China: 'Airpocalypse' Now

Tyler Durden's picture

Authored by Richard Iley of BNP Paribas,

  • China’s growth model, which has delivered an economic miracle over the last 30 years, is increasingly close to exhaustion. Diminishing returns are increasingly evident.
  • A bloated investment share, fed by financial repression and the systematic mispricing of capital, is producing growing resource misallocation and soaring credit dependency.
  • China’s lopsided investment-led growth is also feeding voracious growth in energy demand, particularly coal, which is generating increasingly deleterious environmental consequences.
  • Radical reform of the financial system that has spawned China’s alarming rise in credit and energy dependency over the last decade is the only solution.

China at the point of 'model exhaustion'

China’s economic model, which has delivered a genuine economic miracle over the last 30 years by lifting more people out of poverty than ever before in human history, is increasingly tapped out. While the authorities have been talking about rebalancing the economy since at least 2006, China’s macroeconomic imbalances have become progressively more extreme. The economy now has an investment share of ~48% of GDP, which no other economy has been able to reach, let alone sustain. Unsurprisingly diminishing returns are increasingly apparent.

Gauging the efficiency of investment is difficult, but one approach is to look at so-called incremental capital output ratios (ICORs). Calculated as the investment share divided by GDP growth, China’s ICOR, at over 5x, has been flashing amber for some time, implying that any further increase in the investment share will have next to no impact on GDP growth. Consistent with its ICOR rising to dangerous levels, China’s credit elasticity has soared to levels seen in the US immediately prior to the global financial crisis (see China: Would you credit it?). Consistent with ‘model exhaustion’, credit growth at a c.25% annualised pace over the last six months appears to be producing only a relatively lacklustre recovery by historical standards.

Environmental cost of China's model is high

The corollary of China’s unsustainably rapid investment growth and climbing credit dependency is unsustainably rapid growth in energy consumption and pollution. The media has focused on the suffocating levels of air pollution being experienced by Beijing, where levels of micro-particle pollution have reached over 880 on a scale that supposedly goes up to 500. While Beijing suffers from a number of idiosyncratic problems (sand storms, a ‘bowl’ location), official statistics only peg Beijing as the third-most polluted city in China after Lanzhou and Urumqi.

China’s CO2 emissions have soared since 2002 and at 8.9 billion of tons of oil equivalent in 2011, have surged past those of the US and EU. China’s share of global CO2 emissions (34 billion tons of oil equivalent in 2011) has jumped from 14% in 2002 to over 26%. As is frequently the case with China, its scale is what is makes it so different. The compound growth of its CO2 emissions has slowed to a still frighteningly fast 40% in the five years to 2011 (below India’s 47%). And its economy’s increasing size (it should reach USD 9trn this year) means that it has accounted for a stunning 73% of the increase in global CO2 emissions in the last five years.

China’s pollution problems reflect the fact that the investment-intensive nature of its GDP growth in the last five years has ensured that the energy intensity of per-unit GDP, previously falling, has started to flatten out. China’s strong GDP growth since the global financial crisis has, therefore, produced an huge surge in absolute energy consumption. China’s primary energy consumption has leapt from 1.1 billion tons of oil equivalent a decade ago to over 2.6 billion tons in 2011, much larger than both the US (2.26 billion tons) and the EU (1.69 billion tons).

Increased energy needs largely met with coal

Greatly exacerbating the problem is that China’s sharply rising energy demands continue to be met primarily by coal. While China’s coal dependency was showing signs of falling in the 1990s and the early part of the last decade, the rise in the investment share during the Wen era has seen China’s coal dependency pick back up, with the increase coal consumption accounting for two-thirds of the economy’s increased energy needs in the five years to 2011, for example.

Similarly, China’s coal consumption per unit of GDP has flattened out, breaking the downtrend in place between 1980 and 2002. The net result is that China’s coal consumption has reached extraordinary levels. From 2007 to 2011, it grew 40% to be worth almost 50% of global coal consumption, accounting for a staggering 89% of the increase in global coal consumption over the period. China was still a net exporter of coal as recently as 2008, but 2012 saw it run a coal trade deficit of USD 27.7bn (Chart 4).


