China’s Energy Governance: Perception and Reality

By Edward A. Cunningham, MIT Center for International Studies. Posted March 19, 2007.

As observers outside of China warn of a looming Chinese endgame in global energy assets, manipulated by Beijing, leading policymakers inside of China are facing considerable challenges governing major energy companies -- especially those that the state owns. Chinese President Hu Jintao's recent tour of African states and rumors of the first Chinese takeover of an overseas listed company have attracted critical attention and spurred much discussion. Most analysis of China's energy governance has placed the central government in the driver's seat. The reality is that this perspective is grossly misleading.

Critics of Beijing should take a collective step back and re-examine the historical and contemporary dynamics shaping energy policy in China. First, government actors -- even at the central level -- are plagued with vague and conflicting interests, resulting in still-born energy institutions that historically have failed to produce focused energy policy. Second, successful measures by the central government in state-owned enterprise (SOE) reform have created newly empowered corporate actors whose operations are largely obscured from official view, and who selectively tap state resources as they see fit. Third, the traditional levers of "top-down" vertical authority by the Chinese state, such as direct financing, permit approval, and penalty enforcement have been greatly weakened by domestic reform. Energy decisions in China do not conform to the state-dominant view suggested by both pundits and government officials. At best, this lens leads to ineffective US policies. At worst, it encourages the dismissal of competing evidence, greatly weakening the ability of policymakers to identify emerging trends and to forecast future trends.

Rhetoric vs. Reality

Despite the far-reaching political salience of the issue, the public debate over state involvement in public firms reveals a surprising lack of balance. For the vast majority of analysts the term "state-owned" equates to "state-controlled," fueling a perception that the "hidden hand of the socialist state lurks behind many Chinese companies." The June 2005 bid by China National Offshore Oil Corporation's to acquire Unocal, an established mid-sized American petroleum firm, captured well the rising sense in the US that Beijing is "going global," and doing so through the tentacles of state-owned enterprises. A few weeks after the bid, a range of publications, including the New York Times and the Economist, published articles addressing the "China, Inc." argument. Borrowing from the work of scholars such as Chalmers Johnson, whose label "Japan, Inc." powerfully reconceptualized the success of Japan's industrial policy of the late 1970s and 1980s, US government officials and a multitude of pundits have employed the variant "China, Inc." to frame industrial policy in China's energy sector. Such analysis posits that Chinese firms are "mere tools of an expansionist policy propagated by Beijing's leadership." The reality suggests otherwise.

It is clear that Chinese energy SOEs are utilizing a degree of state financing and a host of diplomatic resources through Beijing. Respected observers have written about the offsets of balance of payment deficits created by large oil purchases, well-timed military sales to energy clients such as Iran, and of course the subsidized financing provided to Chinese firms by Beijing. Indeed, the October 2006 Forum of China-Africa Cooperation clearly signalled the importance of state diplomacy in winning business contracts. However, this relationship does not confirm that the causal arrow of influence points from Beijing to the firms. The evidence supports a less monolithic view.

In the energy downstream markets, Chinese government sources estimate that approximately 120,000 MW of electric capacity currently in the process of installation has not received approval from Beijing and is, therefore, illegal. This illegal capacity alone is greater than that of Germany's national grid, the largest in the European Union. China's energy upstream markets reveal similar trends. In the summer of 2005, analysts blamed "artificial" and "man-made" shortages for the miles-long lines plaguing south China's major cities, the result of Sinopec and other major petroleum firms illegally exporting crude in an effort to profit from the estimated $10-20 gap between low domestic and high international oil prices. The country's largest coal producers and power producers repeatedly failed to agree on negotiated coal pricing for eight months between 2005 and 2006, despite repeated government attempts to mediate. Local actors are now shaping China's energy markets at an unprecedented pace and scale, engaging in long term investment decisions in fuel choice and technology that will remain in place for decades. Moreover, these actors are regulated by a fractured and diminished central bureaucracy.

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Edward A. Cunningham is a PhD candidate in the Department of Political Science at MIT, and a research fellow both at MIT’s Industrial Performance Center and Harvard’s Asia Pacific Policy Program.

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