CHINA: ENERGY AND ECONOMIC GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00310R000100050007-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 21, 2016
• Document Release Date: February 20, 2009
• Sequence Number: 7
• Publication Date: April 1, 1984
• Content Type: REPORT

Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Directorate of Secret
Intelligence
China: Energy and
Economic Growth
A Research Paper
Secret
EA 84-10079
April1984
cOPj 353
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Directorate of Secret
Intelligence
China: Energy and
Economic Growth
Comments and queries are welcome and may be
directed to the Chief, China Division, OEA, on
25X1
25X1
Secret
EA 84-10079
April 1984
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85T00310R000100050007-4
Secret
Overview
Information available
as of 30 January 1984
was used in this report.
China: Energy ant
Economic Growth
China has made exceptional progress in the past five years in improving the
efficiency with which its economy uses energy. This has allowed fairly
rapid economic growth and a large increase in energy exports despite slow
and erratic growth in the production of energy. Unlike most countries,
China has done this without sharp increases in energy prices.
Energy conservation has not come without costs, however. Use of capital
equipment is down sharply because of fuel and electricity shortages. Some
indexes of economic progress, such as the share of farmland plowed
mechanically, have actually declined. Moreover, in terms of energy
consumption, China's vast rural population remains one of the most
impoverished in the world.
We anticipate that pressures on China's energy supplies caused by
economic growth will increase through the rest of the 1980s:
? Offshore oil production may not be available soon enough to offset an ex-
pected decline in production from the country's large but mature onshore
oilfields-especially Daqing.
? Coal, because it is being counted on to substitute for oil wherever
possible, will be hard pressed to provide the energy needed to fuel
economic growth.
? Electricity shortages, caused by insufficient investment in recent years
and surging demand, may be the most critical short-term bottleneck to
economic growth.
Beijing must resolve these and other potentially divisive problems if
satisfactory growth is to be attained. Two important decisions being
debated are whether to reduce or even eliminate oil exports-20 percent of
the country's foreign exchange earnings-and how to build the political
consensus that is needed to raise domestic energy prices sharply.
Nevertheless, the government's strong control mechanisms and the high
priority placed on energy conservation should allow the economy to
increase at a modest 4- or 5-percent rate through the 1980s--slower than
in the past but faster than that initially planned by Beijing. We doubt that
the much faster growth expected by Beijing for the 1990s can be achieved
without putting undue strain on both energy producers and consumers.
iii Secret
EA 84-10079
April 1984
Approved For Release 2009/02/20: CIA-RDP85T00310R000100050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
China's 1978 decision to forgo self-reliance and bring in foreign invest-
ment, both to spur energy production and to improve the efficiency of
energy use, appears firmly on track. We believe the need for technology
and capital will act as an important and continuing underpinning to
China's opening to the West, especially to the United States. Commercial
opportunities for US energy companies in China should continue to expand
and help to strengthen political links between the two countries.
The depth of such cooperation-and China's long-term ability to meet its
energy requirements-is critically dependent on large oil discoveries being
made in China's offshore regions. Should the Western firms that are
preparing for intensive drilling this spring not find the oil deposits they
expect, China may have to decide between importing oil in the 1990s-at
great expense to the country's international financial position-or return-
ing to the more self-reliant and isolationist policies of the past.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
China's Energy Supply
Coal-China's Energy Foundation 5
Petroleum-Depending on Offshore Discoveries 7
Natural Gas-Unknown Potential 10
Electric Power Supply-Increasing Shortages 12
Slowdown in Capacity Expansion 12
Thermal Power 14
Hydroelectric Power 14
Nuclear Power 15
China's Demand for Energy 16
China's Demand for Coal 17
Industrial Demand 17
Household Demand 21
Implications 21
Demand for Petroleum 22
Product Structure 22
Industrial Fuel Oil Consumption 22
Petrochemical Feedstocks 24
Demand for Light Petroleum Products 24
Agriculture Demand 24
Transportation Demand 25
Military Consumption 26
Demand for Electric Power
Prospects-Further Tightening
Beijing-Tough Choices Ahead
Investment Strategy
Energy Prices
Oil Exports
Household Demand
Implications for the United States
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
China: Energy and
Economic Growth
Five years ago the People's Republic of China sharply
reduced its long-term expectations for increasing en-
ergy production-particularly petroleum-and began
to address the problem of energy shortages that have
increasingly become an obstacle to economic growth.
Looming energy shortages were an important factor
behind Deng Xiaoping's major economic "readjust-
ment" of 1979, when it became apparent that Soviet-
style growth led by heavy industry-without the
Soviet Union's huge energy resources-could prove
disastrous. Premier Zhao Ziyang, in his December
1982 speech announcing the Sixth Five-Year Plan
(1981-85), reiterated those concerns and stated that
expected energy shortages were a major reason for the
plan's low economic targets. A deputy director of
China's Academy of Social Sciences recently was
more explicit, saying, "Whether or not China solves
its energy problem will determine the direction of
Chinese economic progress over the next 20 years."
Beijing since 1978 has countered the energy problem
on three fronts. First, it has attacked the country's
wasteful energy consumption habits by restructuring
industry, closing inefficient plants, and placing quotas
on energy use. Political considerations and a lack of
flexibility in its price system have prevented China
from raising energy prices sharply, the single most
effective measure taken by other countries to curb
energy consumption. Nevertheless, the program has
been successful. Energy consumption has increased by
only 1.9 percent per year between 1978 and 1982
while industrial growth averaged more than 7 percent
annually. In the first three decades of the PRC's
existence, energy consumption rose at a faster rate
than industry as a whole.
Second, China has tried to correct policies that
pressed energy industries to meet short-term produc-
tion goals at the expense of developing the resource
base. Higher priority, at least in theory, is now being
given to exploration and infrastructure development.
We believe that Beijing has not been satisfied with
results thus far. There are no indications, for instance,
that the long-term decline in proved oil reserves has
been stemmed. Also, a recent surge in demand for
coal, caused by a sharp rebound in heavy industrial
output, is leading coal mines to produce as much as
possible and neglect investment in long-term coal
capacity. Capital-intensive hydroelectric and nuclear
projects, moreover, have been slow to move out of the
planning phase.
Third, and of the most interest to the United States
and other foreign countries, Beijing has opened im-
portant segments of its once highly protected energy
industries to Western and Japanese investment. In a
remarkable turnaround, the Petroleum, Coal, and
Electric Power Ministries, once bastions of Mao
Zedong's ideology of self-reliance, have become lead-
ing proponents of Western investment in China. Proj-
ects already under way will, in our opinion, foster
long-term commercial links between China and the
non-Communist world. A nagging problem, however, 25X1
is that some in the leadership, with the intention of
reasserting self-reliance at some later date, will at-
tempt to import technology at a pace we believe will
be too rapid for proper absorption.
This three-pronged policy is aimed at doubling both
energy output and the efficiency of energy use be-
tween 1980 and the year 2000, thus allowing a
quadrupling of GNP by that date without the need for
importing energy. These goals imply growth rates of
3.5 percent per year for energy output and 7 percent
per year for the economy as a whole
In analyzing China's energy situation, we looked both
at production and at demand to determine how
realistic Beijing's goals are and what problems it will
face in reaching them. Data recently released by the
Chinese make possible a good understanding of how
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Forecasting future energy demand is more difficult.
Data limitations and the lack of market mechanisms
make standard econometric forecasts of dubious value
for China. Static input-output matrixes, on the other
hand, also require large amounts of data and tend to
underestimate the potential for efficiency gains. These
shortcomings are compounded by the need to differen-
tiate between oil, coal, gas, and hydroelectricity in
order to avoid assuming too large a degree of substi-
tutability between fuels
We looked at potential energy demand by breaking
the economy into the key energy-consuming industries
and, using available Chinese plans, by forecasting the
growth of output in these industries and the coal, oil,
gas, and electricity required for such growth. These
individual industry studies provided the data to make
the energy/GNP elasticity judgments-the percent
change in energy required for a given percentage
change in GNP-that we believe may be applicable to
the entire economy. In this way we hope to avoid the
common but often unwarranted assumption that ener-
gy demand increases in a 1-to-1 relationship to GNP,
that is, an elasticity of 1. At the same time we
examine the implicit assumption by China's planners
that energy demand will increase at only one-half the
rate of increase of GNP, that is, an elasticity of 0.5.
Our results suggest that the Chinese economy will
have an overall energy elasticity of between 0.65 and
0.70 for the remainder of the 1980s and the 1990s-
that is to say that energy consumption will increase at
between 65 and 70 percent as fast as national income.
This, we believe, is an encouraging coefficient-
smaller than what is expected for most major coun-
tries and much smaller than China's historical record.
It is slightly higher than China's performance since
1978 because considerable restructuring has occurred
since that date. We are optimistic, however, only
because we believe the Chinese Government will
continue to exert great control over the use of
energy-particularly oil and electricity. We believe
situation the country can ill afford.
uncontrolled demand for energy, even at sharply
higher prices, would force China to import energy, a
We expect the use of oil to increase only 45 percent as
fast as national income in the 1980s, rising to 80
percent in the 1990s as opportunities for switching to
coal are reduced. This still will allow substantial
growth in the petrochemical industries. Coal con-
sumption will increase about 75 percent as fast as
national income in the 1980s, falling to 60 percent in
the 1990s, with a large part of the increase going to
the electric power industry. For electric power itself,
we agree with Chinese estimates that electricity con-
sumption will increase at the same speed, if not faster,
than national income
These results suggest, based on anticipated gains in
energy output, that the economy will grow no faster
than 5 percent per year over an extended period. This
is not much different than earlier studies by both the
CIA and the World Bank.' Our results show that even
5-percent annual economic growth will put more
strain on the coal and electric power industries than it
will on the petroleum industry-despite anticipated
slow growth in petroleum output-as long as Beijing
is willing to reduce oil exports. Unlike World Bank
estimates, we do not believe China will have to import
oil unless the offshore exploration program brings on
line substantially less than the 50 million tons of
annual capacity (1 million barrels per day) that
several major oil companies believe is likely. In the
near term, a shortage of electric power appears to be
the most likely constraint on economic growth.
China produced about 700 million tons of coal equiva-
lent (MTCE) commercial energy in 1983, up about 5
percent from 1982. Energy output in the past five
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Figure 1
China: Energy Production, 1965-2000
Million Metric Tons of Coal Equivalent
1,200
_-_---- Hsdroe le,aric
-~----r__--r---+--Z~_===3 Natural gas
80 85 90 95 2000 N uCIcar
years, however, has increased at an average annual
rate of only 2 percent, in marked contrast to the 6-
percent annual growth registered in the preceding two
decades. The steady erosion of coal's share of energy
supply that occurred from 1950-78 has been reversed;
coal's share of energy output rose from 70 percent in
1978 to 71 percent in 1983. Petroleum, with output
flat since 1978, has lost about 4 percentage points and
is now providing 18.8 percent of national energy
supply. Hydropower has gained steadily to provide
about 4.4 percent of the country's energy, while
natural gas has declined to only about 2.5 percent. In
addition, Chinese economists estimate that agricul-
ture and forestry provide about 300 MICE in the
form of crop stalks and firewood, which is consumed
in rural China on a noncommercial basis. On the basis
of these figures, China ranks third in world energy
output, following the Soviet Union and the United
States. In per capita energy production, however,
China ranks in the bottom one-third of all countries in
the world.
China's Sixth Five-Year Plan (1981-85) and less
definite but widely quoted long-range plans indicate
that energy output will continue to grow slowly
through the end of the century. Table I includes what
we consider the most realistic energy-sector targets.