And the torrid pace of increased coal consumption shows little sign of abating. Despite 2012’s sluggish 7.8% GDP growth, coal imports rose by more than 105 million tons. Regionally, Indonesia and Australia have been the key beneficiaries, with their coal exports over the last five years rising by around USD 25bn and USD 40bn, respectively.

Explosive investment math ominous

The unsustainable trajectory of China’s development arc has been long understood; that’s why Chinese policymakers have been talking about rebalancing China’s economy since at least 2006. Less well understood is that the imbalances have been getting worse and quite how toxic (literally) Premier Wen’s legacy is likely to prove (see China: ‘Helicopter Wen’ flies off).

We have previously highlighted how if China’s credit growth continues on its current trajectory, China’s total credit market relative to GDP will be on a par with the US’s immediately prior to the global financial crisis. Largely uneconomic investments in sectors already suffering overcapacity, such as real estate and steel, continue to accelerate, fuelling exponential growth in energy consumption and producing increasingly unbearable levels of pollution.

With GDP set to exceed USD 9trn this year, China’s investment share of close to 50% means that without radical reform of its economic model and financial system that pulls back the investment share, the economy will make new investments (ie, the gross flow into the capital stock) of almost USD 20trn in the next four years. While a substantial part of these investments will inevitably be wasteful and, so, depreciate quickly, such a mind-bogglingly large investment flow will inevitably see China’s energy consumption and pollution levels continue to soar.

Policies that address the symptoms, such as energy-reduction targets via curbs on driving and restrictions on factory activity near major cities, are likely to be of limited success unless the root cause of the problem – mispriced capital and the moral hazard created by the belief that the state backstops the entire financial system, whatever its size – is tackled. Despite the long-term gulf between reform rhetoric and concrete action, ‘hype’ at least continues to spring eternal.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
MrX's picture

Don't for get to smoke lots of doobies this weekend:


swissaustrian's picture

Chart#2 totally supports the thesis that we Westerners in the US and Europe must introduce carbon taxes while the Chinese do not.

The UN told us so.

falak pema's picture

if you believe in global warming then its vital to set the example and not wait for the other guy to start...

If you don't its another problem. 

francis_sawyer's picture

Chinese Solars! ~ use your bitcoins to buy 'em!


If you don't like 'odd lots', then pour the rest into RURUREMON...

francis_sawyer's picture

'Reo' ~ ror [bRobbing up on occasion]

sangell's picture

China is protecting our planet from another Ice Age.

JOYFUL's picture

if you believe in global warming then you assuredly deserve the fate that awaits all those who, contrary to common sense,(and the evidence of their senses!)insist on subscribing to the latest, cutting edge effort of[the global elites, usual suspects, "oligarchs"@@! - fill in your favorite term here]to construct another level of bogus taxations and structural inefficiencies upon the already declining economic engines of a sputtering world economy.

Carbon has no doubt been selected for this scam because the 'think tank' folks who get paid to sit around dreaming up these scams took a look at what is left that has not already been made expropriable into a commodity for profit...and realized that breathing represents the final frontier! Taxing the sheeple for expelling carbon dioxide(and if you think they are likely to stop after taxing industrial emissions, and not move on to the next echelon, your naiveity is truly boundless!). Soon it will be mandatory to quite literally 'express your support' for the god-like government with every breath!

And it's only fitting that the greatest supporters of this total command economy effort should wish to impede the Chinese from catching up in the carbon-spewing sweepstakes...after all, in the post-legacy economies of the 'green' west, it's long past the time for coal and other noxious substances...right?, wrong...while Europe freezes this winter with yet more record-breaking cold, the genius of the Eurocrats in boosting subsidies for technologies which refuse to actually function when most needed has revealed itself...higher and higher unit costs have consumers there reeling at the same time as expensive gas-prodution plants are being mothballed right after construction...and cheap American coal is being rushed in to save the day!  Shutting down 'uneconomical' fossilfuel plants used to be assumed to mean 'dirty fuels' like coal...but due to the miracle of centrally planned 'anti global warming' initiatives some 12 000 MW of 'clean' gas-fired plant capacity may have to be shut in Europe by 2020, as Europe continues it's drive into economic eco-cide.

