China and indida the quest for energy resource in the 21 centurey

81 The Economic Geography of Air Transportation Space, time, and the freedom of the sky John Bowen 82 Cartelization, Antitrust and Globalization in the US and 84 Critical Issues in

ROUTLEDGE STUDIES IN THE MODERN WORLD ECONOMY

China and India

The quest for energy resources in the twenty-first century

Zhao Hong

China and India

The book sheds understanding on the relations between development and global energy security by looking at China and India It addresses the following issues: What is the new definition of energy security? How does it affect global politics and international relations? What are the energy security concerns of China and India, and what policies and approaches have they taken to deal with energy security issues? Since China and India are searching for oil and gas in the Middle East, Africa, and Southeast Asia, will their acquisition efforts conflict with the interests of other energy giants, such as the US and Japan, and will their growing overseas activities challenge US policy in those energy- rich regions?

The book provides insight into what the new global energy order may be and how the growth models and energy structures may shape the economic growth and energy It analyzes both the state- centered approach and market- oriented approach in the global quest for energy resources It also examines how China and India can adopt a cooperative approach for beneficial relations

The book will be of interest to anyone who is keen to learn how the world, especially the US, can accommodate and adapt to the new global energy dynam-ics and how China and India operate as new players in global energy markets

Zhao Hong is Senior Research Fellow at the East Asian Institute (EAI), National

University of Singapore Before coming to EAI, he was Professor at the Research School of Southeast Asian Studies, Xiamen University, where he taught International Political Economy, Big Power Relations, and Southeast Asian Economy His research interests are mainly China–ASEAN economic integration, China–India energy competition and cooperation, and East Asian community

Routledge studies in the modern world economy

1 Interest Rates and Budget

Deficits

A study of the advanced economies

Kanhaya L Gupta and

Bakhtiar Moazzami

2 World Trade after the

Uruguay Round

Prospects and policy o ptions for

the twenty- first century

Edited by Harald Sander and

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3 The Flow Analysis of Labour

Markets

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4 Inflation and Unemployment

Essays in honour of Vito Tanzi

Edited by Mario I Blejer and

Teresa M Ter- Minassian

6 Fiscal Policy and Economic

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Essays in honour of Vito Tanzi

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Modalities for co- operation

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8 Working in the Macro Economy

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9 How Does Privatization Work?

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10 The Economics and Politics of

International Trade

Freedom and trade: volume II

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68 Globalization and Regional

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aviation market

Alan Dobson

69 Russia Moves into the Global

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Trends in working hours, laws,

and policies in a global

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Jon C Messenger, Sangheon Lee

and Deidre McCann

72 International Water Treaties

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Shlomi Dinar

73 Economic Integration in the

Americas

Edited by Joseph A McKinney

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74 Expanding Frontiers of Global

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The political economy dynamics

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75 The Macroeconomics of Global

Imbalances

European and Asian perspectives

Edited by Marc Uzan

76 China and Asia

Economic and financial interactions

Edited by Yin- Wong Cheung and Kar- Yiu Wong

77 Regional Inequality in China

Trends, explanations and policy responses

Edited by Shenggen Fan, Ravi Kanbur and Xiaobo Zhang

78 Governing Rapid Growth in

China

Equity and institutions

Edited by Ravi Kanbur and Xiaobo Zhang

79 The Indonesian Labour

Market

Shafiq Dhanani, Iyanatul Islam and Anis Chowdhury

80 Cost- Benefit Analysis in

Multi- level Government in Europe and the USA

The case of EU cohesion policy and of US federal investment policies

Alessandro Ferrara

81 The Economic Geography of

Air Transportation

Space, time, and the freedom of

the sky

John Bowen

82 Cartelization, Antitrust and

Globalization in the US and

84 Critical Issues in Air Transport

Economics and Business

Rosario Macario and

Eddy Van de Voorde

85 Financial Liberalisation and

Edited by Michael Devereux,

Philip Lane, Park Cyn- young

and Wei Shang- jin

88 Innovative Fiscal Policy and

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90 Time Zones, Communications

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Toru Kikuchi

91 Miraculous Growth and

Stagnation in Post- War Japan

Edited by Koichi Hamada, Keijiro Otsuka, Gustav Ranis, and Ken Togo

92 Multilateralism and

Regionalism in Global Economic Governance

Trade, investment and finance

Edited by Junji Nakagawa

93 Economic Growth and Income

Inequality in China, India and Singapore

Trends and policy implications

Pundarik Mukhopadhaya,

G Shantakumar and Bhanoji Rao

94 Foreign Direct Investment in

98 Exchange Rates and Foreign

Direct Investment in Emerging

100 China- India Economics

Challenges, competition and

collaboration

Amitendu Palit

101 Case Studies on Chinese Enterprises

Edited by Donglin Xia

102 Argentina’s Economic Growth and Recovery

104 China and India

The quest for energy resources in the twenty- first century

Zhao Hong

China and India

The quest for energy resources in the

twenty- first century

Zhao Hong

First published 2012

by Routledge

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Simultaneously published in the USA and Canada

by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 2012 Zhao Hong

The right of Zhao Hong to be identified as author of this work has been

asserted by him in accordance with the Copyright, Designs and Patents

Act 1988.

All rights reserved No part of this book may be reprinted or reproduced or

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registered trademarks, and are used only for identification and explanation

without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

Zhao, Hong.

China and India : the quest for energy resources in the 21st century /

Hong Zhao.

p cm – (Routledge studies in the modern world economy)

Includes bibliographical references and index.

1 Energy policy–China 2 Energy policy–India I Title

1 China, India, and the new global energy order 1

1.1 The Asian century? 1

1.2 New energy demand shifts east 5

1.3 Debates on oil- balance strategy 8

2.1 Energy demand drivers 12

2.2 Energy demand 21

2.3 Energy supply 23

3.1 Energy security in a global market 32

3.2 Meanings and dimensions of energy security in China and

India 35

3.3 China’s and India’s energy security concerns 38

3.4 Securing China’s and India’s energy 52

3.5 Challenges and constraints 56

4.1 Strategies: where and how to quest for energy resources? 58

4.2 NOCs and outward FDI as means for “going out” 61

4.3 Energy exploration abroad 67

4.4 Competitive advantages: Chinese NOCs versus Indian

NOCs 71

xii Contents

5.1 The importance of the Middle East 76

5.2 Chinese and Indian interests in the Middle East 78

5.3 China’s energy strategy in the Middle East 82

5.4 India’s energy strategy in the Middle East 87

5.5 Looking to Iran for energy resources 90

5.6 Will China and India challenge US policy in the Middle

East? 95

6.1 The importance of Africa 98

6.2 China and India are not newcomers to Africa 98

6.3 China’s energy strategy in Africa 102

6.4 India’s energy strategy in Africa 107

7.1 Oil and gas in Southeast Asia 112

7.2 China–ASEAN energy ties 115

7.3 India’s “look east” strategy 116

7.4 China–India gas competition in Myanmar 119

8 Conclusions: adapting to the new global energy dynamic 132

8.1 Threat or opportunity? 132

8.2 China–India energy relations: from competition to

cooperation? 134

8.3 US, China, and India: working together to shape a new

international energy order 138

Figures, maps, and tables

3.3 China’s crude oil imports by source, 2008 393.4 India’s crude oil imports by source, 2009 403.5 Gas import dependence, China and India, % of total gas

