How China’s Downturn Could Save the World
The story of emissions over the past two decades has been written in Chinese. Since it joined the World Trade Organization in 2001 and became the worlds factory, China has contributed nearly two-thirds of the growth in carbon pollution globally. Even in per-capita terms, its now a bigger greenhouse emitter than the European Union. The worlds carbon footprint is split into three roughly equal portions: China, all developed nations, and the rest of the world. That makes the recent signs of strain in the countrys CO2-intensive growth model an issue not just for Beijing, but for the long-term fate of the planet. If things head in a similar direction to the former communist states of Eastern Europe when their similar economic model came off the rails in 1989, we may be about to see the most dramatic reduction in emissions the world has ever seen. That might be a disaster for Chinas leadership, as well as for a population who would likely suffer through a lost decade as the economy reorients toward more productive activities. For Chinas long-term prosperity and the fate of the planet, however, it would be an unexpected victory. Few people were closely considering the climate implications when the Berlin Wall fell in 1989. But the change was extraordinarily dramatic: In Russia, CO2 output dropped by more than a third over the subsequent decade, and by half in Ukraine and Romania. The 10-year growth rate of global emissions slowed more in the 1990s than it did after the 1973 oil crisis. Through ambitious green policies, the EU managed to cut its greenhouse footprint about 28% between 1990 and 2022. With barely a shred of climate intent, economic crisis has left the oil-stained former Soviet Union about 20% below 1990s levels. How was this achieved? The best explanation was outlined in the early 1980s by Hungarian economist Janos Kornai, who presciently argued that Eastern Europes command economies had become bloated under a system of so-called soft budget constraints. Investment was being directed not to profitable enterprises that would improve long-term prosperity, but to whatever projects would do most to juice the headline rate of growth. Once the financial bubble burst, swathes of the economy turned out to be junk calories. Thats a remarkably apt analogy. Peking University finance professor Michael Pettis, one of the more notable bearish voices on the Chinese economy, is a follower of Kornai, who has argued his theories are a good explanation of the direction the country has taken over the past 15 years. Energy consumption in China is inextricably linked to gross domestic product in a way Kornai would recognize. Former Premier Li Keqiang once argued electricity demand and rail loadings (which are mostly coal) were a better guide to gross domestic product than the official numbers. During the first phase of the Covid-19 pandemic in 2020, Caixin reported that local governments were ordering businesses to keep equipment running in deserted offices to maximize power consumption and minimize the perceived downturn in output. What would China look like if it spurned the junk calories of energy-intensive growth? The government has been trying to make that switch for a decade. In the early years of Xi Jinpings presidency, there was much official talk of a switch from investment to consumption as the driver of growth. More recently, the government has pledged to crack down on so-called dual-high industries high in both energy usage, and carbon intensity, such as cement, steel and glass which account for about half of the countrys greenhouse pollution. Neither policy has shown many signs of success. Indeed, while the carbon-intensity of Chinese energy consumption has fallen dramatically under Xis leadership thanks to rising renewables usage, the energy-intensity of economic growth has stalled relative to his predecessors Hu Jintao and Jiang Zemin. Thats likely because the government has become so dependent on energy-intensive heavy industries such as infrastructure and real estate as the only available tool to hit its economic targets. Its a counterproductive ambition, though: Were China able to generate as many dollars from each megajoule of energy as developed countries, its GDP would be twice as large. No one should welcome the prospect of a Soviet-style collapse in China. Quite apart from the domestic human cost, the effects would be a global depression, since China is far more integrated with the world economy than the Soviet Union was in 1989. The ripples of Russias hyperinflation are still being felt in 2023, given the role that the chaos of the 1990s had in the rise of Vladimir Putin and his revanchist ideology. And yet Russias story is not one of unmitigated misery. When the dust settled on the post-Soviet chaos, it resumed a path of rapid growth that left it, on the eve of the Ukraine war, in a respectable position compared to other complex, oil-exporting large economies. With an economic transition that avoids the disastrous shock therapy policies of Yeltsin-era Russia in favor of bringing state-owned industries more gradually into line with conventional budget constraints, China could reduce its emissions without an economic disaster for its citizens. Such a shift might even preserve the role of the Communist Party, a key concern for Beijings policymakers. A more gentle realignment is more or less what happened in Japan after its own malinvestment bubble popped in 1991 and that countrys Liberal Democratic Party remains as dominant now as it ever was. With careful management of this crisis, China can save itself and the world all at the same time. More From Bloomberg Opinion: China Needs Its Own Lehman Moment Now: Shuli Ren Chinas Slowdown Isnt Xis Biggest Problem: Minxin Pei More Infrastructure Stimulus Is the Last Thing China Needs: David Fickling This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. David Fickling is a Bloomberg Opinion columnist covering energy and commodities. Previously, he worked for Bloomberg News, the Wall Street Journal and the Financial Times. More stories like this are available on bloomberg.com/opinion 2023 Bloomberg L.P.