billion tons. Annual copper consumption will be 5.3 to 6.8 million tons and the supply-demand gap for 20 years will be 50 to 60 million tons. From 2022 to 2028, China will face an aluminum consumption peak. Annual consumption will be 13 million tons and the supply-demand gap for 20 years will be 100 million tons. In any case, China will continue to be a big buyer in the world resource market. Energy consumption structure will improve gradually and in particular consumption of renewable energy and natural gas will increase rapidly. However, because of price and supply considerations, the basic composition of energy would not be changed

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greatly. Coal will continue to play a dominant role in China’s mix for the foreseeable future. According to Wu (2003), environmental awareness is already becoming a major factor in determining energy policies in China. As the Chinese society becomes more affluent, demands for clear air and less polluted environment are heard stronger, particularly coming from urban residents (Kristen, 2005). Although China is a low CO2 emitter on a per capita basis, in absolute terms it is the second largest polluter, only behind the US (Wu, 2006). A drastic change is needed to turn the wheels against the trend of China becoming the world’s largest CO2 producer by 2020-2030. The role of relatively environmentally advanced countries, such as Australia can be significant in slowing down this trend. 3. Resource and Energy Supply Links between China and Australia 3.1 China-Australia trade outlook Australia and China are important economies in the Asia-Pacific region as well as globally. China is Australia’s second largest trading partner – A$32.8 billion, the second largest export market – A$13.0 billion or 10.2% of total exports, the second largest source of imports – A$19.8 billion or 13.3% of total imports (Government of Australia, 2005). Australia is China’s 11th largest merchandise trade partner, 11th largest import source and 13th largest export destination. Table 2 shows that the trade balance between the two countries is negative for Australia. The boom in Australia’s resource sector triggered by China’s demand is likely to slightly reduce the gap; but as China’s economy continues to grow, imports to Australia are also likely to increase. An additional factor which could contribute to narrowing the trade gap is the expected increase in the costs of production in China (and labour costs in particular) as its economy becomes more and more affected by globalisation. Table 2. Merchandise trade details between China and Australia $A million 2000-01 2001-02 2002-03 2003-04 2004-05 Australian 6841 7817 8803 9935 12978 exports Australian 9881 11275 13789 15338 19812 imports Balance -3040 -3458 -4986 -5403 -6843 Source: Department of Foreign Affairs and Trade, Australia

%YOY 30.6% 29.2%

For Western Australia (WA) in particular, China is its 2nd largest trading partner with two-way merchandise trade worth A$9.6 billion in 2005, and China is on track to become WA’s biggest trading partner by 2007 (Government of Western Australia, 2003a). 3.2 Australia’s resource and energy supply to China More importantly, the economies of China and Australia are complementary and have a great cooperation potential. In 2004, primary commodities accounted for around two-thirds of the value of Australia’s merchandise exports to China (Government of Australia, 2005). Iron ore, aluminum, wool and energy (including petroleum and coal) are Australia’s largest exports (see Table 3).

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Table 3. China’s top ten merchandise imports from Australia US$ million 2001 2002 2003 Iron 945 995 1,632 Alumina 523 589 998 Wool 639 682 588 Crude 154 242 445 petroleum Coal 28 146 208 Wheat 8 10 1 Gases 74 87 127 Aluminium 96 135 196 Barley 211 229 133 Manganess 46 56 104 ores Source: Department of Foreign Affairs and Trade, Australia

2004 3,346 1,103 900 467 387 364 273 261 239 227

As Table 4 shows, most of natural resources exports to China increased rapidly in 2004-2005. These trades are underpinned by sizable long-term contracts, for example for iron ore and the sale of liquefied natural gas into the Guangdong market, and will remain the basis of Australia’s export trade for many years to come. As a resource-rich state, WA is supplying China with a large amount of natural resources, and its top 10 exports to China in 2005 include iron ore, crude petroleum and nickel ores. 4. Effects on Australia from the Rise of China From a sustainability point of view, the effects of China’s demands on Australia include positive as well as negative dimensions. Sometimes in realistic situations it is difficult to distinguish between these two dimensions because what is positive or negative often depends on the choices made and the measures put in place to deal with the challenges. 4.1 Economic effects China’s huge and continuing demands have and will continue to propel the Australian economy giving it opportunities to restructure or adjust. In economic development, natural resources should be treated as an important source of income, some of which should be saved and converted into capital to support increases in future output levels. For example, resource rents may be used for the nurturing of new industries, science and technology activities, education and health programmes, transport (in particular public transport) development, modernisation of telecommunication systems amongst others. On the other hand, the boom resulting from the advantage of abundant natural resources in Australia will continuously strengthen resource industries in the Australian economy. Such a trend can be risky as overdeveloped resource industries may restrain development of other industries, especially skill- and technologyintensive industries.