China, of course, has been shivering in the grip of even greater cold...but that's of no consequence in these types of discussions...they simply must find a way limit their use of the most economical energy source they can heat with, so that we can all breathe easier! This species of article prefers to present facts in a selective fashion, ignoring others, such as that China's use of chemical fertilizers, insecticides and fungicides have been decreasing, at the same time as the pace of agricultural modernization has been increasing! What a contrast to the more 'green' and ecologic west, were the dupes who bought Monsanto's promises of reduced fertilizer and insecticide requirements are finding out the bitter truth through their wallets, as they rush in a panic to buy more of both!

Although China's interest in Africa is usually painted as a resource extraction story, there's another angle that will never occur to the warmist's those equatorial climates which the coming(not so)Mini Ice Age we are facing, the ability to grow crops in replacement for vast sections of the northern hemisphere no longer free of permafrost will prove to have a great advantage for those few 'carbon-based' lifeforms lucky enough to have re-located in time!

Totentänzerlied's picture

That may be the most naive statement, regarding the economics of climate change, I've yet heard.

TGR's picture

That'd make it Airporkalypse Now.

Byte Me's picture

How do you spell Hard Landing again?

q99x2's picture

Well no wonder the bankster's Obamster dude shut down US clean energy coal power plants. They can make so much more by shipping US coal to China. Sort of thought that was the case when Rothschild was appearing in the CNBC articles recently.

The Invisible Foot's picture

Markets don't care about the environment.

riphowardkatz's picture

good point, markets arent people so they can't have values. now the infividuals operating in a market can care about the environment and they can boycott the companies that damage the environment but not in a centrally controlled monstrosity like china/

See chernobyl, see three mile island, see hanford, see the US military supported by Obama and democrats, see all the dams built by FDR and Gore 1. See the BLM and the destruction they cause, see the forest service and their maintaining the most roads in the world that give free access to loggers, see Portland Oregon dumping sewage into the river it goes on and on. No company or person can ever inflict as much damege on the environment as a government with guns pointed at its citizens heads. 

secret_sam's picture

That's really not true.  Markets care about anything you can commoditize.  Isn't some guy in China selling cans of clean air?

It's a win-win for the marketeers. 

1) profit while trashing the environment
2) buy up all the "underpriced" assets which are relatively untouched by your industry
3) once your air and dirt is sufficiently toxic, you're sitting on a goldmine of pristine ecological zones

This is why, for example, the folks in states like New York, Maine, and California are so pleased that West Virginia and South Dakota are falling all over themselves to exploit their States' natural resources. 

It's the long game.

Seer's picture

California's primary resource is agriculture (New York and Maine?).  I'm not defending the politics of California, just it's importance in producing food (Food, Shelter and Water).  New York has all the banksters, so, yes, exploitation is a driving trait from there.

akak's picture

There is a substantial fraction of the California population who would argue that California's primary resource is anchor babies.

secret_sam's picture

If you check a map, you'll realize that NYC is only a tiny part of the territory that is NYS, and there are millions of folks who are fine with WORKING in NYC, but would never consider LIVING there.

It's actually a kinda perfect example of the hypocrisy of the industrialist-types who are trying to win concessions to turn poor parts of the country into a moonscape.

Atomizer's picture

Please watch. We will not proceed in accepting the end of this video suggestion. Re-coining currency & debt obligations has been going on for millions of years. The old movie reruns always demonstrate that an Empire & the administration staff always gets killed in the end.

Invisible Chains


How do you think we shall handle this known problem?? It’s time to start thinking, rather than reacting.

Mr. Magoo's picture

From rags to riches back to dirty old rags. Thats what I call PROGRESSive

DoChenRollingBearing's picture

21 pallets just arrived from China.  Selling like hotcakes.  Link later, when I finish!

DoChenRollingBearing's picture

Thank you, very nice, I appreciate it.  Cajamarca & Lima customers.  And just WHAT do you do with 21 pallets of Chinese bearings?

"Customers and Bearings"

akak's picture

Now where oh where is our dear Chinese dishwashing friend who loves to rail about US 'american' resource blobbing-up and consumptionalization?  His "inability to self-indict" his own consumption-mad nation is like the wok calling the kettle black ---- black as Beijing air and Yangtze water, in fact.

prains's picture

paging AnAnalogousAnus......please pick up the courtesy phone after you've washed your hands 

DoChenRollingBearing's picture

Maybe he got taken away by the Limeño garbage collectors who picked up all our debris...

akak's picture

Now how in the Hell did you manage to insert the letter 'enye' here?