3.6 Barrels of oil consumed per US$1 million GDP 543.7 World nuclear generating capacity (gigawatts) 55

4.2 Energy policy administration in China’s energy sector 724.3 Energy policy administration in India’s energy sector 73

5.3 China’s crude oil imports by source, 2009 795.4 China’s exports to Middle East, by product type, 2009 805.5 India’s crude oil imports by source, 2009 815.6 US and China crude oil imports from Saudi Arabia (mt) 825.7 US, Chinese, and Indian trade with the Middle East and North

6.1 Major developing economy FDI in Africa, 2006–2008 (US$

7.2 Myanmar’s gas production (cubic feet per day) 122

xiv Figures, maps, and tables

Maps

7.2 Proposed gas pipeline from Myanmar to India 129

Tables

1.1 Gross national income (Alas method), China and India 21.2 PPP GNI growth, China, India, Japan, and the US 31.3 Shares of global trade in goods and services (% of total) 41.4 World oil demand structure (% of total) 61.5 Energy- related CO2 emissions (% of world total) 72.1 Population size, China and India (millions of people; share of

4.2 Regional share of China’s OFDI (% of total) 664.3 Sectoral share of India’s OFDI (US$ million; % of total) 684.4 China’s Overseas Equity Oil, 2013–2015 (barrels per day) 695.1 Gas imports into China and India by source (bcm) 795.2 China’s FDI in the Middle East (US$ million) 855.3 Major oil exporting nations to China (mt; %) 865.4 Iran’s oil and gas production and consumption 905.5 Iranian petroleum export destinations and amounts, 2008 915.6 China’s investment in oil and gas projects in Iran 936.1 The ten largest M&As in Africa by companies from

6.2 India’s development assistance to Africa (US$ million) 1087.1 Proven reserves of oil and gas in selected ASEAN countries, 2008 1137.2 China–Myanmar bilateral trade (US$ million) 1237.3 Cumulated approved FDI to Myanmar by country 1258.1 China–India cooperation in oil and gas exploration and

8.2 Top five countries for renewable energy capacity, end- 2009 137

My interest in comparing China and India in their development and overseas economic activities began when I attended an international conference on China and India in Beijing in 2005 It occurred to me as an interesting and significant research subject In 2006, I had the opportunity to do research work as a visiting research fellow at EAI and ISEAS (Institute of Southeast Asian Studies), and wrote an articles on China–India competitive relations in Southeast Asia My new direction on China’s and India’s energy security and strategies took off in

2007 when Professor John Wong (then research director of EAI) suggested and encouraged me to focus on this topic, which is so important for these two energy giants

From early 2009, I was back at EAI as a visiting senior research fellow I wrote two EAI Background Briefs on China’s oil venture in Africa, and China’s and India’s energy policies, and gave presentations on this topic at the Univer-sity of Malaya and the University of Auckland, New Zealand It was in this year when Ms Lam Yong Ling, editor at Routledge in Singapore, invited me to write

a book on China and India and their overseas energy quest and competition I was more than happy to agree and am grateful for her kind offer and support For the next two years, I worked feverishly on this research project, making full use of the research facilities at the EAI and National University of Singapore libraries, interviewing many Chinese, Indian, and American scholars on this topic at various conferences and workshops That I could eventually finish this humble book was due to many people who helped and supported me in my aca-demic career over the past years Although they might not have opportunity to read my manuscript, I wish to profusely thank them for their kind help and important guidance

They are Professor Liao Shaolian at Xiamen University (who supervised my PhD dissertation and encouraged me to become an international scholar when I was his student); Professor John Wong (who guided and supported me greatly in

my research at EAI); Professor Zheng Yongnian (who read the manuscript in its entirety and gave me many opportunities and encouragement at EAI); Professor Wang Gungwu (Chairman of EAI, a brilliant, benevolent and respected scholar);

Dr Lam Peng Er (who provided me with many related books and gave me a lot

of good comments and suggestions for writing this book); Dr Shee Poon King

xvi Acknowledgments

(who introduced me to EAI and encouraged me to study energy issues); and fessor Gerald Chan (who has always kept in touch with me and helped me with letters of reference) Heartfelt thanks also go to my colleagues and friends at EAI for their encouragement and collegiality: Dr Yang Mu, Dr Bo Zhiyue, Dr Sarah Tong, Dr Michael Heng and Mr Lye Liang Fook Appreciation too goes to Routledge editorial team and Ms Lam Yong Ling in Singapore for bringing this book into fruition in a timely manner

Many thanks also go to the journals below for their permission to revise and publish the following articles: “The Expansion of Outward FDI: A Comparative

Study of China and India” in China: An International Journal (parts of Chapter 4); and “An Energy Comparison of the Asian Giants: China and India” in Asian Affairs (parts of Chapter 2) Parts of Chapter 5, “Case study: the Middle East”

appeared in a draft paper presented at an international conference organized by Institute of Energy Studies (National University of Singapore) in March 2011 For their endless support and selfless understanding of me, I wish to dedicate this book to my wife, my daughter and my parents’ eightieth birthdays

ADB Asian Development Bank

AOC- BOC Assam Oil Companies- Burmah Oil Company

ARF ASEAN Regional Forum

ASEAN Association of South- East Asian Nations

b/d barrels per day

bbl/d billion barrels per day

bbl billion barrels of oil

bcm billion cubic meters

BCP Burma Communist Party

bt billion tons

Btu British Thermal Unit

CNOOC China National Offshore Oil Corporation

CNPC China National Petroleum Corporation

CTL coal to liquids

EAI East Asian Institute

EIA Energy Information Administration (US)

FDI foreign direct investment

FOCAC Forum on China–Africa Cooperation

FTA free- trade agreement

GAIL Gas Authority of India Ltd

GCC Gulf Cooperation Council

GDP gross domestic product

GNI gross national income

GNP gross national product

GNPOC Greater Nile Petroleum Operating Company

IAEA International Atomic Energy Agency

IEA International Energy Agency

IEEJ Institute of Energy Economics, Japan

IOCs International Oil Companies

IOC Indian Oil Corporation

ISEAS Institute of Southeast Asian Studies

ITEC Indian Technical and Economic Cooperation

KOGAS Korea Gas Corporation

xviii Abbreviations

LNG liquefied natural gas

M&A Mergers and acquisitions

mb/d million barrels per day

MOGE Myanmar Oil & Gas Enterprise

MoU memorandum of understanding

mt million tones

mtce million tones of coal equivalent

mtoe million tones of oil equivalent

NBR National Bureau of Asian Research

NDRC National Development and Reform Commission

NEA National Energy Administration

NEC National Energy Commission

NOCs National Oil Companies

OECD Organization for Economic Cooperation and DevelopmentOFDI outward foreign direct investment

