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China must come clean about its energy needs

Article by Joshua Cooper Ramo

September 15, 2006

Schrodinger’s interest was in the moment after the particle slipped into the system but before the box was opened. At that point, no one knew if the gas had been released, meaning the cat could be described as both alive and dead. The uncertainty of a subatomic state had been translated into uncertainty in the visible world.

For the past 25 years, China’s economy has practised a kind of Schrodinger capitalism. Lack of transparency in everything from financial markets to energy use to intellectual property meant China’s growth was occurring inside a black box. Investors often had to guess about the state of the economy, about what regulations they were supposed to follow, about what Beijing would do next. That kind of uncertainty seemed the perfect antidote to 50 years of destructive, ideological certainty. Starting with Deng Xiaoping’s introduction of the household responsibility system in 1980, which could be likened to Schrodinger introducing that particle, China’s economy grew at an average of more than 9 per cent a year; 400m people have been lifted out of poverty. Within the often stark limits of politics, China’s leaders were content to let citizens improvise ways to develop what became known as a “socialist market economy”, something that sounds to westerners like a contradiction in terms (an alive-dead cat).

But Beijing’s leaders, confronted with an economy that is still out of control in important respects and an uncomfortably lively debate about the future of party ideology, have begun to tire of uncertainty. As the Chinese new year begins – the year of the rooster – much of what is now under way can be explained as an attempt to bring clarity into the system. In early January, party leaders surprised much of the country by announcing a party education campaign to send more than 60m cadres off for self-criticism and education. At the same time, Beijing has been cracking down in parts of the country where local officials ignore edicts on economic growth. Despite orders to try to slow growth last spring, it is still common to find regional officials promising 18-20 per cent annual growth. In the autumn, Beijing announced it was relocating all local statistical work to the capital, another attempt to keep local officials from delivering fast growth for friends while lying to Beijing.

Until recently, the rattles of China’s opaque economy were mostly felt on the mainland and in the wallets of investors and foreign companies operating here. But the one area where the alive-dead cat has begun to squeeze global markets is in commodity prices. China plans to quadruple the size of its economy over the next 20 years. To do this it must have guaranteed access to inputs such as oil and minerals. So far, commodity prices have been no object to China’s leaders: without these inputs, their whole social and economic experiment would freeze. But the implications for the world are enormous. Imagine the effects of quadrupling Chinese demand for basic inputs. The economic challenge for developed nations such as the US will be tremendous. For developing countries, the effect may be disastrous, pricing them out of input markets for decades.

A Schrodinger strategy of deliberate uncertainty served China well in the past. It helped the country hold the vast contradictions of reform and development together under a coherent banner of transformation. But it is now time for the country to add transparency to its list of development virtues.

The government announced last month that it will issue an unprecedented energy planning memo this year, which will give world markets a look at China’s future energy demand. It has announced plans to develop a strategic oil reserve. Now China must understand that energy and mineral diplomacy are a vital part of its future.

At the National Peoples Congress in March, China’s leaders should take up a proposal that has been privately floated in many circles to create a ministry of energy. To international commodity markets, China at the moment seems like a mouth that eats but does not speak. It is making people nervous.

The year of the rooster should be known as the year when China starts doing that most rooster-like thing: talking.

The writer is an adviser in China and author of The Beijing Consensus, an analysis of China’s economy published by the Foreign Policy Centre in London

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