I have never been able to do that!

DoChenRollingBearing's picture


Hold down the Alt key and type (from the number pad) 164.  Do not know how to do the CAPITAL 'enye' though...

Seer's picture

Son of a ... someone stole the number pad from my laptop!

CTG_Sweden's picture





“The economy now has an investment share of ~48% of GDP, which no other economy has been able to reach, let alone sustain. Unsurprisingly diminishing returns are increasingly apparent.”




My comments:


An investment share of ~48% would probably be no problem if people could afford all the new apartments and houses that have been built. The problem seems to be that there has been poor incentives for making productive investments, like more efficient factory equipment and agricultural machinery, and too good incentives for investing in real estate.


In theory, it seems quite easy to me to solve this problem. The fact that it seems easy to solve this problem indicates that decision makers may benefit from investments in real estate rather than productive investments.


Furthermore, it seems to me as if the consumers in China could use larger and better homes. The problem seems to be that the general productivity in the economy can not support the wages that it would take to buy those homes. So therefore real estate owners should actually also benefit from a more productive economy that could support higher wages.


The solution to China´s problems seems to be to make productive investments more attractive compared to investments in real estate. I don´t understand why that should be so difficult. To me, it seems as if they have a problem which should be quite easy to solve. It also seems as if the Chinese leaders have imposed a new tax that will hit upper middle class real estate speculators. The question is whether these people feel that there are other investments which they think stand out as attractive enough.

Seer's picture

GROWTH IS THE PROBLEM!  You cannot solve it by MORE growth!

You have to understand the concept of exponential growth.  They were targeting 10%+ growth levels.  That's a DOUBLING of only 7 years!  Keep that up for another 7 years and you've got FOUR times the resultant output from a mere 14 years earlier.  China has what, 3 billion people?  Do the math!

China is the poster child for the growth ponzi.

Energy makes things happen (coupled, of course, to other physical resources, and propelled by a need).  China is now a net importer of coal: it was once a net exporter.  This is all you need to know about China's future.

CTG_Sweden's picture




“You have to understand the concept of exponential growth. They were targeting 10%+ growth levels. That's a DOUBLING of only 7 years! Keep that up for another 7 years and you've got FOUR times the resultant output from a mere 14 years earlier. China has what, 3 billion people? Do the math!


China is the poster child for the growth ponzi.


Energy makes things happen (coupled, of course, to other physical resources, and propelled by a need). China is now a net importer of coal: it was once a net exporter. This is all you need to know about China's future.”



My comments:


Although I haven´t checked out the exact figures it seems as if the Chinese economy so far has not grown faster than the South Korean economy did from the 1960s up to the crises in the late 1990s.


If the Chinese need more energy I guess that more expensive energy like wind power, solar power and Thorium reactors would not be a disaster. Furthermore, that kind of energy would probably improve their balance of payments. Why export shoes in order to be able to buy coal? That doesn´t sound like a clever strategy if you want to improve the average standard of living in China.


The total, Chinese population is about 1.2 billion people as far as I know.

earleflorida's picture

Who is Maurice Strong?  Some say, 'the right hand man of Rothschild's'... you decide what is a conspiracy, and what is a predictable mare's nest regarding, 'constructive ambiguility! And, what does 'timing' have to do with it?

google @ Maurice Strong - Right Hand Man of Rothschild

thankyou Tyler


klapper's picture

Carbon Dioxide is not pollution, not if plants had a vote anyway. Coal is still a relatively cheap fuel, despite the rapid ramp up in demand, and one that is easy to transport (low tech but still no danger from "spills"). Pollution, with the exception of CO2, can be controlled. China hasn't done a good job at controlling the conventional pollution from coal, but is getting better. In the final analysis, coal was the only choice for China to increase electricity production at the rate they did; there was no competitor when you consider the parameters of capital cost, operating cost, level of technology, and fuel supply. As we look forward I predict the "climate catastrophe" hysteria will fade as it becomes ever more apparent the extreme predictions for global warming are not materializing. Maybe at that point we can start thinking rationally about our energy choices.