OIL Oil India Ltd

ONGC Oil and National Gas Corporation (India)

OPEC Organization of the Petroleum Exporting Countries

OSSI Oil Supply Securities Index

OVL ONGC Videsh Ltd

PPP purchasing power parity

PRC People’s Republic of China

PSC Production Sharing Contracts

SASAC State Asset Supervision and Administration CommissionSinopec China Petroleum and Chemical Corporation

SLOC sea lanes of communication

SLORC State Law and Order Restoration Council (Myanmar)

SOE state- owned enterprise

tcm trillion cubic meters

TWh terawatt hours

UAE United Arab Emirates

UNCTAD United Nations Conference on Trade and Development

1 China, India, and the new global

energy order

1.1 The Asian century?

This book has been motivated largely by the huge changes in the world economy that have occurred since the new millennium The most important change has been the rise of China and India—the two biggest emerging economies in the world Is the twenty- first century going to be the Asian century, as the twentieth century was the American century and the nineteenth century was Europe’s? Many agree that it might be thanks to the contribution of China and India to the world’s economic growth

In the last two decades, Asia’s economic growth has diverged from that of other developing regions Since the mid- 1980s, economic growth in emerging Asia (including China and India) has been much stronger than elsewhere Such growth has benefited from economic integration with the global economy From the mid- 1990s, China and India started to make their mark in the world economy In 2009, according to World Bank, the Asia and Pacific region accounted for almost one- third of global GDP, while 54 percent of the region’s GDP comes from just China and India.1

Thanks to policies of reform and openness, China has experienced rapid nomic growth over past decades In total economic size, China has quickly caught up with other large economies In 2008, it overtook Germany to be the third largest economy in the world, and in 2010 it surpassed Japan to be the second largest economy (Table 1.1) Various projections have been made to estimate the timing of China becoming the world’s largest economy As early as

eco-1997, the World Bank published a report to prognosticate about China’s rise in the twenty- first century as a world economic power and predict that China will overtake the US to become the world largest economy in the 2020s.2

At market exchange rate, India’s GNI (Gross National Income) in 2009, at US$1,367.1 billion, was the eleventh largest in the world, accounting for 9.6 percent of that of the US Emerging from decades of economic insulation, the country’s economy has been growing strongly with the result that vast amounts of wealth have been accumulated and the number of poor has been greatly reduced Another alternative way to measure the size of an economy is by purchasing power parity (PPP) A PPP GDP is computed by converting its value to

2 China, India, and the new global energy order

international dollars using purchasing power parity rates An international dollar has the same purchasing power over GNI or GDP as a US dollar has in the US

Since China’s and India’s domestic prices for most goods and services have been much lower than that in the US, their PPP GDP or PPP GNP (gross national product) has generally appeared much higher than their nominal GDP or GNI

As shown in Table 1.2, over the period of 2000–2009, China’s PPP GNI increased from US$2,975.6 billion to US$9,228.2 billion, leading to it becoming the world’s second largest economy; while India’s increased from US$1,543.9 billion to US$3,832.7 billion, making it the fourth largest economy after the US, China, and Japan.3 By PPP GNI, China surpassed Japan in 2002 when its economy reached the size equivalent to 35 percent of the US economy Now the size of the China’s economy, measured by PPP GNI, is over 65 percent of the

US economy

Drivers for global trade expansion

Economic growth in China and India affects growth in the rest of the world largely through international transactions The global impact of growing trade with the two countries—especially China—has already been huge and will increase further in the future China is one the world’s most open economies: its exports as shared of GDP increased from 20.4 percent in 1999 to 38.1 percent in 2008; in India, the share also increased from 11.4 percent to 21.9 percent.4 China and, to a smaller degree, India have been major contributors to the massive expansion of global trade

The expansion of China’s trade with the rest of the world has been one of the most striking global economic phenomena of the last decades China accounts for 10 percent of world’s exports and 8 percent of world’s imports—well above the country’s contribution to world GDP (Table 1.3) China is the world’s largest

Table 1.1 Gross national income (Alas method), China and India

Rank in the world As percentage of US GNI (%)

4 China, India, and the new global energy order

exporter, having just overtaken Germany, and the second largest import behind the US.5 The importance of trade to China’s economy reflects the high degree of integration of China’s industry into international production chains, particularly within Asia About one- third of the value of gross exports of China is estimated

to come from imported inputs—mainly parts and components for assembly into finished products and capital equipments Most exports are finished goods Due to its relatively small economic scale, India’s contribution to global trade remains much smaller, but its share of exports increased from 0.5 percent in

1983 to 1.3 percent in 2009

Demand for energy

In the last decade China’s GDP growth has been driven by strong investment growth and very strong export growth, while domestic consumption remained more subdued Besides strong and sustained GDP growth rates, China’s growth model, which is based on a combination of cheap labor, market size and rapid technological modernization, is redefining the terms of global competition China is rapidly becoming the world’s manufacturing hub, with the fast expan-sion of manufacturing value- added, in terms of both output and exports India,

on the other hand, has become a major player in global outsourcing and services

by capitalizing on its English- speaking workforce

Both countries are leading changes in world industrial activity, being a source not only of lower- cost sourcing, but of high- value manufactures As a result, developments in these two countries are increasingly affecting the economic health and the structural evolution of the economy of the rest of the world, with inevitable consequences for global energy markets

Rapid economic development, industrialization, urbanization, and improved lifestyle will undoubtedly drive energy higher According to the International Energy Agency (IEA), the combined share of China and India in global oil use

Table 1.3 Shares of global trade in goods and services (% of total)

China, India, and the new global energy order 5

will increase from 12 percent in 2006 to 20 percent in 2030; the combined share

of their gas demand will increased from increase from 3 percent in 2005 to 7.3 percent in 2030 As a result of much faster growth in import requirements, the combined shares of China and India in inter- regional oil trade will increase from

13 percent to 29 percent The importance of China and India in global gas trade

is also increasing Their combined share of world inter- regional gas trade will increase from 2 percent in 2005 to 29 percent in 2030.6

Outward FDI

Rapid economic growth, fueled by high saving rates and foreign exchange reserves, also drive China’s and India’s acquisition of overseas assets and energy resources According to UNCTAD (United Nations Conference on Trade and Development), the shares of outward foreign direct investment (FDI) of China and India in total East, South and Southeast Asian FDI outflows rose from 23 percent in 2007 to 37 percent in 2008 Despite the global crisis, FDI from China reached US$56.5 billion in 2009, over 100 percent up from 2007 (US$26.5 billion), and its outflows continued to grow in 2010.7 The country currently ranks thirteenth in the world as a source of FDI and third among all developing and transition economies.8 FDI outflow from India was $18.8 billion in 2008, slightly down from $21.4 billion in 2007