The 1985 targets are revised official Sixth Five-Year
Plan goals and appear reasonable. For 1990, we have
used our own estimates, which are generally based on
unofficial Chinese projections. For 2000 we have used
projections made in 1982 by the Shanghai World
Economic Herald, a Chinese Academy of Social
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Table 1
China's Energy Production a
Total million TCE
637
632
668
Coal
Million tons
620
620
666
Million TCE
442
442
475
Oil
14.3
12.7
11.9
12.1
12
12
18
19
17
16
16
16
16
24
Billion kWh
0
0
0
0
0
0
36
Million TCE
0
0
0
0
0
0
15
a We use the Chinese definition of coal equivalent energy to
aggregate various energy types. One ton of coal equivalent energy
(TCE) is defined as the amount of fuel that is required to provide 7
million kilocalories of heat energy. It is equivalent to 1.4 tons of raw
coal, 0.7 ton of crude oil, 752 cubic meters of natural gas, and 413
kilowatt-hours of electricity.
b Chinese targets.
c CIA forecast.
d Shanghai's World Economic Herald forecast, 1982.
Sciences publication. The Herald also made projec-
tions for 1985 and 1990, but these appear overly
pessimistic in the light of a strong performance in
1982 and 1983. These projections fall slightly short of
Beijing's general guidelines for doubling the availabil-
ity of energy by the year 2000. They imply growth
rates of 2.9 percent a year through the rest of the
1980s and just over 3 percent a year in the 1990s.C
Achievement of these energy production targets will
require a sharp boost in investment. Energy invest-
ment now accounts for about 45 percent of industrial
investment, and Beijing's efforts to control its overall
investment outlays have strongly affected the energy
sector. Despite considerable emphasis on the energy
problem, Beijing reduced state investment in energy
development from 11.4 billion yuan in 1978 to only
9.0 billion yuan in 1981 and 10.2 billion in 1982 (see
table 2). The Sixth Five-Year Plan (1981-85), more-
over, included only a 2-percent-a-year increase. The
sharpest decline occurred in the petroleum sector-
probably because China's expensive offshore explora-
tion has been picked up by Western companies-but
declines were also registered in coal and electric
power.
Only within the last year has Beijing allowed energy
investment to rebound. Eleven-month data for 1983
indicate energy investment reached close to 13.6
billion yuan for the year, up about 35 percent from
1982. The largest increases went to the electric power
industry.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
Table 2
China: Energy Investment a
10.7 11.3
3.2 3.3
Crude oil NA 2.7 3.2
Refining NA 0.5 0.6
Electricity NA 4.8 4.8
Hydropower NA NA 1.8
Thermal NA NA 1.9
a Basic capital construction investment in plant and equipment by
state-owned units. From State Statistical Bureau and other official
sources.
b Projected from six-month data. Industry breakdown is not avail-
able.
Coal-China's Energy Foundation
The 71-percent share of China's energy provided by
coal is the highest for any major country. As suggest-
ed in table 1, that share will probably rise even higher
in the next decade as China strives to double its coal
output. China certainly has the coal reserves to meet
that goal-official Chinese estimates of 600 billion
tons are some 900 times current annual output.
Beijing, moreover, has recently begun an investment
program that should allow substantial growth in coal
output.' However, much of this growth will depend on
whether China holds to the present course-China's
coal policies have fluctuated greatly over the past two
Billion yuan
(except where indicated)
1981
1982
1983 b
Annual Average
Investment for
the Sixth
Five-Year Plan,
1981-85 (percent)
9.0
10.2
13.6
10.8
2.3
3.0
NA
3.6
2.7
2.6
NA
2.2
NA
0
0.5
0.4
NA
NA
4.0
4.6
5.4 d
4.1
1.5
1.8
NA
NA
1.2
1.3
NA
NA
c The World Bank quotes Chinese sources for energy investment in
1978 of 12.1 billion yuan, including 3.3 billion for coal, 3.8 billion
for oil, and 4.9 billion for electricity.
d Plan for 1983.
China's coal output increased by 7.4 percent in 1982
to reach a record 666 million tons of raw coal (475
MTCE). Output in 1983 again increased substantial-
ly, meeting the 1985 target of 700 million tons two
years early.
The improved performance comes after a difficult
period in 1980 and 1981 during which coal investment
was reduced and output dropped. This decline can be
attributed in part to diminished demand by heavy
industrial users during the 1980 and 1981 Chinese
recession. Heavy industry rebounded strongly in 1982
and in 1983, along with coal output. The decline was
also caused by government policies that encouraged
investment in profitmaking industries at the expense
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Figure 2
Coal Industry
A Open-pit mine
Underground mine
Large coal deposit
- Proposed coal slurry pipeline
0 Coal port
Railroad
Province-level boundary
- tatyu f
Malan
~
Hainan
Dao
ar
Chength ----fi
South China
Sea
Soviet,"Un+on
Tara In
Philippines ?
0 200 400 Kilometers
0 200 400Statute Miles
Boundary representation is
not necessarily authoritative.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
of industries, such as coal, that often operate at a loss
because of low prices arbitrarily set by the state. Low
prices are a continuing problem for the industry, but
Beijing has substantially increased central govern-
ment investment. The 1981-85 Plan allocated 17.9
billion yuan (approximately $10 billion) to coal-32
percent more than in the preceding five-year period-
despite the fact that overall industrial investment was
scheduled to decrease. Coal's share of the capital
construction budget was thus set to rise from 6.1 to
7.8 percent. Actual expenditures will probably be
considerably higher. In addition, the industry has
been opened to foreign investment-largely Japanese,
European, and US-which may add the equivalent of
1 billion yuan by 1985.
Two years ago Beijing set targets of 700 million tons
of coal output by 1985, 850 million tons by 1990, and
approximately 1,200 million tons by 2000.
Beijing now hopes to exceed the planned targets
and reach 740 million tons by 1985 and 940 million
tons by 1990. We believe that rapidly increasing
demand, and possibly sharp price increases, will spur
China's mines into meeting this 1985 target. They
may produce as much as 900 million tons by 1990, a
figure projected in an authoritative article in the
Communist-affiliated Hong Kong newspaper Wen
Wei Bao. The railroads, however, may not have the
capacity to transport the coal.
Beijing's strategy for increasing coal output includes:
? Encouraging the development of small mines to
meet local and short-term coal requirements. These
mines accounted for about two-thirds of the increase
in national coal output during the past two years.
They are slated to increase output from 350 million
tons in 1982 to 500 million tons in the year 2000.
? Significantly expanding and developing new state-
controlled underground mines-especially in
Shanxi, Shandong, Anhui, and Guizhou Prov-
inces-using domestic, Japanese, and European fi-
nancing. These mines will increase production ca-
pacity from about 350 million tons in 1982 to 600
million tons in 2000.
? Opening five very large open pit mining areas using
large amounts of US and European investment.
These new mines will produce 200 million tons by
Of the 600-million-ton increase in capacity, at least
130 million tons will be developed in cooperation with
Western and Japanese firms. Problems in marketing
the foreign company's share of coal from these proj-
ects have come up in the past year as a result of a
sharp drop in the international coal prices. Final
agreement on the large Occidental Petroleum joint
venture for development of the Pingsuo open pit mine,
for instance, has been delayed. These, and the trans-
portation problems that constantly plague the indus-
try, may prevent Beijing from meeting its targets.
Given the high priority currently afforded the coal
industry, we believe, nevertheless, output will increase
LDA I
Petroleum- Depending on Offshore Discoveries
China's oil production peaked in 1979 at 106 million
tons' a year (152 MTCE per year) and declined
slightly in 1980 and 1981. China has since recouped
most of the loss and is now the seventh-largest
producer in the world, about the same as Venezuela
and the United Kingdom.
Beijing expects little growth in production through
1990; after that it has high expectations for offshore
production. Without further technical study we are
not in a position to challenge those expectations and
have included an estimate of 105 million tons (2.1
million b/d)-the same as 1983-for 1990. This
would include a small amount of new offshore oil by
that point. Given the limitations of the country's
proved oil reserves, however, we believe there is a
chance that oil production will decline by 1990. If
offshore oil is not as abundant as initial signs indicate,
the 1990s could see further declines. The forecasts of
the Shanghai World Economic Herald for 150 million
tons (3 million b/d) by 2000 is reasonable, however, if
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Figure 3
China: Petroleum Output, 1970-2000
Million Metric Tons
2 SO
6U
IOU Cw'rcnt Ibrcculst'
50
1)70 75 80 8 90
Ulilciul CI ii1i ,C Iorcr.l,t
~, Shunehai- Atiurld Il cunumlc Ilcruld -
An October 1980 edition of a
plans were apparently made by simply extrapolating
the rapid growth of production in the 1970s, without
regard to actual oil reserves.
China does not publish official statistics on oil re-
serves, and we believe that many figures quoted in
both the Chinese and Western press are far too high.
journal published by the Chinese Academy of Social
Sciences included what appears to be the most defini-
tive calculation of reserves to date. It cited a reserve-
to-production (RAP) ratio of 14.6 to 1, which at the
1980 output rate of 106 million tons (773 million
barrels) is equivalent to 1.5 billion tons (11.3 billion
barrels) of reserves. This is another way of saying that
China, without any new discoveries, has enough re-
serves to last less than 15 years at current production
rates.' Reserves by the end of 1983 were probably
down slightly as Chinese statements indicate oil is
being produced faster than it is being found. Official-
ly, the Ministry of Petroleum states that it has found
geological oil reserves in excess of the volume of oil it
has produced in the last two years, but typically in oil
industry experience only about 40 percent of this
95 2000 category of reserves is ever produced. We estimate
that the current oil reserves figure is below 1.5 billion
tons (11 billion barrels) and that the R/P ratio is
about 14 to 1.
offshore oil production is successful. We believe only
an exceptionally successful offshore oil program and a
large increase in exploration activity in western China
would make the 200-million-ton (4-million-b/d) offi-
cial target attainable.4
Beijing, as recently as early 1978, had much higher
expectations for oil production. According to the
official plan at that time, as outlined by Vice Premier
Yu Qiuli, production was slated to reach 150 million
tons in 1980 and 240 million tons by 1985. These
This marks a doubling of reserves since 1965, but,
because production has increased so rapidly, the ratio
has plunged. Most of the increase in reserves came
before 1977 with expansion of the Daqing oilfield in
Manchuria and the Shengli oilfield in North China
and discovery of the Liaohe and Renqiu oilfields, also
in the North China Basin complex. Since then we
know of only one significant commercial onshore
discovery-the Zhongyuan fields, which the World
Bank is helping to develop. At least one and possibly
four or five offshore fields have been discovered in the
last two years but exploration is not far enough along
Western estimates for proved and probable reserves include 13.2
billion barrels by the World Bank, 9.48 billion barrels by a
Japanese source, and 17 billion barrels by the US Geological
Survey. Chinese and Western press articles, on the other hand, have
quoted figures as high as 440 billion barrels, which is higher than
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
25X1
25X1
25X1
25X1
25X1
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
to determine reserves
these discoveries are relatively small and will not have
a significant impact on the countrywide reserves. New
fields have also recently been discovered in the Qai-
dam and Tarim Basins in western China, but we
doubt those can currently be considered commercially
viable because of their isolated locations.
An R/P ratio of less than 15 would not necessarily be
a major problem for a country such as China with
large, relatively unexplored regions offshore and in its
far west. The R/P ratio for the United States, in
comparison, is approximately 9 to 1. China does have
a major problem with the location of its reserves.
