Peak China

China has become wealthier in the last couple of decades but unfortunately is using some of that new wealth for military adventures against its neighbours.  The neighbours aren’t happy.  Over 60 percent of the people in countries bordering the South China Sea fear Chinese aggression and expect imminent war.  If China keeps growing their economy that will only make them more capable militarily and more aggressive.   Increases in Chinese debt have been fuelling growth in GDP but as that debt balloons out, further growth becomes unsustainable.  But beyond economic considerations are there any physical limits to how big the Chinese economy might get?

It has been suggested that water availability is China’s hard limit.  But if the Israelis can grow crops commercially using desalinated seawater, then water may not be a problem if the solution is simply to build desalination plants.  All economic activity derives from energy sources so let’s start with them.  This is a graph of China’s coal production from 1981 with a projection to 2050.

China is the big orange blob in the middle.  If this graph is anywhere near correct, China is building coal-consuming steelworks and power stations that are going to run out of coal to burn before the plants themselves wear out.  China started out with coal reserves very similar to the US at 220 billion tons.  Of that endowment, 60 billion tons have been dug up and burnt so far.  The Chinese coal reserves are counted as those seams down to 1,000 meters.  Beyond that depth, mining is much more difficult due to rock stresses, gas outbursts and temperature.  In the north of China where their coal is, the mines in the eastern provinces now have an average depth of 600 meters and the average depth in the main coal-producing province, Shanxi, is near to 500 meters.  At the current production rate of four billion tons per annum with 90% of that from underground mines, China’s coal mines are getting deeper by 16 meters every year.  In another ten years China will have burnt through half of its coal reserves, with costs rising and production falling after that.  So from about the middle of next decade China will start losing its energy cost advantage. 

There is a similar story in oil production.  China has produced 44 billion barrels of oil. The official figure for remaining reserves is 24 billion barrels but the real figure might be as much as 36 billion barrels, for a total initial endowment of 80 billion barrels.  Using the latter figure, this is what China’s oil production profile looks like from 1966 with a projection to 2060: 

According to this profile, Chinese production peaks within a couple of years and then falls away at about 100,000 barrels per day per annum.  China is now the largest oil importer on the planet, at a rate of close to seven million barrels per day.  China is stockpiling oil at the ferocious rate of 1.4 million barrels per day.  That rate of stockpiling says something about Chinese expectations regarding the pricing and availability of oil in the next few years.  Assuming no further demand growth in China, the gap between domestic supply and demand will be about eight million barrels per day by 2025.  China has begun producing synthetic liquid fuels from coal and could expand that to fill the gap.  But eight million barrels of liquid fuels per day would require one and a half billion tons of coal per annum, accelerating the exhaustion of their coal reserves. 

Besides energy supply, there is another aspect to China that suggests that it is more of a paper tiger than the common perception of inevitable further strength and influence.  This analysis is based on Hubbert linearization of Chinese monthly steel production data.  King Hubbert was a Shell Oil geologist in Houston in the 1950s who used the ideas of a 19th century Belgian mathematician on the rate of extraction of a finite resource.  It works for oil fields.  It may work for Chinese steel production -- if that reflects the ability to create credit and thus the size of the current credit bubble in the Chinese economy.  Chinese steel production has risen from 10 million tons per month in 2000 to the current rate of 70 million tons per month.  If we use the data in a logistic decline plot, the data since 2006 does plot as a straight line suggesting that it is reflecting depletion of a finite resource (credit not iron ore):

The line intersects the y axis at 15 billion tons of cumulative production.  Theory states that the year of peak production should be at half that level. That is now, given that as at May 2014, cumulative production was 7,353 million tons from 1990.  Of course Chinese steel production won’t fall away to nothing.  There will be a level of inherent demand from the economy which may be of the order of 200 to 300 million tons per annum.  In the interim, China’s monthly steel statistics will be followed closely by economic analysts and geostrategists.  The data to date suggests that we are at “Peak China,” just as 1990 was Japan’s peak year following its credit bubble of the 1980s. 

The Chinese themselves would be closely following Russia’s attempts to annex parts of the Ukraine.  If Russia can do that without too much damage from sanctions and so on from the civilised world, then China will be emboldened in attacking Japan and Filipino and Vietnamese bases in the South China Sea.  Russia may not be aware of it, but its actions in the Ukraine are encouraging China, and Russia itself is on the list of “Six Wars China Is Sure to Fight in the Next 50 Years.”  So in dismembering the Ukraine, Russia is bringing forward the day that it will be attacked by its eastern neighbor to seize everything east of the Urals.  Both countries have foolish dreams of empire.  There will be a great deal of death and suffering in the attempts to realise those dreams.  That is why we can be forgiven for anticipatory schadenfreude as these nasty and aggressive countries overreach and become undone.

David Archibald, a Visiting Fellow at the Institute of World Politics in Washington, D.C., is the author of Twilight of Abundance: Why Life in the 21st Century Will Be Nasty, Brutish, and Short (Regnery, 2014)

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