The outward FDI expansion of China and India has also been reflected in their growing levels of overseas mergers and acquisitions (M&As) In recent years, firms from China and India have been actively involved in M&As which are believed to be a less risky mode of entry into developed markets and an important means of accessing overseas assets urgently required for global expan-sion Chinese energy companies, such as state- owned China National Petroleum Corporation (CNPC) and Sinopec (China Petroleum and Chemical Corporation), have been actively investing abroad in oil and gas fields to secure supplies While Indian conglomerates have been involved in mega deals, many medium- sized enterprises have also been undertaking M&As in developed regions Thus between 2000 and 2006, the value of cross- border M&As by Chinese firms increased greatly from US$0.5 billion to US$15 billion, while that by Indian firms increased from US$0.91 billion to US$4.7 billion.9

1.2 New energy demand shifts east

As China and India rise economically, the world energy system has experienced some shifts and changes in the past years The first is the energy demand (oil and natural gas) shift from West to East The era of growing demand for oil and other fossil fuels in the industrialized countries is over; most of the future growth

in demand will come from the emerging countries For example, as Table 1.4 shows, the Organization for Economic Cooperation and Development (OECD) countries’ share of oil demand of total world oil demand declined from 65 percent in 1980 to 56 percent in 2006, and is predicted to further decline to

6 China, India, and the new global energy order

46 percent in 2030; that from Asian developing countries (excluding Middle Eastern countries) increased from 6.7 percent in 1980 to 18.0 percent in 2006, and is predicted to rise further to 27.5 percent by 2030

In terms of natural gas, according to the IEA, the share of its demand from the OECD countries in total world gas demand had declined from 63 percent in

1980 to 51 percent in 2005, and is predicted to further decline to 42 percent in 2030; while that from Asian developing countries (excluding Middle Eastern countries) had increased from 2.4 percent in 1980 to 9.2 percent in 2005, and is predicted to further increase to 14.8 percent by 2030.10

Rising energy consumption (especially of coal and oil) in developing Asia is contributing to higher CO2 (carbon dioxide) emissions According to the IEA, the share of energy- related emissions coming from OECD countries will decrease from 48 percent in 2005 to 36 percent in 2030, while that from the Asian developing countries will increase from 28.6 percent to 42.5 percent Most

of the increase in energy- related CO2 emissions comes from China and India which together account for 56 percent of the increase in emissions between 2005 and 2030 China is by far the biggest single contributor to incremental emissions between 2005 and 2030 (see Table 1.5)

The second structural change is the geographic location of the energy sector Oil production is concentrated geographically, and the market for oil is domi-nated by geopolitical considerations The remaining oil and gas reserves are increasingly concentrated in the potentially unstable Middle East and Persian Gulf, Africa, and Central Asia and Russia Nearly two- thirds of existing oil reserves are in Saudi Arabia, Iraq, Kuwait, the United Arab Emirates (UAE), the OPEC (Organization of Petroleum Exporting Countries) countries, and Russia; just over 70 percent of natural gas reserves are in Russia, Iran and Qatar The political significance of South America and the Caspian area is growing, but remains relatively small

The third shift in world energy system is the changing energy structure The potential ability of natural gas to serve as a substitute for coal and oil is import-ant In EU and US and other parts of the world, relatively low gas prices and the rising carbon price meant that it was more expensive to generate electricity from coal than from gas For example, the share of gas in total power generation in

Table 1.4 World oil demand structure (% of total)

OECD 64.5 55.8 55.8 53.8 51.6 45.5 Transition economies 14.5 5.5 5.3 5.2 5.1 4.8 Developing countries

China

India

Other Asia

14.5 2.9 1.0 2.8

30.0 6.1 3.0 5.8

34.0 8.4 3.1 6.5

37.0 10.0 3.4 6.8

39.3 11.3 3.8 7.0

45.8 14.2 5.6 7.7 World 100 100 100 100 100 100

Source: IEA, World Energy Outlook 2007, p 80.

China, India, and the new global energy order 7

the US reached an unprecedented 28 percent in 2009, up from 20 percent in 2008

The importance of gas and the increase of its production were partly due to the difficult development of clean energy and the result of fundamental techno-logical advancements in US gas production Technological advances, such as horizontal drilling (which eases access to layers of oil or gas) and hydraulic frac-turing (which uses water pressure to release gas from hard rocks), were employed to make unconventional gas resources, such as tight gas, shale gas, and coal- bed methane, accessible on a large scale.11

Another driving factor for gas use is the growing concern about carbon sions and a growing awareness that fossil fuels can not immediately be replaced with carbon- free alternatives Gas burns much more cleanly than coal and oil Producing one kilowatt- hour of electricity with natural gas emits a little more than half the amount of carbon that producing the same amount of energy with coal does

The third factor is the difficulties of developing other alternative clean gies: it is technically and economically not yet feasible to make renewable energy such as solar power, wind power, and biofuels the main source of energy; the nuclear power crisis that happened in Japan in early 2011 has set back the nuclear power development in the world Many countries like Germany, France, the US and Malaysia have announced that they will abandon or postpone devel-oping new nuclear power projects

These changes in the world energy system have strategic implications for Asian emerging countries, especially China and India:

• Since domestic demand for oil and gas keeps rising in these countries, and since they are “later comers” to the international energy markets, where and how will they find more oil and gas? Will these countries cooperate or compete with each other for energy resources abroad? Will geopolitical ten-sions over energy spark conflicts with the US and other Western countries?

Table 1.5 Energy-related CO2 emissions (% of world total)

Transition economies 9.4 8.8 7.6 Developing countries

48.1 25.2 5.3 5.9 5.3 2.9 3.5

54.7 27.2 7.9 6.4 6.0 3.3 3.8

Source: IEA, World Energy Outlook 2007, p 199.

8 China, India, and the new global energy order

• An increasing volume of oil and LNG (liquefied natural gas) has to be ported from exporting countries to importing countries through sea lanes

trans-As their overseas national interests grow, how will countries effectively protect these interests? Is increasing military presence overseas necessary, and will it be seen as a threat to other countries?

• With concerns about the environmental impact of energy use, especially

CO2 emissions (an intrinsic byproduct of burning fossil fuels, especially coal) with conventional technology, how can countries diversify their energy structures away from relying on traditional energy resources to clean, environment- friendly energy resources? How can they collaborate with the

US, EU and other developed countries to find a more effective way to develop clean energy?