Much of China's proved reserves-the World Bank
estimates about 20 percent-are in Qinghai Province
and the Xinjiang Autonomous Region where poor
transportation hampers production. The Xinjiang re-
gional government estimates that oil production in the
west will quadruple from 5 million tons per year
(100,000 b/d) to 20 million tons per year (400,000
b/d) by the year 2000; even if that target is reached,
the entire west will produce only slightly more than
the Shengli producing area's current output.
Most of the remaining reserves are in mature oilfields
that are increasingly difficult to exploit. Daqing oil-
field, which produces half of the country's oil, is the
most critical. Over its 24-year production history, it
has withdrawn about 650 million of the 1.3 billion
tons that Beijing hopes ultimately to recover. Output
has been held steady at 50 million tons (1 million b/d)
for the past six years by massive waterflooding of the
reservoirs. Oilfield administrators and the Minister of
Petroleum, say the field will maintain this output rate
until 1986 or 1987 before starting to decline.
Analysis performed by Daqing Oilfield's Research
and Planning Institute, published in a Chinese techni-
cal journal in July 1983, indicates that waterflooding
of the reservoirs had caused the share of water
produced with the oil to reach 64 percent of total fluid
production by 1981. This water-cut ratio is increasing
by 3 percentage points a year and by the end of
1985-the last year of the Institute's projection-is
projected to reach 75 percent if oil output is to be
maintained at the 50-million-ton-per-year level. Fig-
ure 4 includes the Institute's projections for water and
oil production through 1985. We have extrapolated it
Figure 4
China: Oil and Water Output,
Daqing Oilfield, 1970-88
Million Metric Tons
300
to show the accelerating volume of water that must be
injected and processed if the current volume of output
is to be maintained through 1988. Clearly, at some
point, the accelerating costs associated with handling
this geometrically increasing volume of water will
cause the oilfield to abandon the goal of level produc-
tion. After that, it appears that the field will face a
rapid decline in production.'
Other major fields, particularly those in the Shengli
producing area, are in similar stages of production
(see table 3). Nationwide, production from existing
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Table 3
China: Oil Output by Major Producing Areas
1966
14.55
8.78
2.00
1967
13.88
9.04
2.67
1968
15.99
9.30
3.33
1969
21.74
12.83
4.00
1970
30.65
21.18
4.67
1.02
0.49
0.38
1.19
1.72
1971
39.41
22.14
6.50
1.75
0.54
0.50
1.84
6.14
1972
45.67
25.55
8.45
2.48
0.62
0.60
2.48
5.48
1973
5161
28.30
9.50
3.22
0.68
0.73
3.13
8.07
1974
64.85
34.61
11.02
3.95
0.71
1.04
3.77
9.75
4.68
0.69
1.38
4.42
2.90
3.91
0.67
1.73
4.49
6.95
1979
106.15
50.75
18.88
17.33
1980
105.95
51.50
17.59
16.03
1981
101.22
51.75
16.11
12.22
2.88
0.56
3.48
6.88
7.34
1982
102.21
51.90
16.35
11.31
3.02
1.38
4.03
7.24
6.98
1983
105.99
52.00
18.35
NA
wells is declining at an annual rate of about 10 million
tons (200,000 b/d) or 10 percent of production. This
has been offset by drilling 2,000 new production wells
a year, at a cost of 1 billion yuan, and by increasing
water injection. This massive effort has come at the
expense of some exploratory drilling and is a major
reason for Beijing's increasing willingness to enlist the
help of Western oil firms for secondary and tertiary
production technology.
Natural Gas-Unknown Potential
Natural gas production has dropped by 17 percent
since 1979, and, like oil, the industry faces cloudy
prospects because of limited proved reserves. Official
data are not available, but unofficial Chinese sources
placed reserves at about 180 billion cubic meters in
1981. The World Bank, on the other hand, estimates
that in 1981 China had proved gas reserves of 131.5
billion cubic meters including 58 billion cubic meters
of associated gas found in oilfields and 73.5 billion
cubic meters of nonassociated gas. This is enough gas
for only 11 years at current production rates.
About 45 percent of China's gas is produced from
gasfields in Sichuan Province. Many of these are
having severe difficulties maintaining current produc-
tion rates. US firms have been invited into Sichuan to
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
Figure 5
Oil and Gas Basins
AFO. Tarim
A Kaye
Cease-Fire
L one
* Ulaanbaatar
MONGOLIA
oa^~ He Beijingje
T
FMU Us Ra"MM
Lanzhou Van
Baoji'
Bo Hai
(North China)
Nanning
701831(545114)4-84
give technical advice and sell some improved produc-
tion equipment. Prospects for these fields do not
appear good, but more intensive exploration of south-
eastern Sichuan and Guizhou Provinces could turn up
large new deposits. The remainder of China's gas
output is produced as associated gas in the major
northeastern oilfields, with Daqing, Liaohe, and
Shengli the major contributors (see table 4).
Shenyang
UeehlA
i"r Sonya
Boundary representation is
d V~,
Natural gas output relative to oil output is unusually
low in China, particularly because of the country's
largely continental hydrocarbon source rocks, which
many geologists believe should be conducive to gas
formation much of the 25X1
gas that was created escaped to the surface in China's
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Table 4 Billion cubic meters
Natural Gas Production
per thousand cubic meters to deliver Yinggehai gas to
Hainan and $123 per thousand cubic meters to the
mainland. These costs may be too high to warrant
development, even if large resources are confirmed.
Total 13.73
Sichuan 6.15
Liaohe
Shengli
Other
1.80
1.40
1.18
14.51
14.27
12.74
11.93
12.1
6.52
6.33
5.78
5.24
NA
3.31
3.39
2.90
2.78
NA
1.86
1.88
1.53
1.26
NA
Electric Power Supply-Increasing Shortages
China's economic planners admit that electricity con-
sumption in the long term must increase at close to if
not even faster than the overall economic growth rate.
Over the past three decades, electricity consumption
in China has risen twice as fast as industrial growth.
China's broad goals for "modernizing" the country
thus include a guadrupling of electric power availabil-
ity by the year 2000-an annual growth rate of more
than 7 percent. This represents a massive challenge
for the industry but not necessarily an impossible one.'
typically highly faulted basins. Others believe there is
a great deal of gas potential, particularly at extreme
depths, but that Chinese drilling technology is not
sophisticated enough to find it.
These differing views make it difficult to predict gas
production even in the short term. A gradual increase
appears reasonable because of new imported technol-
ogy. Several significant gas discoveries since 1980
have already allowed a small turnaround in gas
production this year. The most important onshore find
is in the Zhongyuan area that the World Bank is
helping to develop. Gas resources in Zhongyuan's
eight identified oil and gas fields might total as much
as 36 billion cubic meters. Output in 1983 was
probably about 300 million cubic meters, accounting
for most of the gain nationwide. By 1985 the area is to
produce 500 million cubic meters a year.
Gas discoveries have also recently been made offshore
in the Bohai, the East China Sea, and in the Yingge-
hai Basin south of Hainan Island. The Yinggehai
discovery, made by Atlantic Richfield in its conces-
sion area, is particularly promising.
Many other structures in the Yinggehai Basin-
which geologists believe is one of the few gas-prone
rather than oil-prone offshore basins-remain to be
drilled.
Offshore gas, particularly when it is not associated
with oil, however, is very expensive to develop.
it will cost a minimum of $89
China, however, has two major disadvantages that we
believe will prevent it from raising capacity by any-
thing more than 5 percent per year for the indefinite
future. First is the limited availability of domestic
capital and high worldwide interest rates if China
should decide to borrow capital. Second, limited
supplies of oil and gas and much higher costs for
nuclear power plants are forcing China's power devel-
opment to be rather narrowly focused on coal-fired
thermal and hydroelectric power plants.'
Slowdown in Capacity Expansion. In the 1970s,
electric power output in China increased at an 11-
percent annual rate, reaching 300 billion kilowatt-
hours (kWh) by 1980. Generating capacity rose by 11
' Chinese economists point out that the United States, from an
electric power base in 1947 that was equivalent to China's current
base, quadrupled power output and capacity by 1965. The Soviet
Union accomplished a similar expansion in only 15 years in the
1960s and 1970s. China, moreover, can take advantage of the
important technological improvements in power technology-par-
ticularly in the use of larger turbine/generator units-that have
25X1
25X1
,?tix1
25X1
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
Table 5
Electric Power Capacity
Total capacity
57.1
63.0
65.9
69.3
(thousand megawatts)
Thermal
39.8
43.9
45.6
47.4
49.4
52.5
56.2
73.0
90.0
110.0
Hydroelectric
17.3
19.1
20.3
21.9
23.0
23.5
25.0
30.0
37.0
45.0
Nuclear
0
0
0
0
0
0
0
0
2.5
10.0
Total average annual growth
10.3
4.3
5.1
4.5
5.0
3.4
4.9
5.0
5.0
(percent)
Thermal
c
10.3
3.9
4.0
4.2
6.3
3.5
5.4
4.3
4.1
3.7
4.3
4.0
0
C
32.
a Planned.
b CIA projection.
c Not applicable.
percent per year to reach 66,000 megawatts (MW) in
1980, sixth largest in the world. Beijing's modest
Sixth Five-Year Plan (1981-85) called for an increase
of 12,900 MW of generating capacity by 1985, which
would represent a capacity growth rate of only 3.6
percent per year, only one-third the rate of increase in
the 1970s. This figure probably does not include
increased capacity from small hydroelectric plants
that are built by villages and are not tied into
Ministry of Electric Power grids. If these are includ-
ed, an estimated 2,000 MW should be added to the
five-year plan targets for a total of 14,900 MW, and
the growth rate raised to a 4.2-percent annual rate
Actual expansion in 1981 and 1982, including small-
scale hydro, was 3,400 MW and 3,100 MW, respec-
tively-generally in line with the Five-Year Plan. The
1983 plan called for a 3,180-MW increase in large-
and medium-sized plants, which combined with an
estimated 400-MW increase in small-scale plants,
would increase total capacity to about 76,000 MW,
an increase of 5.2 percent. Including small-scale
hydro, the balance remaining under the Five-Year
Plan would be only about 2,500 MW of new capacity
each year in 1984 and 1985-an annual increase of
These increases are much smaller than the peak
additions of 5,048 MW and 5,900 MW in 1978 and
1979, respectively. The slowdown can be directly
attributed to cutbacks in electric power investment as
Beijing has tried to control its investment budget. As
table 2 indicates, investment in the industry was
slashed by 20 percent in 1981 with only partial
recovery in 1982. Investment in electric power in-
creased sharply in 1983, far above the Sixth Five-
Year Plan allocations.
Despite the slowdown in the growth of generating
capacity, power output growth has slackened only
slightly. Output increased by only 2.9 percent in 1981,
when industry was depressed, but achieved a steady
increase of about 7 percent each year in 1982 and
1983. Capacity utilization, particularly for hydroelec-
tric facilities, has grown very fast, removing a cushion
that had developed in the 1970s. Power demanded by
a rapidly growing industrial sector may now be
raising capacity utilization to unsustainable levels. If
so, and if capacity increases in 1984 and 1985 are no
only about 3 percent.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
more than the current Five-Year Plan suggests, annu-
al increases of power output may slump to 3 percent
per year, a severe limitation on an industrial sector
already starving for electricity.
Longer term prospects are somewhat better, provided
Beijing is willing to increase steadily its budget
allocations. China now has approximately 23,000
MW of capacity under construction that is slated to
come on line after 1986. We estimate that about
22,000 MW of net new capacity will be commissioned
during 1986-90; this estimate allows for new projects
that will be started in the next few years, for retire-
ment of some existing plants, and for a carryover of
several thousand megawatts of hydropower capacity
that will not be completed by then. This is an annual
growth rate of about 5 percent.