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Table 4. Change of Australian merchandise exports to China in 2004-05 $A million 2003-04 2004-05 $A Total exports 9935 12978 3044 Other ores (excl. 242 483 242 iron and copper) Nickel 83 167 84 Coal 325 490 166 Iron ore 1911 3818 1907 Copper 121 171 50 Wool 1066 1276 210 Aluminium 277 232 -45 Crude petroleum 670 307 -362 Cotton 186 125 -61 Source: Department of Foreign Affairs and Trade, Australia

%Change 30.6% 100% 102% 51% 100% 41% 20% -16% -54% -33%

According to Sachs and Warner (1995), countries which base their economies on natural resources, such as Russia, Nigeria and Venezuela, tend to be examples of development failures. In contrast, countries which had only limited access to natural resources, such as Japan, Hong Kong, Korea, Singapore and Switzerland, experienced remarkably high economic growth rates. Further interesting conclusions about the “resource curse” are presented by Sachs and Warner (1995, 2001), Papyrakis and Gerlagh (2004). Availability of natural resources may lead to sloth and less need for sound economic management and institutional quality. The boom may also create a false sense of security and weaken the perceived need for investment and growth-promoting strategies. Natural resource abundant economies benefit less from the technology spillovers that are typical in manufacturing industries. Finally, as the natural resource sector expands relative to other sectors, the returns to human capital decrease and investments in education decline. All these are warning signs for Australia and WA. 4.2 Ecological effects Rapid growth of resource industries results in ecological and environmental pressures: non-renewable resources are being depleted; some landscapes are being transformed; water and soil can be affected; population (and labour) growth puts pressure on residential areas. As China’s resources demand will keep on for a long time, it will continue to bring pressure on the ecological systems in Australia and Western Australia. Economic prosperity does not play an absolutely negative role in environmental protection. In fact, it can strengthen Australia’s and WA’s financial ability to engage in positive ecological restoration, environmental infrastructure, etc. It can allow for a bigger scrutiny for development projects as far as their environmental impact is concerned. Sustainability assessment can be put in place to make sure that enduring benefits flow into all areas.

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4.3 Governance effects As a new economic power, China will definitely (albeit limitedly) influence the political system of Australia. Some politicians and parties who keep close relation with resource industries will play more important role in the political and administrative activities at the national and state level. Rent-seeking economic agents will put pressure on the administration in order to gain access to attractive resource projects (Krueger, 1974). At the same time, sections of the civil society will challenge certain decisions, particularly how they relate to environmental protection. Many policies and governance structure affecting decision-making may have to change. 4.4 Social and cultural effects With the growth of two-way trade and personnel exchange, diverse factors of Chinese culture influence the social and cultural life of Australia. Although Chinese people have been living in Australia for a long time, the Chinese cultural elements brought by them are thin and superficial, without influencing mainstream culture (rooted in European culture with core values originating from Christianity). In the future, however, Chinese culture (rooted in Confucianism) will play a more important role in Australia’s cultural diversity. A clash of civilisations, to some extent, may take place. 5. Policy Suggestions 5.1 Promote the ideas and knowledge of sustainability In order to realise sustainability as social advancement, economic prosperity and environmental protection (Government of Western Australia, 2003b), government, industries and the community need to be aware of their respective responsibilities. Sustainability education and communication should be provided to everybody but the role of certain key actors will be crucial. Such key actors – special individuals, administrative and government institutions, economic agents, NGOs and local community – are critical stakeholders that have important impact on Australia’s sustainability strategy. Organised in a key actor network, they can not only provide sustainability education but further become a hub of knowledge diffusion and strategy implementation with impact beyond the borders of Australia, including China. A noteworthy problem is that most Chinese firms have weak awareness of environmental protection and sustainability. Such an Australian network should popularise ideas and knowledge of sustainability and social responsibility, helping Chinese businesses accept an advanced model. 5.2 Promote green and innovative milieu in Western Australia Australia but WA in particular has a strong tradition of sustainability and social communities embrace green and environmental ideas. China’s boom will also bring some positive Chinese cultural elements such as harmony between nature and humanity, the golden mean (of Confucian school), and other oriental wisdom. If the resource boom is used to encourage smart industrial development, including science and technology and education, WA could become a green and innovative milieu with quality environment, economic prosperity, cultural diversity and social inclusion.

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Acknowledgement The first author wishes to acknowledge the support of National Social Science Foundation of China, and National Innovation Centre of History and Civilization for Science and Technology (USTC) and the second author is grateful for the support of the Australian Research Council. The authors also want to thank two referees for their helpful comments. References Crowley, P. (2005). China and the Far East: Future energy strategies & security scenarios, Rio Tinto Energy. http://www.westminsterenergy.org/events_archive/ downloads/China20051201/crowley.pdf, accessed 22.10.2006. Government of Australia. (2005). Australia-China Free Trade Agreement: Joint Feasibility Study. Canberra: Department of Foreign Affairs and Trade, Australia and Ministry of Commerce, China. Government of Western Australia. (2003a). China: Economic reform and implications for Western Australia. Economic Research Paper. Perth: Department of Treasury and Finance. Government of Western Australia. (2003b). Hope for the future: the Western Australian State Sustainability Strategy. Perth. Kristen A.D. (2005). China's environment and the challenge of sustainable development. Armonk, N.Y : M.E. Sharpe. Krueger, A.O. (1974). The political economy of the rent-seeking society. American Economic Review, 64 (3), 291-303. National Bureau of Statistics of China (2006). http://www.stats.gov.cn, accessed 22.10.2006. Papyrakis, E. & Gerlagh, R. (2004). The resource curse hypothesis and its transmission channels. Journal of Comparative Economics, 32, 181-193. Sachs, J.D. & Warner A. M. (1995). Natural resource abundance and economic growth. In NBER Working paper No 5398, Cambridge, MA. Sachs, J.D. & Warner, A.M. (2001). The curse of natural resources. European Economic Review, 45, 827-838. Shi, Q., Zhao, J. (Eds) (1999). Development report of Chinese industries 1999. Beijing: China ZhiGong Publishing House. Wang, A. 2002. Minerals and Economic Development. Beijing: Earthquake Publishing Company. Wu, Y. (2004). China’s Economic Growth. London: Routledge Curzon.

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Wu, Y. (2003). Deregulation and growth in China's energy sector: A review of recent development. Energy Policy, 31(13), 1417-1425. ____________________________ Author Email: [email protected]

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