1.3 Debates on oil-balance strategy

As countries in Asia industrialize and become more affluent, concern is growing that there may not be enough oil and gas at affordable prices to accommodate the development needs of these countries China and India are by far the two most populous nations and have high rates of energy demand As latecomers to the global oil markets, they found that most of the world’s proven oil reserves are controlled by state- controlled enterprises or Western- based, politically well- connected, multinational oil companies such as Exxon, Chevron, BP and Total They have to meet much of their rising demand by signing new exploration and production agreements in less established oil- producing countries

During the past few years, China has signed bilateral oil production or chase agreements with Angola, Iran, Iraq, and Myanmar, among others China owns around 40 percent of Sudan’s major oil company, and China National Off-shore Oil Corporation (CNOOC) and Sinopec have separately bought out BP’s share in order to take full control of Argentina’s second largest oil and gas pro-ducer; they have also joined Chevron in a deepwater natural gas project off the coast of Indonesia.12 Indian companies also have signed contracts with Kaz-akhstan, Australia, Ghana, Iraq, and Thailand, among others

As China’s and India’s outward FDI and quest for energy resources have been expanding globally, some concerns have also been raised For example, China’s overseas investment and the potential role of its sovereign wealth funds have stocked concerns that Beijing is maneuvering to lock up global energy assets through its FDI expansion.13 Critics also say that “China’s energy quest and its record in the world’s trouble spots, from North Korea and Myanmar to Iraq and Darfur, suggest that it defines its responsibilities in ways that enhance its eco-nomic interest.”14

China’s investments in Africa are particularly controversial In places like the Niger Delta, China’s investment in the oil sector has been opposed by some local groups owing to concerns over their impact on labor standards and the environ-ment Human right organizations are concerned that some of Africa’s most authoritarian governments may use the Chinese example and assistance to ignore

China, India, and the new global energy order 9

international and domestic pressures for democratization Hence, will China’s and India’s overseas investment and competition for energy resources become a source of geopolitical tensions?

Competition for strategic resources (oil and natural gas) among big powers has been the research focus for scholars in international relations and related fields Currently, the debates on this issue in academic circles mainly focus on the fol-lowing aspects:

Competition and possible conflicts

Competition for scarce natural resources has been an important determining factor in human development In history, tribes of hunter- gatherers fought over land and the flora and fauna that surrounded them, and early agricultural socie-ties that existed along rivers fought deadly conflicts over getting their share of the water Kingdoms large and small traded or battled for iron, gold and other metals, as well as precious stones The beginning of the Industrial Revolution in Western Europe and the input materials it required were major reasons for the expansion of colonialism.15

The core issue here is whether, in modern society, competition for strategic resources will lead to armed conflicts between energy supply and demand coun-tries, as well as energy seeking countries There are two different schools of thought on this issue:

1 The “zero- sum” nature of strategic resources leads to conflicts Scholars that hold this view believe that strategic resources (such as oil and natural gas) are of zero- sum nature, thus competition for strategic resources between countries will inevitably lead to outbreak of conflicts, and strategic resource- rich regions are bound to become the leading forefronts for confrontation between big powers.16 For example, US reports refer to China’s increasing military capabilities as potentially applying to regional conflicts, including conflicts over resources Should China seek to protect its sea lanes, the US Department of Defense would see this as potentially challenging the US Navy’s accustomed role in protecting international sea lanes and as China being capable of involvement in territorial or resource wars.17 The Austral-ian Defense White Paper also talks of security risks from tensions over energy supply.18

Based on their observations, some Chinese analysts predict an inevitable war over oil between China and the US.19 They reason that the US has his-torically worked to control the production movement of oil supplies world-wide As China pursues domestic and international economic expansion and the US sees China as a major challenge to its preeminent role in global affairs, US control of the world oil industry can be used at least indirectly to

10 China, India, and the new global energy order

check Chinese ambitions by manipulating movement of world oil prices.20

Furthermore, the US controls vital sea lanes in the Persian Gulf, the Indian Ocean, and Southeast Asia, making unfettered transportation of oil from Middle Eastern and African ports to Chinese shores a matter of US choice

2 Competition for strategic resources may not necessarily lead to conflicts Scholars that hold this view believe that strategic resources can always be replaced by other resources (such as renewable energy resources) There-fore, competition for strategic resources will not lead to or exacerbate con-flicts On the contrary, conflicts over strategic resources have been slowing down.21 The horrors of two world wars during the twentieth century, and of

a Cold War, convinced most countries that it was better to buy or jointly develop energy resources than to occupy countries militarily This lesson was confirmed by the high cost the US has incurred since its occupation of Iraq in 2003.22 Such scholars argue that since China began to import oil in the early 1980s, there has not been a single case of the US intercepting oil moving into or out of China.23

China’s and India’s oil strategies and their impacts

These studies mainly appeared after the 1990s, when China’s and India’s oil demand rose and their quest for energy resources abroad gradually expanded The main issues scholars voice concern about include:

1 The “going out” strategy and its motivations Some Chinese scholars found that in order to meet the growing demand for oil, emerging countries’ gov-ernments (including China and India) encourage their national oil com-panies (NOCs) to go for overseas oil resources Ensuring oil supply and energy security is increasingly becoming an important driver of both coun-tries’ diplomacy “Since China remains a relatively centralized, government- driven economy, Beijing has been able to adapt its foreign policy to its domestic development strategy.”24 China’s “going out” strategy fully reflects the policy of energy mercantilism ideas which see energy security in dis-tinctly national terms of establishing national control over energy resources and transportation routes Actually, US and other Western powers, scholars maintain, long ago abandoned such pernicious practices in favor of reliance

on the world oil market for supply security.25

2 The risks of the “going out” strategy Some Chinese scholars found these risks include political risks, technical risks and inevitable risk (war, natural disasters) The main solution to these risks for China’s NOCs include the establishment of energy partnerships with international oil companies (IOCs); carefully select oil development areas; find ways to encourage joint ventures in oil extraction; to improve technological and administrative capacity in energy conservation and corporate governance.26

3 The role and impact of the “going out” strategy Most Western scholars hold that the “going out” strategy can not fundamentally solve a country’s energy

China, India, and the new global energy order 11

security.27 “The main means of addressing these energy security concerns has been to rely on markets, which make it easier to diversify supply and demand, substitute fuels, and make the most of the gains in efficiency brought on by technological change.”28 Energy security is a global problem that requires a global solution; national energy security depends on interna-tional energy security.29 Scholars believe that the crux of China’s energy problem is the lack of a rational and efficient energy management system.30

China needs to further reform its energy system, for example, by allowing more private companies to participate in energy sectors

Meanwhile, the “going out” strategies have different impacts China’s oil import dependence has put energy security high on its foreign security policy agenda In response, it pursues political relations with oil and gas producing countries, looking for bilateral agreements for future oil and gas supplies; and, through its NOCs, it has engaged in mutual investment relations in these countries, often seeking equity oil or gas shares These actions, however, are regarded as security threats by many US analysts and politicians.31 For example, it is believed that China’s energy cooperation with Sudan, Iran, and Myanmar could lead to increased regional conflicts “China’s close relationships with oil- producing nations in the Gulf region, particularly those non- US-friendly, have raised American eyebrows.”32 Thus China’s strategic pressure has been increasing.33

India’s search for energy resources overseas has aroused some Indian analysts call for a reorientation of its foreign policy, pushing for a closer relationship or even an alliance with China and Russia, hence raising concerns in US policy- making circles and think tanks about whether India’s foreign policy- makers have

“pushed the country in a new direction to meet India’s energy needs.”34

Overall, these studies and arguments are based on reasonable analysis, but they mainly focus on the consequences and process of energy competition, and

do not see the specific reasons and factors for Chinese and Indian NOCs to search for energy resources overseas There is still a lack of studies on why, how and where for later comers (China and India) can get access to strategic resources as required by their rising economies More importantly, they do not find solutions to accommodate and help these two energy- consuming giants within the international energy system, instead criticizing their increasing energy consumption, low energy efficiency and overseas quest for energy resources