Thermal Power. Thermal power plants account for
approximately 52,000 MW or 70 percent of China's
power capacity and contribute 77 percent of power
output. They include an estimated 43,000 MW of
coal-fired and 7,000 MW of oil-fired plants. Relative
to power industries in other countries, China's indus-
try is characterized by hundreds of small plants that
use inefficient 50-, 100-, and 200-MW turbine/gener-
ator units. Even in the current Sixth Five-Year Plan
period, most new plants are installing only 200-MW
The lack of larger scale generators reflects the inabil-
ity of China's machine-building industry to produce
large numbers of more efficient 300-MW turbine/
generator units. After more than a decade of develop-
ment, only five indigenously developed 300-MW units
are in operation. In any case, China's transmission
system has been unable to handle large loads.F___-]
Both of these conditions are now changing rapidly as
China imports needed technology from the West. In
1978, Westinghouse and Combustion Engineering
signed contracts making available to China 300- and,
eventually, 600-MW turbine/generator technologies
that are already beginning to have an impact. We
expect these units will form the basis for capacity
expansion in the industry in the late 1980s and in the
1990s. China is also rapidly expanding its 500-kilovolt
(kV) transmission capabilities with some imported
These efforts are particularly important in developing
large power plants at mine locations that we think
offer China the best chance of keeping up with its
power needs. These plants not only alleviate the need
for transporting coal, they can be located in rural
areas and will not contribute to already major pollu-
tion problems in China's cities. Currently, only 15
percent-6,880 MW--of China's coal-fired plants are
located at mine mouths. At least 9,000 MW of new
mine-mouth capacity is now under construction or is
in advanced planning stages.
Hydroelectric Power. China has developed only a tiny
share of what is generally accepted as the world's
greatest hydroelectric power potential. Hydroelectric
generating capacity now totals about 24,000 MW, of
which 8,000 MW are small-scale rural plants not tied
into any grid systems. Hydroelectric output totaled
74.4 billion kWh in 1982, 23 percent of total power
output. Hydro's 13-percent increase over 1981 was
the only reason the Ministry of Electric Power met its
annual goals; thermal plants missed their target as a
result of a fuel shortage. Hydroelectric output did
even better in 1983 with production through Novem-
ber up 18.6 percent over the same period in 1982. F_
Several major hydroelectric projects have been com-
pleted since 1979 and have provided a major boost to
output. These include the 965-MW first stage of
Gezhouba, the first dam constructed on the Chang
Jiang; 300-MW of the first stage of Baishan, located
in Manchuria; and the 630-MW Wujiangdu project
in Guizhou. Another factor behind the surge in
hydroelectric output is heavy rainfall over the past
two years that has allowed a surge in production,
especially from small-scale plants that are heavily
dependent on timely rainfall. Output from these
plants was up 34 percent in the first three quarters of
Beijing, in keeping with its goal to quadruple electric-
ity supply by the year 2000, has ambitious goals for
the hydro sector. According to figures published in a
Ministry of Electric Power journal, hydrocapacity will
increase by 4,000 MW between 1980 and 1985 (most
of this has already been achieved); by 9,000 to 10,000
equipment.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
Table 6
China: Hydroelectric Power Plans a
Planned Capacity Average Annual
(MM Capacity Growth
(percent)
1995
2000
MW in the Seventh Five-Year Plan (1986-90); by
12,000 to 16,000 MW between 1991 and 1995; and
an astonishing 11,000 to 20,000 MW between 1996
and 2000. Included in these plans for the 20 years
(1981-2000) are 12,000 MW of additional hydropower
from small plants and 28,000 to 38,000 MW from
medium and large plants. This is an annual growth
rate of about 5 percent in the 1980s, accelerating to
more than 6 percent in the 1990s
We believe achievement of these goals is highly
unlikely. Currently, 27 large- and medium-sized pow-
er plants with designed capacity totaling more than
12,000 MW are under construction; most have only
recently been started and will not produce electricity
until the late 1980s and early 1990s. With a minimum
of 12 years required to construct a hydroelectric plant,
the 1990 and 1995 targets already seem out of reach.
Some Chinese economists, moreover, appear to be
questioning the advisability of heavy emphasis on
long-term, capital-intensive hydroelectric projects
when power shortages are a daily phenomenon. Major
criticism has been focused on the large numbers of
people displaced by manmade lakes-one major proj-
ect now on hold, the Three Gorges dam on the Chang
Jiang, would generate 25,000 MW of power but
would require advanced technology and the relocation
of 1.2 million people. There is also considerable
criticism of small-scale hydroplants, for their high per
unit capital costs and for unreliable service.
Under these circumstances, we believe China will do
well to sustain an increase of 4 percent per year in
hydro capacity through the 1990s. This estimate,
based on an assumption that all existing projects will
be completed by 1995 and that the rate of increase
from small-scale hydro will remain flat at 400 MW
per year, would bring capacity up to about 30,000
MW by 1990 and close to 37,000 MW by 1995.
Output growth may be slightly more rapid as more
integrated grid systems lead to higher utilization
rates.
Nuclear Power. China has been actively considering
the development of nuclear power since at least 1970
but thus far has made little progress. One small (300
MW) domestically designed plant is in an initial stage
of construction near Shanghai with a completion
target of 1988. The Ministry of Water Resources and
Electric Power (MWREP) has also negotiated with
Western firms for two 1,800-MW turnkey plants, one
for Guangdong Province that would share power with
a Hong Kong utility, and a second plant near Shang-
hai. The Guangdong plant has received State Council
approval, and, if MWREP can settle with the French
firm, Framatome, construction could begin within a
year. Framatome has signed a preliminary agreement,
but China continues to state it prefers a US supplier if
US nonproliferation concerns are worked out. The
plant could not be complete until the early 1990s
when it will supply only about 1 percent of the
nation's power.
These plants will give China practical experience with
a technology that some Chinese planners believe is the
only solution to China's long-term energy require-
ments. For the next 20 years, however, we believe-
and official Chinese plans reflect-that nuclear power
will be too capital intensive and too expensive an
energy source for China to depend on. Some estimates
25X1
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
for the Guangdong plant, for instance, range as high
as $5 billion, more than five times the cost of an
equivalent coal-fired plant.
Beijing last year cut its plans to have 20,000 MW of
nuclear capacity onstream by 2000 by half. This new
10,000-MW target appears feasible and is one that
will still offer substantial sales of Western technology
and equipment. However, it will contribute only about
6 percent of the nation's electric power output and
about 1 percent of total energy supply at the end of
the century; the investment required will probably
total more than $20 billion in 1982 dollars.
China's Demand for Energy
China has slowed the rate of increase in energy
consumption in the last five years. Unlike in many
Western economies, this conservation has taken place
in a period of fairly rapid economic growth. Energy
consumption in China increased at an annual rate of
1.9 percent from 1978 through 1982 while national
income increased at a 6.2-percent rate. This energy
elasticity of national income of 0.30 is in sharp
contrast to an elasticity of 1.47 for the Chinese
Figure 6
China: Energy Consumption and Economic
Growth, 1970-1983
Index: 1970= 100
350
economy from 1965 to 1978 (see figure 6).
Most observers, in China or in the West, doubt this
low elasticity can be maintained. Much of the im-
proved energy use between 1978 and 1982 has been
the result of economic restructuring caused by rapid
growth in energy-efficient light industry and agricul-
ture and very slow growth in energy-intensive heavy
industry. Beijing officially attributes two-thirds of the
energy savings to structural change and only one-third
to conservation. This suggests that, had the structural,
change not occurred, energy consumption would have
been 12 percent higher in 1982-76 MTCE energy-
twice the level of energy exports in that year.F__~
intermediate goods required for producing light indus-
trial goods and cannot continue to lag light industry
indefinitely. If efficiency gains continue along recent
trends, this balanced growth would suggest an elastic-
ity close to 0.75, which is not consistent with Beijing's
planned 0.50. It would imply that if energy supplies
double by the year 2000 as planned the overall
economy could increase at a rate of only 4.8 percent
per year, not the planned annual rate of 7.2 percent.
The separation of structural change from a more
narrowly defined efficiency gain-that is, reduced
energy consumption for production of a given prod-
uct-is important in forecasting China's future de-
mand for energy because Beijing's plans call for more
or less balanced growth between heavy industry and
light industry and somewhat slower growth for agri-
culture. Heavy industry provides the investment and
Although these broad elasticity statistics are useful in
providing a general idea of China's energy problem,
they can be misleading on two accounts. First, there
can be considerable structural change within these
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
broad sectors that can have a strong but, without
careful study, ambiguous impact on energy demand.
Second, they do not differentiate between types of
energy. Oil, coal, and electric power output are not
likely to increase at the same rate nor can we assume
that demand for these energy sources will increase at
the same rate. To the extent that these fuels cannot be
readily substituted for each other, bottlenecks will
occur as a result of a shortage of one fuel, even though
in more aggregate terms the country might have
plenty of energy.
To improve our ability to analyze China's energy
demand, we have disaggregated China's energy con-
sumption by energy type and energy-consuming in-
dustry as shown in tables 7 and 8. The 1978 data are
taken largely from a Chinese publication, which,
although not official, appears to contain offical data
we have not seen published elsewhere. No similar
source is available for 1982; hence, we have had to
include a mixture of official data, where they are
available, and our own estimates. In table 8, where we
have no basis for making an estimate, we have used
"NA." Electrical energy consumption by industry is
treated as an intermediate product and is not included
in the table. The distribution of electric power con-
sumption can be found in table 12, page 27.
China's Demand for Coal
China's demand for raw coal reached 637 million tons
in 1982, up from 565 million tons in 1978-an annual
rate of increase of about 3 percent. In terms of
standard coal equivalent, these figures are 454 million
tons and 404 million tons, respectively. In 1981 when
China's heavy industrial output slumped, coal con-
sumption actually declined but rebounded strongly in
1982 with a 5.2-percent increase. Preliminary data
indicate that coal consumption may have increased
even faster in 1983, possibly more than 6 percent. The
resurgence in coal demand results largely from two
factors: resumption of rapid growth in heavy industry
and sharp rises in retail sales of coal to households
and local industries as economic reforms have re-
moved some restrictions on the private mining and
selling of coal.
Industrial Demand. The five industries discussed
below-electric power, iron and steel, synthetic am-
monia, building materials, and railroads-accounted
for 45 percent of China's coal consumption in both
1978 and in 1982. We estimate that, consistent with a
5-percent annual growth rate in the value of produc-
tion for the group as a whole, their coal consumption
will increase at annual rates of about 3.6 percent in
the 1980s and 2.5 percent in the 1990s (see table 9).
The apparent improvement in the rate of efficiency
gain in the 1990s is actually the result of structural
change in the use of energy. In the 1980s, coal will be
substituting for oil in the generation of electric power;
in the 1990s, nuclear power will be substituted for
some coal. If this group of industries remains repre-
sentative of Chinese industry in general, industrial
consumption of coal will rise to 686 million tons a
year by 1990 and 880 million tons by the year 2000.
The electric power industry is China's largest indus-
trial consumer of coal, accounting for about 140
million tons or 22 percent of the nation's total demand
in 1982. Power plants have increased coal consump-
tion by approximately 5 percent a year over the past
five years, slightly faster than the output of thermal
electricity because of the gradual conversion of oil-
fired plants to coal. Despite the high priority in fuel
allocations given to the electric power sector, the lack
of coal on occasion has constrained electricity supply.