2 Economic growth and energy

demand

This chapter analyzes the relations between economic growth and the energy status of China and India Population growth (urbanization), expansion of trans-portation, and high economic growth are the main drivers for rising energy demand By energy type, fossil fuels (coal, oil and gas) will continue to domi-nate energy demand for decades ahead in both countries But both countries’ domestic oil and gas supplies can not meet the increasing demand

2.1 Energy demand drivers

As China and India are emerging economies, high GDP growth, population growth (urbanization), and rapid expansion of transportation are the main drivers for their rising energy demand

GDP growth

China and India are emerging giants in the world economy GDP growth and population rise are assumed to be the most significant drivers of energy demand

in these two countries Over the past decades, China and India have experienced

a profound economic transformation This has largely been attributed to their openness to trade and foreign investment (to a less extend for India) During 1978–2007, the average real GDP growth rate was 9.9 percent in China and 5.6 percent in India (Figure 2.1) Although India is still lagging behind China in terms of economic performance, it has been catching up in recent years India, with its mega- population of over 1.1 billion, is expected to continue its steady growth, although various risk factors are anticipated, such as an inadequate social infrastructure and a shortage of development funds

The high GDP growth rates of China and India in the 1980s made little ence to the world economy because both countries’ economies were relatively small Today, the situation is different China and India are at the heart of the current wave of economic globalization, involving rising international trade and capital flows, and the integration of financial markets As a result, developments

differ-in these two countries are differ-increasdiffer-ingly affectdiffer-ing the health of the world economy, with inevitable consequences for the global energy market Large

Economic growth and energy demand 13

populations, which are fueling the labor pool, and still low levels of income compared with the industrialized countries are expected to maintain the momen-tum of economic development

Although Asia was affected by the 2007–2008 global financial crisis, it is assumed that India, China, and some other Asian emerging economies will con-tinue to enjoy economic growth and progress over the long term With both countries’ governments being fully committed to the goal of high economic growth and poverty reduction, the current development momentum is expected

to continue for decades to come The uncertain global economic environment may slow the two Asian giants in the short run, but their remarkable economic transformation and increasing clout are a long- term trend

China and India are at a stage in their economic development in which oil consumption has just taken off and will not decelerate in the foreseeable future According to a calculation by the Asian Development Bank (ADB), the income elasticity of oil consumption has historically been about 0.5, where 1 percent economic growth translates into 0.5 percent growth in oil consumption.1 China consumes 7.9 million barrels of oil per day (2007 figures), which accounts for 9.3 percent of the world’s total consumption; India consumes 2.8 million barrels

of oil per day, 3.3 percent of the world’s total consumption.2

According to the ABD, in spite of the global financial crisis, India’s GDP growth in 2008 was 6.8 percent, and rose to 8.0 percent in 2009 and 8.5 percent

in 2010; China’s GDP growth was 9.6 percent in 2008, 9.2 percent in 2009 and rose to 10.3 percent in 2010.3 As the economies keep growing at this rate, the

Figure 2.1 GDP growth rates, 1978–2010 (sources: China Statistical Yearbook 2008;

Reserve Bank of India; IMF).

Notes

Figures for 2010 are forecasts.

14 Economic growth and energy demand

average annual oil demand growth of China from 2007–2015 will be 0.41 million barrels per day (mb/d), and that of India will be 0.125 mb/d.4 Both coun-tries’ rapid growth and structural transformation will continuously fuel rapid growth of oil consumption for some time to come

In a broader context, it is widely believed that the deterioration of the global economies during 2008–2009 had a negative impact on global oil demand in the short run However, the slow but still healthy growth of developing countries (in particular China and India) will help prop up demand In the coming years, global oil demand growth will increasingly come from developing Asia As described in Chapter 1, developing Asia accounted for about 40 percent of the positive demand shock in 2004, and is likely to account for up to one- half of global demand growth in the future in spite of the sharp slowdown of growth in the US, Europe, and Japan In these emerging countries, the positive income effect associated with robust economic growth is overwhelming the negative effect of higher oil prices For example, in the gasoline markets in China and India, the rise in demand due to robust economic growth and large numbers of new car buyers is overriding the fall in demand caused by higher prices

Population growth

In 2007, China’s population was 1.32 billion and will reach 1.43 billion in 2020 Between 1980 and 2007, India’s population grew at an average rate of 1.9 percent per annum (reaching 1.15 billion), a level that far exceeds that of many Asian countries (Table 2.1) The population of India is assumed to grow at a rate

of 1.3 percent per annum between 2007 and 2020

Essentially all of the increase in the population of both countries will occur in urban areas, while the population of rural areas is expected to decline For

Table 2.1 Population size, China and India (millions of people; share of world total, %)

Asia 2,435 (55) 3,641 (55.2) 4,148 (54.6) 4,413 (53.7) 4,528 (53.3) China 987 (22.3) 1,321 (20.0) 1,431 (18.8) 1,462 (17.8) 1,462 (14.2) India 687 (15.5) 1,145 (17.4) 1,357 (17.9) 1,468 (17.9) 1,526 (18.0) World 4,428 (100) 6,595 (100) 7,598 (100) 8,219 (100) 8,500 (100)

Annual growth rate (%)

Economic growth and energy demand 15

example, in China, the urban population will increase from 531.8 million (40 percent of total population) in 2005 to 822.2 million (57 percent) in 2025, while the rural population will decline from 784 million to 623.6 million These popu-lations will become increasingly wealthy, urban and mobile This will influence the growth in power consumption at the aggregate level, as well as the energy structures, switching away from direct use of coal and biomass and toward clean and refined fuels such as electricity and gasoline in the residential, commercial and transport sectors The power sector alone accounts for over 50 percent of the increase in primary energy demand in China and India As the population increases and urbanization grows, the power sector share of primary demand will reach 46 percent in 2030 in China and 45 percent in India

Transportation expansion

The expansion of the transportation sector, especially the growth in the number

of motor vehicles, is another driving factor for increasing energy demand Among final sectors, transport sees the fastest growth in energy demand, although industry is the single biggest contributor to the growth in final energy demand and remains the single largest consumer in both countries Road trans-port—freight and passenger cars—accounts for the bulk of the increase in trans-port fuel use According to IEA predictions, the share of transport in final energy consumption will rise from 11 percent in 2005 to 19 percent in 2030 in China, and from 10 percent to 20 percent in India

As urbanization grows and people get richer, their demand for mobility takes off, especially once average per- capita GDP reaches a level of between US$3,000 and US$10,000, at which a large portion of the population can afford

to own a motor vehicle.5 Vehicle sales have been booming in China and India Over the past decade, the number of motor vehicles on the road in both coun-tries has increased dramatically For example, during 2000–2009 the total number of private vehicles in China had increased from 6.3 million to 45.7 million.6 Data from India also shows that nearly 1 million units were added to the roads in Delhi during 2000–2004 (an increase from 3.4 million units in 2000

to 4.2 million units in 2004), and that the number of registered motor vehicles in Tamil Nadu soared from 4.6 million to 8.6 million units during the same period.7

According to IEEJ, the total number of vehicles on the road is projected to soar from about 42 million in 2007 to more than 232 million in 2030 and 296 million

in 2035 in China, and from 18 million to 82 million and 97 million respectively

16 Economic growth and energy demand

between the characteristics of economic development in China and India China has followed a similar development path to that of other East Asian countries, involving the recycling of export revenues and domestic savings into fixed investment China

is often characterized as the “world’s factory,” with growth driven largely by duction and exports of manufactured goods In fact, China’s growth has been remarkably broad- based across agriculture, industry and services, though industry accounts for a large share in GDP India’s growth has been driven in large part by service- related activities, both export and domestically oriented, which accounted for nearly 60 percent of GDP in 2008 (compared with 40 percent in China) This has entailed lower investment and exports relative to GDP than in China

China’s economic expansion has been largely based on capital formation—underpinned by the country’s extremely high savings rate—and rising total factor productivity; increased labor input has made only a marginal contribution

to GDP growth Productivity has grown at a similar rate in India, but labor inputs have grown slightly faster than in China, mainly due to a higher rate of popula-tion increase India’s capital formation has been much slower than China’s, and this is the main reason why its overall GDP growth has lagged behind that of China since the 1980s The World Bank noted that the GDP- weighted averaged rate of gross capital accumulation in 1990–2003 was 42 percent in China and 24 percent in India.9 In both countries, much of the increase in productivity stems from the reallocation of labor from farming and state sectors to private industry and services, associated with migration towards cities and industrial districts Sustained productivity growth will be a major challenge for both countries A main uncertainty facing China’s economic prospects is the extent to which labor and resource- intensive industry can continue to drive the growth, in view of rising raw- material costs, resource constraints and environmental effects In mid- October 2010 the 5th Party Plenum issued the draft 12th Five- Year Plan (2011–2015) which highlights five major development objectives for the coming five years They include restructuring the economic growth pattern towards greater domestic consumption and lesser export dependency, boosting greater market efficiency, and promoting faster urbanization and regional development The Chinese government has adopted several measures in pursuit of structural adjustment, including raising minimum wages, reducing income taxes and increasing public spending, as well as taking the steps needed to contain rapid growth in investment and to promote consumption The government has lifted interest rates, imposed duties on some exports and instructed state banks to rein

in lending to overheated sectors But these efforts will take time to take effect Both investment and savings have continued to grow strongly in recent years, pushing the trade balance into massive surplus continuously Yet there are signs that production is starting to shift towards less resource- intensive goods and higher- value industrial products and services that generate better wages

In contrast to China, India is faced with a need to increase the share of ment in GDP and to relieve infrastructure constraints to sustain growth, includ-ing inadequate roads and electricity networks Low real interest rates in recent years have driven consumption up more than investment Another major

invest-Economic growth and energy demand 17

challenge is to develop human capital and provide job opportunities for a large pool of underemployed and undereducated workers The continued movement of labor from the farming sector to urban industry and services could underpin further advances in labor productivity Faster and deeper labor- market and product- market reforms, improved management of government finances and more effective public sector administration could boost the long- term rate of economic growth

China’s perceptions

Some Chinese scholars have further analyzed India’s economic growth and pared its economic reform and development models with China’s In the percep-tions of these Chinese scholars, India’s sustainable growth and development can

com-be attributed to many factors, such as relatively high investment efficiency, dynamic private enterprises, a relatively healthy financial system and a young labor force with a sizable educated segment They believe that India’s growth model has its own potential advantages

First, India’s industrialization has been driven largely by domestic companies, entrepreneurs and indigenous funds, with limited FDI (at least until recently).10

China’s growth mainly stems from massive accumulation of resources and tinuous inflows of FDI, together with public sector investments resulting in impressive infrastructure India does appear to be better integrated into interna-tional business society and is utilizing available scarce resources more efficiently than China For example, according to the EIA (Energy Information Administra-tion, US), India’s oil consumption is currently less than 40 percent of China’s, and in 2001, India’s energy efficiency (energy consumption per dollar of GDP) stood at 25,307 British Thermal Units (Btu), whereas China’s stood at 35,619 Btu.11 It is believed that the economic criterion for a country’s economic success

con-“is not whether it can attract a lot of FDI, but whether it stresses on efficiency, whether it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political inter-vention.”12 In this regard, India has done a better job than China

Second, unlike their Indian counterparts, Chinese entrepreneurs display a dominant reliance on formal, state- run mechanisms for the smooth functioning

pre-of their businesses For instance, instead pre-of using family savings for finance, Chinese entrepreneurs are primarily financed by traditional bank loans Aspiring businessmen often mention that they are inspired to become entrepreneurs by the pro- business policies of the government In India, local entrepreneurs have high-lighted a much more important role played by family networks, family finance and internal motivating factors, as opposed to factors directly related to govern-ment policies Democracy, a tradition of entrepreneurship, and a decent legal system inherited from Britain have given India the underpinnings necessary for free enterprise to flourish Indian private sector business houses have offered successful business models that are being discussed in the leading business schools of the world.13

18 Economic growth and energy demand

India has large numbers of internationally competitive private companies lowing international best practice of business rules and transparency, such as Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile com-ponents and Mahindra in car assembly “Even though Indian manufacturing lags behind China due to logistical and regulatory bottlenecks, Indian companies are consolidating and multi- nationalizing their business operations, overcoming domestic bottlenecks and capturing the international market.”14 Whereas in China, small businesses have been contained and regulated by the government Only recently have Chinese governments begun to allow more small businesses

fol-to gain access fol-to many of industrial secfol-tors that were previously dominated by state- owned enterprises or even FDI

Third, India has improved its educational system, especially in higher tion “India’s young population has embraced state- of-art computer and informa-tion technologies, making their country one of the most important high- tech hubs

educa-in the world.”15 India’s information technology and computer companies in galore have been named as the world’s second Silicon Valley Some Chinese analysts and officials acknowledged that, compared with India, China made a costly mistake in the 1990s when it created many world- class infrastructures and buildings, but badly under- invested in education.16 For sustainable economic development and competitiveness, the quality and quantity of human capital will matter far more than those of physical capital

India seems to have the right policy priorities and may gain its competitive edge over China with its well- educated and younger work force According to the ADB, by 2008, only 20 percent of China’s population was under 14, while in India this percentage was over 30 percent (Figure 2.2) By 2015, two- thirds of China’s population will be over 50, while 60 percent of India’s will be under

30.17 China’s ageing population will cause a demographic drag on growth while India will reap the dividends of a large and young workforce—so long as its workers receive an adequate education