This was particularly true in 1981 when thermal
power plants were unable to meet their annual targets
because of a lack of fuel.
Over the past three decades, the power industry has
steadily improved the efficiency with which it burns
coal. Coal consumption per kilowatt-hour has dropped
from 700 grams in 1949 to 400 grams in 1983, an
average gain in efficiency of about 1.7 percent per
year. This gain has leveled off to about 1 percent per
year recently, a rate of improvement that, according
to articles in Chinese electric power journals, Beijing
hopes to maintain through the 1990s. Large-scale
production and installation of more efficient 300-MW
and 600-MW turbines and generators in new plants
should make this efficiency gain possible.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85T00310R000100050007-4
Table 7
China: Primary Energy Consumption, 1978
National total
Industry
Heavy industry
Total Share of Total Share of Total Share of Total Share of Total Share of
(MTCE) a Total (MTCE) Total (MTCE) Total (MTCE) Total (MTCE) Total
(percent) (percent) (percent) (percent) (percent)
571.3 100 404
313.6 54 225 56
269.6 47 196 49
Nonferrous
2.7
1
2
NEGL
0.7
1
NEGL
NEGL
Ammonia
30.2
5
20
5
0.5
NEGL
9.7
53
Petrochemicals
3.5
1
NEGL
NEGL
3.5
3
NEGL
NEGL
Building materials
18.2
3
17
4
1.2
1
NEGL
NEGL
Oil
15.9
3
NEGL
NEGL
12.1
9
3.8
20
Machine building
16.3
3
15
4
1.3
1
NEGL
NEGL
Light industry
43.7
8
29
7
14.7
11
NEGL
NEGL
Transportation
36.0
6
20
5
16.0
12
NEGL
NEGL
Rail
19.0
3
18
4
1.0
1
NEGL
NEGL
Motor vehicle
15.0
3
NEGL
NEGL
15.0
11
NEGL
NEGL
Agriculture
16.5
1
2
NEGL
14.5
11
NEGL
NEGL
Household/ commercial
78.5
14
76
19
NEGL
NEGL
2.5
14
We calculate that, if China succeeded in quadrupling
power output by the year 2000, even assuming real-
ization of hydroelectric and nuclear power plans, coal
consumption would rise to about 450 million tons a
year, despite improved efficiency. This would repre-
sent a doubling of the power sector's share of coal
consumption-to about 40 percent and a rate of
growth of 6.7 percent per year, which we believe is
highly unlikely. If, on the other hand, thermal power
capacity rises at the rate of between 4 and 5 percent
per year that we project (see electric power supply
section, page 12), the power sector's demand for coal
will increase by a more manageable 3- to 4-percent
rate
The iron and steel industry is China's second-largest
industrial consumer of coal. In 1978 it consumed
about 76 million tons of raw coal, 13 percent of the
nation's total. Consumption declined to less than 68
million tons in 1981 despite a 12-percent increase in
steel output. This represents a total efficiency gain of
25 percent in the three-year period-from 2.0 tons of
coal per ton of steel in 1978 to 1.6 tons of coal in
1981. Much of this improvement was the result of
closing hundreds of small steel plants. Also, better use
Approved For Release 2009/02/20: CIA-RDP85T00310R000100050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
OCII V t
Table 8
China: Primary Energy Consumption, 1982
Total Share of Total
(MTCE) Total (MTCE)
(percent)
Share of Total Share of Total
Total (MTCE) Total (MTCE)
(percent) (percent)
Share of Total Share of
Total (MICE) Total
(percent) (percent)
100 30.0 100
43 14.8 94
6 0.5 3
Nonferrous 3.0 NEGL 2.0 NEGL
Chemicals NA NA 41.0 9
Ammonia 36.8 6 24.0 5
Petrochemicals 5.0 1 NEGL NEGL
Light industry
51.0
8
35.0
8
16.0
14
NEGL
NEGL
Transportation
38.0
6
21.0
5
17.0
15
NEGL
NEGL
Rail
22.0
4
21.0
5
1.0
1
NEGL
NEGL
19
NEGL
NEGL
1.0
6-
22
18.9
16
NEGL
NEGL
30.0
100
of pig iron in making steel saved considerable energy.
In 1982 and 1983 the efficiency gains have been much
less-probably about 1.5 percent per year, because of
fewer plant closings.
The steel industry will continue to offer China one of
its best opportunities for saving coal. With only
modest goals for steel production and large efficiency
gains still available-particularly through the use of
modern integrated mills such as the Baoshan steel
mill now under construction-we believe the indus-
try's coal consumption need increase only by about 1
percent per year through the end of the century. F_
China's chemical sector also offers substantial coal
savings. In 1978, chemicals consumed 49 million tons
of coal-9 percent of the nation's total-28 million
tons of which were used as feedstock for synthetic
ammonia. By 1982, we estimate coal consumption in
the chemical sector had risen to about 57 million tons,
including about 34 million tons in making synthetic
ammonia. Growth targets for the chemical industry
show that fairly rapid expansion is planned through
the rest of the century, but we believe much of the
increased energy demand will be met by petroleum
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Table 9 Million tons
China's Coal Demand a
Figure 7
China: Coal Consumption, 1978-2000
Million Metric Tons
Other industry
Household
Total demand
565
638
864
1,170
Electricity
Industry demand
465
517
686
881
Steel
Steel
76
69
80
96
28
34
38
43
15
22
41
67
Electricity
113
137
198
260
Rail
25
29
32
30
Other
208
224
297
385
Household demand
100
122
178
289
Production
618
666
900
1,150-1,300
Losses and stocks
53
24
30
40
rather than coal. Chemical use of coal will probably
increase at a rate of only 1 or 2 percent annually,
again making substantial amounts of coal available
for use in other sectors.
Building materials, particularly cement, are likely to
take up some of these savings. We estimate that the
cement industry consumed 22 million tons of coal in
1982. Rapid expansion of the industry-much of it in
relatively inefficient small plants-will probably in-
crease its coal consumption at a rate close to 8 percent
per year through the 1980s, and perhaps a 5 percent
per year annual rate of increase in the 1990s. F_
China and India are the only major countries that
continue to use steam locomotives as the primary
power source for their railroads. About 75 percent of
China's freight is pulled by steam locomotives. These
locomotives consumed 25 million tons of coal in 1978
and an estimated 29 million tons in 1982. Efficiency
gains by steam locomotives have lagged in recent
years. Coal consumption per ton-kilometer of freight
actually increased slightly in 1982
Losses
[ Rail
? Exports
China's railroad sector over the past decade has been
unable to keep up with economic growth. Freight
movements, as measured in ton-kilometers, increased
by only a little more than 4 percent per year. The
resulting bottlenecks have been particularly trouble-
some for coal transport and are causing Beijing to
reconsider its dependence on steam locomotion. Ulti-
mately, we believe China will be forced to move
toward diesel and electric locomotion. The reasons, as
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
expressed in Chinese energy and transportation jour-
nals, are the efficiencies of energy and capital that
diesel and electric offer. The changeover will be
gradual-70 percent of locomotive production is still
steam engines, which typically last 30 years. The
Chinese press, however, has speculated that China's
single remaining steam locomotive plant-the largest
in the world-will change to diesel electric production
sometime in this decade.
Household Demand. Retail sales of coal reached
approximately 150 million tons in 1982, up sharply
from only 100 million tons in 1978. This 10-percent-a-
year increase has been a major stimulus to coal
production by locally owned coal mines, which in
1982 increased output by 20 million tons-an increase
of 15 percent. In 1978, almost all retail sales of coal
went for household consumption, at least according to
one Chinese publication, which gave figures of 60.98
and 39.65 million tons for urban and rural household
consumption, respectively, in that year. Liberalization
of controls on the private mining and selling of coal
and the proliferation of private and collectively owned
industry since 1978, however, suggest that only a
portion of the increased sales went toward household
consumption. We estimate households increased con-
sumption of coal by 5 percent per year over the period,
the same rate that was officially reported for 1979.
This brings household consumption to 122 million
tons in 1982 (see table 9).
Coal still provides only about a fourth of the energy
used in China for heating and cooking-plant materi-
als including firewood and crop stalks provide almost
all of the rest. The effort required for peasants to
gather these materials and the extensive ecological
damage caused are now often cited among rural
China's most pressing problems.
Under these circumstances-and with the relatively
cheap price of coal-household demand for coal is
practically inexhaustible. The central government can
attempt to control this demand by refusing to sell coal
produced in state-owned mines for local use. The
Ministry of Coal, however, plans to increase produc-
tion from locally owned coal mines-which now pro-
vide most of the rural household coal supply-by only
about 2 percent per year through the year 2000, a rate
of increase that is very unlikely to satisfy rural
household demand. We estimate that, at a minimum,
the state will have to allow household coal consump-
tion to increase at the same rate as the economy as a
whole, particularly given its concern over the "quali-
ty" of economic growth and the improvement in living
standards. To provide this coal, Beijing either will
have to allow local mines to increase output at a much
higher rate than the planned 2 percent per year--at
considerable investment cost and at the risk of some
damage to coal reserves-or will have to begin selling
state coal to rural household customers.
Implications. As illustrated in table 9, the above
analysis suggests that demand for coal will increase
by about 3.9 percent per year through 1990 and about
3.1 percent per year in the 1990s-presuming an
economic growth of 5 percent per year. Total demand,
including losses, would thus reach about 900 million
tons in 1990 and 1,200 million tons in 2000. The 1990
consumption estimate helps explain the boost Beijing
gave in 1982 to its 1990 coal production target. The
new target of 940 million tons would allow China to
surpass its export goal of about 20 million tons. The
original 850-million-ton target would have left a
shortfall of about 50 million tons.
The Wen Wei Bao projection of 900 million tons of
coal output in 1990, which is 100 million tons greater
than that predicted by the Shanghai World Economic
Herald and which we believe is about the maximum
attainable, would just meet this demand projection
and leave no room for exports. Beijing would probably
squeeze out some exports anyway to meet commit-
ments to Western and Japanese joint venture part-
ners.
Given our assumptions of less substitution of coal for
oil in the 1990s and the emergence of nuclear power,
the longer term outlook is considerably better. Our
estimate of 1,200 million tons of coal demand in 2000
would allow a significant boost in coal exports if the
official production target is reached. Even in the
1990s, however, economic growth faster than 5 per-
cent would quickly result in a strain on coal supplies.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Demand for Petroleum
China's annual oil consumption declined by 11 per-
cent-10 million tons-between 1978 and 1982, a
remarkable achievement given the country's substan-
tial increase in industrial and agricultural output.
Despite a 2-million-ton decline in oil output, Beijing
was able to boost annual exports by 7 million tons to
take full advantage of the 1979 jump in oil prices. The
value of oil exports thus rose from little more than $1
billion in 1978 to about $5 billion in 1982, an
important element in China's greatly improved inter-
Table 10
China: Petroleum Product Output
national financial situation.
The decline in consumption was made possible by
shifting from oil to coal in many boiler and furnace
operations and by Beijing's extraordinary control over
the disposition of petroleum products. Consumption of
gasoline and diesel fuel actually declined despite a 40-
percent increase in the stock of motor vehicles 'and
tractors. Although forcing some improvement in the
efficiency of fuel use, Beijing's policies have greatly
reduced the utilization rate of motorized vehicles and
machinery.
We believe that, although savings still can be made in
China's oil consumption habits, the easiest gains have
been made and that Beijing will be forced to allow a
gradual increase in consumption. An upward trend
may in fact have already begun. Preliminary produc-
tion and export statistics suggest that consumption in
1983 may have increased by as much as 5 percent. By
our calculations-as follow in a sector-by-sector anal-
ysis-if the economy is to grow at a 5-percent annual
rate, a minimum 2-percent annual gain in consump-
tion will be required to meet the needs of the consum-
ing sectors. We thus calculate an elasticity for oil
consumption at about 0.5. Oil consumption will then
reach just under 100 million tons per year by 1990. If
our output projections are correct, China would have
to eliminate almost all crude oil and product exports
by that time.
Product Structure. China's crude oil and petroleum
product structure is included in table 10. In 1982,
China refined only 72 million tons of the 99 million
tons available after oilfield use and losses. This was
down about 3 million tons from the 1980 peak.
Refinery throughput
70.70
71.46
75.38
71.46
72.06
Product yield
66.68
66.99
70.27
66.97
67.51
Light products
33.54
35.43
34.77
36.22
36.35
Gasoline
9.91
10.70
10.49
11.12
11.14
Naphtha
NEGL
NEGL
NEGL
2.32
2.75
Kerosene
3.56
4.09
4.00
3.50
3.50
Diesel
18.26
18.73
18.28
17.78
17.46
Lubricants
1.81
1.91
2.00
1.50
1.50
Fuel oil
28.14
28.16
28.00
28.18
23.86
Other
5.00
3.40
7.50
2.57
7.30
Approximately half of the remaining crude oil was
exported; the rest was burned directly in electric
power plants and other large boiler or furnace opera-
tions.
China's refineries yield an unusually heavy and low-
value range of products because of rather heavy crude
oil varieties and inadequate cracking facilities in the
refineries. Output of high-value light products-gaso-
line, kerosene, diesel fuel, lubricants, and naphtha
amounted to only about 36 million tons in 1982, about
half of refinery throughput. Fuel oil production and
fuel consumed by refineries themselves accounted for
most of the balanceJ
Industrial Fuel Oil Consumption. Beijing's primary
effort to reduce oil consumption has been to cut back
sharply the direct burning of crude and fuel oil in
power plants and industrial boilers and furnaces. In
1980 the country burned 40 million tons in these
operations, about 12 million tons of crude oil and 28
million tons of fuel oil. This was particularly wasteful
of the crude oil that could have been distilled and
cracked into a higher value range of products.
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
secret
Table 11
China: Demand for Oil a
Figure 8
China:Oil Consumption, 1978-2000
Million Metric Tons
Transportation Agriculture
Other
Oil production
104
102
105
150
-
Electricity
Domestic consumption
91
81
97
145
Industry
63
54
58
71
Petrochemical
Oil
16
14
17
21
Agriculture 11 10 15 24
Other 6 5 6 9
In 1981 and 1982 the State Council imposed strict
regulations on such waste-including a tax of 40 to 50
yuan per ton on fuel oil-and by 1982 oil burning had
declined to 35 million tons. Beijing has called for an
annual reduction of 2 million tons per year through
1990 in the direct burning of petroleum in order to
reduce the waste of crude oil to 20 million tons. The
high cost of converting units to coal-1.6 billion yuan
were spent in 1981 and 1982 alone-and slower-than-
planned conversion of power plants thus far suggests
that China will do well to reduce crude and fuel oil
consumption to 25 million tons by 1990.
Coal-fired electric power plants have always dominat-
ed China's power industry, but in the late 1960s
through the mid-1970s China constructed large num-
bers of oil-fired stations and converted dozens of coal-
fired units to oil to take advantage of the country's
booming oil production. This was particularly true in
the Shanghai area and in the industrial northeast
!Oil industry
? 1{spurn
provinces where transportation and environmental
conditions discouraged the use of coal. By 1978 the
country had a total of 12,000 MW of oil-fired capaci-
ty-21 percent of total power capacity--that con-
sumed 18.3 million tons of crude and fuel oil and
about 500,000 tons of diesel fuel.
With prospects deteriorating for oil production, Beij-
ing after 1978 began to focus on conversion and
reconversion of these plants to coal. Just over 4,100
MW of capacity were planned for conversion by 1985
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85T00310R000100050007-4
for a general savings of more than 8 million tons; most
of this capacity had probably been coal fired original-
ly and thus much easier to convert. By the end of
1981, 2,000 MW had been converted and annual oil
consumption had dropped by 4 million tons. However,
the rate of conversion has slowed as easier units were
completed first, and in 1981 only 340 MW were
converted. No figures are available for 1982 and
1983, but if the conversion program continued at the
1981 rate it would not be complete until 1988. We
calculate that oil consumption in the power sector will
decline by about 800,000 tons each year through 1988
and then will flatten out at about 9 million tons of fuel
oil and about 750,000 tons of diesel oil.
Metallurgy, chemicals, and light industry-particu-
larly the papermaking industry-account for most of
the remaining fuel oil consumption. Beijing plans to
reduce oil burning by these industries by about 1
million tons a year through 1990-a 5-percent decline
in 1983 rising to a 10-percent rate of decline by 1990.
Fuel consumption in these industries declined by 3
million tons in 1981 and 1982, but we do not believe
this success can be sustained. The easiest savings have
already been accomplished. In the steel industry, for
instance, heavy oil is no longer mixed with coking coal
for blast furnace operations. Most of the remaining oil
is consumed in rolling operations that will be much
more difficult, if not impossible, to convert to coal.
New plants, moreover, will need to burn some oil.
Baoshan steel mill, for instance, will require 300,000
tons of fuel oil annually when second-stage operations
begin in 1988. Chemical industries can probably still
make significant efficiency gains, but light industrial
use of fuel oil may increase with the burgeoning
demand for light industrial products.
Petrochemical Feedstocks. China's discussions con-
cerning the optimal use of its oil focus on the need to
rapidly increase the share processed into high-value
fertilizers and petrochemical products. These are cur-
rently large import items that are particularly impor-
tant in US-Chinese trade. Only about 5 million tons
of oil, largely diesel fuel and naphtha, were used for
these purposes in 1982, up from about 3 million tons
in 1978.
this demand will rise to about 16
million tons by 1990 and perhaps to as much as 30
million tons by 2000
Three large ethylene plants are currently under con-
struction that when operational-probably by the end
of 1986-will consume 4 million tons of crude oil
annually to provide materials for synthetic fiber and
plastics production. We also anticipate a rapid in-
crease in the production of synthetic ammonia using
residual fuel as the primary feedstock-a shift away
from coal-derived feedstock technology that consumes
large amounts of electricity.
Demand for Light Petroleum Products. China's out-
put of light products-excluding naphtha, which is
either used as petrochemical feedstock or exported-
has remained steady at about 35 million tons annually
since 1978. Exports of these products more than
doubled to 5.3 million tons between 1978 and 1982,
however, so that products available for domestic
consumption declined by 7 percent (2.5 million tons).
The largest decline came in the supply of diesel fuel-
from 18.3 million tons to 17.5 million tons. Ample
reporting indicates that diesel is now the fuel in
shortest supply. Gasoline output increased from 9.9
million tons to 11.1 million tons in the same period,
but all of the increase went to exports-most of it to
the United States. Domestic consumption of gasoline
has held steady at about 9.7 million tons a year
Agricultural Demand. Consumption of light petro-
leum products by the agricultural sector totaled 10.4
million tons in 1978, including about 8 million tons of
diesel fuel and 2 million tons of gasoline-46 percent
and 20 percent of total demand for these products.
Chinese sources state that agricultural use of these
products declined through 1982, although no specific
statistics are available.
This decline in petroleum consumption has little to do
with improved efficiency of farm machinery nor does
it reflect a reduction in demand for these products.
The stock of agricultural machinery-particularly
Approved For Release 2009/02/20: CIA-RDP85T00310R000100050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
tractors and irrigation pumps-increased approxi-
mately 40 percent (measured by total horsepower in
use) between 1978 and 1982, and peasant demand is
nowhere near satisfied. Chinese journals and newspa-
pers increasingly carry complaints that the peasants
are not getting maximum use out of new machinery
because of fuel shortages. One author in Guangming
Ribao, for instance, complains that agricultural
"modernization" is impossible given the shortage of
fuels. The result, as shown in official statistics, is a
slowdown, even to the point of a reversal, in farm
mechanization and powered irrigation. We believe
that Beijing will soon have to allow an increase in
agricultural fuel supplies-perhaps by about 5 per-
cent annually.
Transportation Demand. China's transportation sec-
tor consumed approximately 12 million tons of petro-
leum products in 1982, including 7.5 million tons of
gasoline and about 3.5 million tons of diesel fuel.' We
estimate that fuel consumption has increased by about
3 percent per year since 1978; annual efficiency gains
of 3.6 percent in the use of gasoline and 2.6 percent in
the use of diesel fuel have allowed a 6-percent annual
rate of increase in total freight carried.
These efficiency gains notwithstanding, Chinese
transportation continues to face severe fuel shortages,
largely the result of the government's determination
to increase exports of these products. Nationwide, the
annual allocation of gasoline and diesel fuel declined
from 7.1 tons per truck (about 2,200 gallons) in 1979
to only 4.5 tons in 1983. In 1981, in response to
widening shortages, the State Council imposed strict
quotas on the amount of fuel allocated per vehicle.
Transport units in Fujian, for example, complained
they were given three-month quotas of 800 liters of
gasoline (210 gallons), enough for only 20 days of
normal operations. In addition, provinces were told to
mothball about 10 percent of their motor vehicles.
The program had an impact; Liaoning and Xizang
Provinces alone mothballed 10,000 and 1,600 trucks,
respectively. These measures reflect Beijing's intense
' Aggregate statistics in the transportation sector can only be
estimated because Chinese official data refer only to Ministry of
Communication and Transportation activities, which include only
China's Automotive Fuel Consumption
The lowly position of the automobile in China illus-
trates both the severe limits to reducing discretionary
fuel consumption in China and the potential for
unbounded growth in fuel consumption if the econo-
my were to develop rapidly and without constraints.
China's stock of automobiles, 267,000 in 1982, is
approximately the same as that of the District of
Columbia. It is only slightly larger than that of
South Korea. Even with such few automobiles, Bei-
jing imposes such severe quotas on fuel consump-
tion-70 kilograms or 22 gallons a month-that
Chinese taxis coast downhill whenever possible. Chi- 25X1
na's automobiles thus consume only 69 million gal-
lons of gasoline a year; China, meanwhile, exports
about 490 million gallons of gasoline per year to the
United States.
focus on saving energy without, in our view, adequate
attention to the very high economic costs of idling
transport capacity.
A Chinese economist, writing in a recent edition of
Neng Yuan (Energy), calculates that transportation
services in China must increase about 1.37 times the
rate of increase of industrial and agricultural produc-
tion. In recent years, transportation's relatively slower
growth has caused major bottlenecks. We anticipate
that, consistent with this analysis and with the current
rate of increase in the stock of locomotives and motor
vehicles, transportation services will increase at about
7 percent per year.
Efficiency gains are expected to continue at a 2- to 3-
percent annual rate," but this will be offset by the
railroads' increased consumption of diesel fuel as they
gradually shift away from coal. On balance we esti-
mate that the use of gasoline and diesel fuel will
'? Major gains can be achieved by improving China's 70-octane
gasoline, and negotiations are under way for importing US terepth-
alic lead technology. Paving roads and gradually shifting from
gasoline to diesel-powered trucks will also allow major gains in
25X1
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
increase at about a 5-percent rate, rising to about 16
million tons in 1990 and perhaps to as high as 38
million tons by 2000.