However, Chinese scholars and analysts also pointed out that India’s ence suggests that democracy can also hinder development in ways not usually considered by democracy enthusiasts Compared with India, China’s political governance facilitates its involvement in regional cooperation and the growth of capital formation, especially investments in physical infrastructure The signing

experi-of China–Association experi-of Southeast Asian Nations (ASEAN) free- trade ment (FTA) is perceived to be largely driven by some political factors and gov-ernment willingness on China’s side Although the India–ASEAN FTA had been signed, little progress has been achieved in terms of tariff reduction This is mainly because of internal disagreement between the Indian Ministry of Com-merce on the one hand, and the agriculture and finance ministries on the other.18

The fundamental difference between China and India is that in China there is

no opposition party and political disagreement within the Chinese Communist Party is muted compared with the intra- coalition differences in the ruling political coalition in India Competitive populism to win elections may hurt long- term investment, particularly in physical infrastructure, a key development- related

Economic growth and energy demand 19

bottleneck in India Such political arrangements make it difficult, for example, to charge user fees for roads, electricity, and irrigation, discouraging investment in these areas Competitive populism also makes it difficult to carry out policy experimentation of the kind Chinese leaders have excelled in throughout the reform era It is harder to cut losses and retreat from a failed project in India, which, with its inevitable job losses and bailout pressures, has electoral con-sequences that discourage leaders from policy experimentation in the first place For some Chinese analysts, India needs to put the long- term development goal at the top of the agenda of different interest groups, and work out a better govern-ance structure within its political system

Given these political constraints facing India, it would be difficult to promote similar incentives, especially when India is facing a policy gridlock at the central level where some partners in the coalition government (which comprises over 20 parties) oppose virtually every reform measure that is proposed For generating rapid and continuous growth, Chinese analysts think that India needs to learn from China about how to improve its administrative efficiency and make its local governments more accountable for local economic development Without better governance at a local government level, physical infrastructure in India will be hard to improve and manage, and without a good level of infrastructure in rural areas, it will be difficult for these areas to accelerate their development

India’s perceptions

India started its economic reform more than ten years after China in 1991 On the one hand, India has got reform momentum from China’s economic develop-ment A series of liberalization policies have been adopted to reform enterprises

Figure 2.2 Population aged 0–14 years in China and India, % of total population (source:

ADB, Key Indicators for Asia and the Pacific, 2010).

20 Economic growth and energy demand

and to foster market forces In particular the government’s attitude towards foreign trade and investment has undergone significant changes But on the other hand, India holds different views on China’s development models and bilateral economic relations

For example, from an Indian perspective, so long as both countries’ economic growth is sustained, domestic pressures are not hard to control But in the event

of a serious economic crisis, leaderships may become more susceptible to alist pressures On this account, China may be more vulnerable because of its authoritarian political system, as an Indian scholar notes that “the Chinese elites have only one real source of legitimacy: economic growth Should that falter, political pressures on the regime would rise rapidly.”19

India has its own vulnerability Social pressures erupt from time to time with intensive violence (as with the mass killings of Sikhs in Delhi in 1984, the lynch-ing of Muslims in Mumbai in 1992, and the slaughter of Muslims in Gujarat in 2002) But these are invariably short episodes of a localized nature Indian society,

by virtue of its social fragmentation and democratic underpinnings, has been able

to absorb the kinds of pressures that lead to large- scale violence “Economic and social change is perhaps more difficult but more stable in India than in China because it depends to a greater extent on the gradual evolution of a social and political consensus favoring the change.”20 The same does not apply to China:China has installed a far more decisive and purposive governance structure than India, but its weaker institutional checks (such as the lack of independ-ent judiciary or other regulatory authority) and low capacity for conflict management make it more brittle in the face of a crisis than the messy- looking system in India, for all its flaws.21

“Its huge mass of ethnically similar people constitutes an organic entity that, if pushed beyond a tipping point, could well produce massive social pressure that spins out of control as happened in the Cultural Revolution in the 1960s.”22

First, India’s industrialization has been more organic in nature, driven largely

by domestic companies, entrepreneurs and indigenous funds, with limited FDI (at least until recently).23 China’s growth mainly stems from massive accumula-tion of resources, together with public sector investments, resulting in impres-sive infrastructure While in India, economic growth is largely achieved by integrating the country into the world economy, and stressing increasing effi-ciency India does appear to be better integrated into the international business society and is utilizing available scarce resources more efficiently than China It

is believed that the economic criterion for a country’s economic success “is not whether it can attract a lot of FDI, but whether it stresses on efficiency, whether

it has a business environment that nurtures entrepreneurship, supports healthy competition and is relatively free of heavy handed political intervention.”24 In this regard, India has done a better job than China

China has achieved better results in poverty reduction in rural areas compared with India In China, the speed of poverty reduction has been much faster and

Economic growth and energy demand 21

effective China experienced a process of fiscal decentralization as early as the mid- 1980s, which allowed the local officials to retain a percentage of local fiscal revenues and delegated the decision- making power to the local governments But such fiscal fragmentation is maintained within a framework of vertical polit-ical control The local officials are appointed by the Party, not elected by popular local votes The combination of political centralization and fiscal decentraliza-tion has created built- in dynamics of investment- driven growth Local officials are induced to pursue their careers by implementing the plan of capital formation and growth targets One of the positive results of such dynamics is the continu-ous upgrading and construction of physical infrastructure by local governments

to attract inflows of external direct investments (including FDI)

Given the political constraints facing India, it would be very difficult to promote similar incentives in India, especially when India is facing a policy gridlock at the central level where some partners in the coalition government, which comprises over 20 parties, oppose virtually every reform measure that is proposed For generating rapid and continuous growth, some Chinese analysts think that India needs to learn from China about how to improve its administra-tive efficiency and make its local governments more accountable for local eco-nomic development Without a better level of governance at local levels, physical infrastructure in India will be hard to improve and manage, and without

a good level of infrastructure in rural areas, it will be more difficult for these areas to accelerate their development

2.2 Energy demand

The importance of China and India in the world’s energy outlook is set to tinue to grow steadily over the coming decades Rapid economic development, industrialization, urbanization, and improved lifestyles will undoubtedly drive energy demand higher According to the IEA’s 2009 predictions, China’s primary energy needs will expand from 1,970 million tons of oil equivalence (mtoe) of oil equivalent in 2007 to 3,827 mtoe in 2030, an average annual rate of increase of 3.2 percent.25 India’s needs grow even faster, by 3.6 percent per year, from 595 mtoe to 1,287 mtoe.26 While according to the IEEJ’s prediction, China’s primary energy needs will expand from 1,765 mtoe in 2007 to 3,161 mtoe in

con-2035, and India’s from 433 mtoe to 1,013 mtoe (see Table 2.2)

It is evident that both countries’ energy needs are growing much faster than that in the rest of the world Based on the IEA’s prediction, China and India will account for 45 percent of the total increase in world energy demand over 2007–2030, and for 82 percent of the increase in coal demand Today, the two countries together account for 20 percent of the world’s primary energy use, and

by 2030, this share will increase to 29 percent.27

In terms of energy structures, both China and India will remain heavily dependent on coal to energize their economies China’s coal demand grows on average as fast as total primary energy demand, so the share of coal remains broadly constant In India, the share of coal increases In both countries, power