Military Consumption. We have no firm estimates of
petroleum use by the military. Presumably such use is
contained within the 6.1-million-ton "other" category
in the 1978 consumption statistics. That figure, how-
ever, also includes other government fuel consumption
and a very small amount of fuel burned by urban
households. Fuel production statistics can provide
some further indications. Kerosene and jet fuel pro-
duction in 1981, less exports and rural lighting con-
sumption, for instance, leaves about 1.6 million tons
unaccounted for, a good share of which probably was
consumed by the Air Force
The military has not been spared in the conservation
effort. In 1981, according to the Chinese press=
petroleum supply was cut by 20
Demand for Electric Power
China consumed 350 billion kWh in 1983, up from
257 billion in 1978. Power consumption rose by more
than 7 percent in both 1982 and 1983, far above the
annual planned increase, but still far short of demand.
Despite the high priority being given to the power
sector, in the short and medium term, we believe
electricity shortages will be the most important
energy-related impediment to economic growth. F_
Electric power is one of, if not, the leading growth
industries in China, having grown at an average
annual rate of 12 percent over the past 25 years.
Perhaps more so than in any other major country, this
growth has served industrial consumers; households
account for only about 5 percent of total consumption.
Approximately 40 percent of China's population has
no access to electricity, and the vast majority of those
that do are allocated only enough power for very
limited lighting. The World Bank estimates that the
average Chinese household consumes only about 0.2
kWh a day-even less electricity than households in
India.
Even with the high priority afforded industry, Vice
Premier Li Peng has stated that industrial demand for
electricity now exceeds power supply by about 50
billion kWh. The Ministry of Water Resources and
Electric Power and provincial authorities have very
strong control mechanisms in place to allocate power
in ways that generally prevent blackouts and brown-
outs. These controls, however, exact a considerable
economic cost, particularly in underutilized capital. In
many regions, Chinese factories operate only four
days a week to save power. Priority is given to light
industry-particularly export-related plants-but
even Western joint venture operations have been
affected. The Chinese press complains that, nation-
wide, industry operates 20 percent below capacity
because of power shortages.
The distribution of electricity consumption by sector
and industry is shown in table 12 and in figure 9. We
obtained these data from Chinese economic yearbooks
and other published sources
partial data are available for 1982.
Industry, particularly heavy industry, dominates pow-
er consumption, receiving about 75 percent of the net
available power in 1982. The chemical and metallur-
gical sectors are by far the most important consumers;
each accounts for about 16 percent of national power
consumption. Power consumption increased by only
1.8 percent in metallurgy between 1978 and 1982, the
result of intensive efforts to save electricity.
Rural electricity consumption-much of it provided
by small hydropower plants-has maintained a 14-
percent annual rate of increase since 1978. A large
share of the increase has gone to supply the booming
rural enterprise sector and to increase electrically
powered irrigation. Municipal power consumption-
mostly for lighting and water pumping-has also
increased rapidly.
Prospects-Further Tightening. We believe, and most
Chinese economists writing on the subject seem to
agree, that national income over an extended length of
time will not increase more rapidly than the available
electric power supply.
25X125X1
25X1
25X1
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Table 12
China: Electric Power Consumption, 1978-82
1978
1979
1980
1981
309.3
Line loss
18.0
NA
23.0
25.0
Industry demand
166.0
185.0
196.0
197.0
Heavy industry
138.0
149.6
164.3
162.1
Coal
15.1
17.5
17.8
Petroleum
7.4
10.2
10.3
Ferrous metals
29.2
30.5
29.3
Nonferrous metals
13.0
15.7
17.7
20.8
10.7
11.3
Paper
15.3
5.7
Textiles
8.9
12.2
2.3
1.3
1.5
1.6
9.7
9.9
5.4
7.8
2.7
3.5
5.8
5.6
Percent Average
Consumption
Annual
as Share of
1982
Consumption
Power Output,
Growth,
1981
1978-82
327.7
6.3
100
NA
8
209.0
6.0
64
170.6
5.4
52
45.0 a
1.8
9
8.3
7.9
1.8
-
5.9
_.
-
3
0.3
Over the past 25 years, power consumption has
increased at more than twice the rate of increase of
national income-an elasticity of 2.25-and 1.25
times as fast as industrial output. Since 1978, these
elasticities have improved to 1.0 and 0.86 for national
income and industrial output, respectively, but this
has been accompanied by more stringent controls and
greater shortages. It has also been a period of much
more rapid growth for light industry, which consumes
less electricity per unit of value than does heavy
industry. It is by no means clear that this relatively
slow increase in industrial electricity consumption can
be maintained, particularly as heavy industrial growth
picks up. We expect that both capacity and fuel
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Figure 9
China: Electric Power Consumption,
1978
Chemicals
Power industry
Other
Metals
Rural use
Metals processing
Coal
Municipal use
Building materials
Petroleum
I i___' I J
limitations will hold increases in electricity supply to
at most 5 percent annually for the next decade.
Output growth in 1984 and 1985, moreover, could be
considerably below that rate. If this analysis proves
correct, Beijing will have to slow the rate of increase
of electric power consumption to less than that of
national income if it is to come anywhere near its
long-term growth targets.
Table 13 gives some indication of the difficulty of
China's task. Industry will have to provide the bulk of
efficiency and structural gains. Yet, for the 24-year
period between 1957 and 1981, in no single industry
Table 13
Economic Growth and Electricity
Consumption, 1957-81
Average Annual Elasticity of
Growth (percent) Electricity Use
to National
Output Electricity Income
Value Use
Gross value industrial
output
Heavy industry
9.7
12.6
1.30
Coal
6.3
9.3
1.47
Oil
16.0
16.7
1.04
Metallurgy
8.5
11.0
1.29
Machine building
11.7
12.7
1.08
Chemicals
14.2
15.8
1.11
Building materials
9.3
12.2
1.31
Light industry
8.9
9.3
1.04
Textiles
7.8
8.7
1.11
Paper
5.8
8.5
1.46
Foodstuffs
5.3
9.3
1.75
did electricity consumption increase more slowly than
the gross value of output for that industry. In fact,
only in the petroleum industry and in overall light
industry-but not for subgroups such as textiles-did
the value of output keep pace with electricity con-
sumption.
A more careful look at the prospects for electricity
consumption in several key industries offers somewhat
more hope. The chemical sector, particularly the
synthetic ammonia industry, can cut back electricity
consumption by shifting from coal-based to petro-
chemical-based products. Similar improvements can
probably be made in other chemical industries. The
steel industry will probably increase its electricity
consumption per unit of steel output, but, because of
low growth targets for this large electricity user, the
annual rate of increase in power consumption will
probably be only 2 or 3 percent. The machine-
building industry will also probably show only small
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
increases. These gains will be partially offset, how-
ever, by the nonferrous metals industry, which will
probably increase power consumption by 5 percent
annually, and by expected continued sharp increases
in small-scale local industrial output.
A key problem will be supplying power to meet
nonindustrial needs-particularly household con-
sumption. Beijing is giving high priority to the pro-
duction of goods that will improve the standard of
living. The production of many of these goods-
television sets, electric fans, washing machines, even
small refrigerators-is giving a tremendous boost to
the industrial production statistics and, because of the
low electricity consumption per unit of output, is
helping to lower the electric power elasticity of indus-
trial output. These items are, however, causing a rapid
increase in the demand for electricity in the commer-
cial and household sectors. Between 1978 and 1982
we estimate that nonindustrial consumption increased
by 13 percent annually.
So far, the problem has not been a major one because
of the low base from which nonindustrial demand is
rising. However, we anticipate this will be an increas-
ing problem through the 1980s and perhaps a severe
problem in the 1990s when electricity supply will be
distributed more widely to the population. Beijing can
limit the expansion of nonindustrial electrical con-
sumption by fiat; but only at considerable cost to one
of the fundamental goals of the modernization pro-
gram-the improvement in living standards.
Economic predictions concerning energy supply and
demand in both market and nonmarket economies
have frequently been off the mark over the past
decade. The foregoing analysis of China's energy
situation could also prove erroneous. Particularly in a
state-controlled economy, however, where fixed prices
do not force an equilibrium between supply and
demand and where government policy is the key
determinant of future production and consumption
conditions, long-range planning is vitally important.
Our analysis attempts to present China's energy
situation in ways that we believe Chinese policymak-
ers must look at the situation, so that we can better
anticipate decisions that face Beijing.
Table 14
Energy Balances Forecast a
618
666
900
1,150-1,300
618
662
894
1,200-1,210
1
5
5
-60-90
Production
104
102
105
150
92
81
97
145
Exports
13
21
8
5
Imports
1
NEGL
NEGL
NEGL
Foreign company
share
0
0
3
10
Electric power (billion kWh)
257
328
482
786
a Assumes a 5-percent annual increase in national income. Because
of rounding, components may not add to totals shown.
b Includes losses and stock building.
Includes both capital recovery and profit oil.
d Assumes capacity increase of 5 percent per year; fuel is taken into
account in coal and oil consumption.
Power demand assumed to increase at least as fast as national
income-that is, 5 percent.
Table 14 summarizes our analysis of supply and 25X1
demand for oil, coal, and electricity that we project if
China has an annual 5-percent economic growth rate.
No major gaps are evident, but there is a definite
tightness in the energy balances that will probably
require Beijing to make difficult decisions in allocat-
ing energy supplies. These calculations also allow only
a little room for energy exports-currently more than
20 percent of China's foreign exchange earnings.
Economic growth faster than 5 percent would, we 25X1
believe, quickly cause serious energy shortages unless
China was prepared to import substantial volumes of
energy. If our energy elasticities of coal, oil, and
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
electric power demand-0.8, 0.5, and 1.0, respective-
ly-are anywhere close to being accurate, a 7-percent
annual rate of growth would require several adjust-
ments:
? The elimination of oil exports even to the point of
repurchasing-in effect importing-the offshore oil
that the Western oil companigs expect to take out as
their profit share.
? Resolving a 100-million-ton shortfall in annual coal
supplies by 1990.
? Coping with a further 15- to 20-percent shortfall in
electricity supplies.
By the same token, long-term annual economic
growth of only 3 or 4 percent would probably not run
into an energy constraint. Energy exports could be
kept at current levels and perhaps even increased. F
Even with slower growth, however, Beijing's planners
must prepare for the possibility that energy supplies,
particularly oil, will not increase as fast as predicted.
Chinese oil ouput predictions are based on the as-
sumption that offshore oil will come onstream in time
to offset and then surpass the anticipated decline in
major onshore fields by the end of the decade. We
believe, however, that Daqing, and perhaps other
onshore fields, will start to decline before significant
offshore production can begin. Of greater concern is
the possibility-always present when exploring a new
area-that China's offshore regions will not yield the
large, highly productive fields necessary for commer-
cial development.
Beijing-Tough Choices Ahead
Weakness in China's supply of energy has already
forced Beijing to make major changes in the country's
long-term political and economic policies. The meas-
ures taken so far have helped to push China's econo-
my away from its Stalinist and Maoist heritage and to
bring it somewhat closer to Western-style economies.
We believe, for instance, that the Deng-Zhao econom-
ic readjustment and reforms program was given a
strong impetus by the 1978 revision in oil supply
projections. The new leadership was quick to realize
that China did not have the resources and capital to
continue to support a massive Soviet-style industrial
buildup and hence opted for a more consumer- and
export-oriented economy led by light industry.
Equally important was the realization that China
could not solve its energy problems by itself. At least
for the energy sector, self-reliance as a guiding princi-
ple was discarded to allow the introduction of West-
ern capital and technology in ways that the leader-
ship's Maoist predecessors would have considered
"exploitationist." Offshore oil is the most dramatic
example, but Western and Japanese firms are increas-
ingly becoming involved in everything from onshore
seismic surveys to nuclear power development.
Our judgment that China's energy balances will
continue to tighten through the rest of the decade will
strengthen China's need to cooperate with the West.
At the same time, however, it will force Beijing to
make difficult and politically divisive decisions about
the allocation of increasingly scarce energy resources.
These decisions may threaten the leadership consen-
sus that has allowed Beijing to make bold decisions on
the importation of Western capital and technology
and the unavoidable "capitalistic" and "bourgeois"
influences that come with it. This danger will be
particularly evident if major programs-such as the
offshore exploration effort-are unsuccessful. We dis-
cuss briefly in the following sections some of the key
areas that will require controversial energy-related
decisions over the next decade.
Investment Strategy. The relatively modest but steady
growth that we believe is possible if there are no
major energy problems is not a cause for alarm in
Beijing. It will, however, require the central govern-
ment to consider its investment programs carefully in
order to make sure the growth occurs in the most
beneficial sectors. Even within the energy sector,
Beijing is now grappling with tough investment deci-
sions that will have a large impact on future energy
supply:
? In the electric power sector, whether to emphasize
long-term, capital-intensive but fuel-saving hydro-
electric and nuclear power development or faster
and cheaper coal-fired capacity. In the past few
years, the long-term approach appears to have had
an edge, but that may change if severe power
shortages occur in 1984 and 1985.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
? In oil exploration, whether to emphasize areas
where discoveries can be exploited quickly or areas,
such as the Tarim Basin, with better prospects but
which will take decades to exploit.
? In coal mine development, whether to continue the
rapid development of small, non-state-owned coal
mines or step up investment in large, state-owned,
mining operations.
A key difficulty in making investment decisions is the
lack of a rational interest rate structure. The very low
domestic rates tend to encourage capital-intensive
projects, particularly nuclear and hydroelectric plants,
whereas the large differential between domestic and
international market interest rates tends to discourage
borrowing from the West.
Energy Prices. This brings into focus one of the key
problems in China's economy-the lack of a pricing
mechanism that allocates scarce resources efficiently.
China's energy prices are by almost all accounts far
out of adjustment. To preserve price stability, Beijing
has held energy prices relatively constant since the
1950s despite clear changes in domestic and interna-
tional supply and demand conditions.
Crude oil and coal are currently priced at only 25
percent and 20 percent, respectively, of the interna-
tional price. Gasoline is priced close to the interna-
tional level, but diesel fuel is inexplicably priced at
only 40 percent of the price of gasoline. Heavy fuel oil
is also very cheap. Although the international prices
may not be a perfect indicator of supply and demand
within China, Chinese economists are increasingly
turning to them to illustrate the inadequacy of Chi-
nese prices.
Also the price system does not take into account the
differences in quality among types of crude oil and
coal. Washed coal, for example, is sold at the same
price as unwashed coal, which creates a disincentive
for mines to clean up their production. This also
forces the railroads to haul tons of rubble along with
the coal.
In the Maoist system-at least in theory-the relative
price of energy made little difference because energy
was simply allocated according to plan and enterprise
profits were returned to the state. In the emerging
"mixed" economy that some of the economic reform-
ers are trying to bring about, prices are much more
important. Numerous articles in Chinese economic
journals now attack what their authors see as imper-
fect decisionmaking based on an irrational price
system. Typical complaints are:
? The abnormally high profits garnered by petroleum
refineries-the result of cheap crude prices and high
product prices-have caused the buildup of redun-
dant refining capacity.
? Industry is encouraged to burn the relatively cheap
crude and fuel oil.
? Oilfields and coal mines are encouraged to export
crude oil and coal at much higher world market
prices rather than sell it to domestic customers.F_
Prominent Chinese leaders have recognized for years
the need to increase energy prices, and some steps
have been taken. In 1981, for example, after coal
output dropped, in part because of the inability of
most of the country's coal mines to make a profit, the
government increased prices for small-scale coal
mines, which helped boost output. More recently,
taxes have been imposed on crude and fuel oil to
discourage such use. When questioned in 1982 about
the need for much larger and more comprehensive
energy price adjustments, however, Premier Zhao
acknowledged the need but stated that politically such
a move was impossible.
Whether the political climate has improved or not,
Beijing is now formulating a sharply higher schedule
of energy prices,
the increases will proba-
bly come in stages so they will not create too large a
shock, but obviously they will not be welcomed by the
public.
total export earnings.
Oil Exports. China's ability to increase exports of
crude oil, petroleum products, and coal during 1978-
82 is remarkable and a major factor behind the
country's strong international financial position. Ta-
ble 15 includes the volume and value of China's
energy exports beginning in 1978 and their share of
25X1
25X1
25X1
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Table 15
China: Energy Exports
Exports (million tons)
Crude oil
Products
Total exports 10.16 13.49
Energy exports 1.34 2.63
13.8 15.2
4.2
6.3
Our analysis suggests, however-and this is increas-
ingly reflected in Chinese energy journals-that Chi-
na may have to phase out oil exports. Indeed, by
eliminating oil exports by 1990, and, if the planned
petroleum output targets are reached, domestic con-
sumption could rise by the 2-percent annual rate that
we calculate will be necessary for a 5-percent rate of
economic growth. Coal exports will probably rise
because of contractual arrangements with Japan, but
can only be expected to replace a small share of
current oil earnings.
Premier Zhao Ziyang stated in his report on the Sixth
Five-Year Plan that China will under no circum-
stances import oil. We also believe China will not
import oil-and our analysis suggests imports will not
be necessary unless the offshore exploration program
finds much less oil than we expect. It is significant,
however, that Zhao did not rule out a reduction of oil
exports.
the top leadership is currently
deliberating over what would be a very difficult
decision to reduce oil exports or slow economic
growth.
1.38 1.39 NA
High-level concern over a possible reduction or even
an elimination of a commodity that currently provides
20 percent of the nation's foreign exchange earnings
may also be a reason for China's reluctance to boost
its general level of imports, despite the large current
account surpluses of recent years. We regard some
conservatism as prudent, particularly until a better
idea can be obtained of what oil resources will be
discovered offshore
Household Demand. An issue that we believe will
come to the forefront later this decade and in the
1990s is the limited degree to which China's commer-
cial and modern energy supplies are allocated for
direct household and personal use. Table 16, from a
d 1982 b ' f
h
paper presente m y a sctenttst r
OM Le
Chinese Academy of Sciences, includes a breakdown 25X1
of energy sources used for household and production
activities by the rural population-80 percent of
China's total population.
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
Table 16
China's Rural Energy Consumption, 1981
Million
Share of Total Share of
TCE
Rural Energy
Consumption
(percent)
National Energy
Output
(percent)
Total
420.3
100.0
Noncommercial
Crop stalks
215.0
51.2
100
Firewood
57.8
13.8
100
Cattle waste
54.7
13.0
100
Small coal
59.3
14.1
80
Mini hydro
5.2
1.2
100
State supplied
Kerosene
1.6
0.4
46
The government, through its unified energy distribu-
tion system, provides only 7 percent of rural energy
supplies and almost all of that is used for production
processes-only kerosene, for lighting, is used by
households. Nearly half of the production from small
coal mines, moreover, is consumed by local industry.
Therefore, of the total energy consumed by house-
holds for heating, cooking, and lighting, only 17
percent is provided by what are considered commer-
cial energy sources-coal and electricity.
The scientist states that total rural energy consump-
tion for household purposes falls 7 percent below what
the Academy of Sciences calculates as necessary to
sustain minimal living standards. As a result many
peasants must use roots and tree bark for their winter
heating. He concludes that the rural energy situation
is "an exceedingly unfavorable development in Chi-
na's rural economy and is of extreme inconvenience to
the peasants' livelihood" and goes on to say that it is a
matter of "urgency" to find ways to resolve the grave
shortage of rural energy supplies
Deng Xiaoping's modernization program and the
increasingly available supply of modern consumer
items-many of which require electricity-must be
raising expectations among Chinese peasants that
Beijing will have considerable difficulty meeting.[
Implications for the United States
China's need for new technology, both to explore and
develop new energy resources and to improve the
efficiency with which the country consumes energy,
was one of the most important reasons for Beijing to
open up strong commercial links with the Western
world. China, we believe, sees the United States as the
best source for much of this technology and thus
makes access to it a pivotal consideration in its official
dealings with the United States. This technology can
thus form a relatively stable underpinning for China's
opening to the United States. Beijing did not, for
instance, allow the mid-1983 political and economic
controversies with the United States to hamper the
offshore oil contract negotiations that were occurring
during the same period."
There are a number of areas in which energy technol-
ogy is already forging important commercial links
between the two countries:
? Offshore oil-a dozen US firms are taking the lead
in exploring China's promising South China Sea
continental shelf. If successful, this exploration will
lead to long-term-up to 35 years-commitments
by the firms to work in China in an industry of vital
importance to Beijing.
25X1
25X1
? Onshore oil-China is actively negotiating for, and
purchasing, US technology needed to maintain out- 25X1
put at increasingly mature fields.
? Technology for the generation and transmission of
electric power-US firms are increasingly becoming
involved in upgrading China's obsolete technology.
China's power industry will probably expand at a
faster rate than in any major country over the next
two decades, offering a continuing source of
business.
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
? The coal industry, in which China also has probably
the most ambitious development program in the
world, is also creating a demand for US production
equipment and the technology to burn coal cleanly
and efficiently.
Two areas of potential cooperation-contingent on
solving difficult investment and political problems-
include hydroelectric and nuclear power development,
which some Chinese view as the dominant energy
sources in the next century.
In most of these areas China believes the United
States holds the most desirable technology. US firms,
however, usually meet fierce competition from Euro-
pean and Japanese firms. China, moreover, has
proved adept at playing competitors against each
other. This competition will probably become more
intense, particularly when it comes to the financing of
energy projects-an area in which the United States
appears at considerable disadvantage.
Despite the development of what must be considered
an overall advantageous commercial relationship for
the United States, China's energy issue also has the
potential for creating problems. China's current lead-
ership has placed a great deal of its prestige on
achieving economic progress. A willingness to experi-
ment with more capitalistic, decentralized economic
policies and a general openness to foreign trade and
investment are key features of the government's mod-
if energy shortages were to retard the process of
economic growth severely, a marked change in leader-
ship policy could result. Although speculative, it is
possible that energy shortages could be blamed on
inadequate state planning, while measures to limit the
economic damage of such shortages, by raising energy
prices, for instance, could raise political unrest. Left-
ists could then point back to a period of cheap and
plentiful energy in the 1960s and early 1970s and call
for a return to more self-reliant, Maoist economic
policy. Oil output did, after all, increase from 10
million tons a year to 90 million tons during the
decade of the now-despised Cultural Revolution.
Our analysis suggests, however, that, with carefully
chosen policies that limit the increase in energy
consumption, and with only average luck in discover-
ing new oil resources, China can maintain a reason-
able economic growth rate that will limit the need for
major policy reversals.
Even without major changes in policy, one likely
problem is that trade and financial tension between
the United States and China will rise should Beijing
decide to reduce sharply its oil exports. Beijing would
try to offset this loss by increasing exports of more
sensitive goods-textiles, for instance-and by re-
questing more financial support from international
aid agencies.
25X1
25X1
25X1
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
 Secret
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4
Secret
Approved For Release 2009/02/20: CIA-RDP85TOO31 OR0001 00050007-4