Oxford Institute forEnergy Studies Balanced Clean Development in China Renfeng Zhao Oxford Institute for Energy Studies/Kreab Courtesy of workshop participants at Balanced Clean Development in China Workshop in Beijing, November 2008

Oxford Institute forEnergy Studies The key features of Chinese Model High investment rate supported by high savings and FDI inflows Trade preferential policies Domination of state-owned commercial banks in financial intermediation Capital control

Oxford Institute forEnergy Studies Gross capital formation, % of GDP Source: WDI online, 2008.

Oxford Institute forEnergy Studies Household consumption, % of GDP Source: WDI online, 2008.

Oxford Institute forEnergy Studies The strength and weakness of Chinese Model Strength –High GDP growth –Mitigate unemployment pressure –Not vulnerable to external shock Weakness –Double misallocation of resources A developing country exporting capital Current account surplus Vs. Poor investment income –Excess liquidity (Inflation pressure + Asset bubble) Twin surpluses (Accumulation of reserve) Exchange rate inflexibility (Incomplete sterilization)

Oxford Institute forEnergy Studies Misallocation of resources A typical developing country should run current account deficit and capital account surplus. To fully utilize the FDI inflows, a developing country should use the capital inflows to purchase foreign machines, technologies and commodities, i.e., to translate the capital inflows into current account deficit. However, twin surpluses reflect that China has fully utilized neither its domestic resource nor capital inflows. A 1.9 billion USD foreign exchange reserve represent a huge subsidy to developed countries

Oxford Institute forEnergy Studies Why China should be worried China’s growth relies on the high investment rate supported by high saving rate; China is aging. Demographic dividend will disappear in 15 years. China will need positive investment income to supplement the declining saving, otherwise China will not be able to maintain a decent investment ratio.

Oxford Institute forEnergy Studies How to rebalance Chinese economy The traditional Chinese model is unsustainable. To rebalance Chinese economy, a comprehensive policy mix should be adopted. Financial crisis is both an opportunity and a challenge for the structural adjustment of Chinese economy. Address specially –Deterioration of environment –Exhaustion of energy –Widening gap between the rich and poor, coastal and inland regions.

Oxford Institute forEnergy Studies Macroeconomic policy, energy security and the environment  Trade-offs and challenges in the energy sector  Energy security and the supply of primary energy  Demand side and efficiency

Oxford Institute forEnergy Studies Trade-offs and challenges Development – need to maintain growth momentum Energy security – how to manage increasing import dependence and diversify away from coal Prices and social impacts – is cleaner energy affordable? Rebalancing – implications for energy security and the environment

Oxford Institute forEnergy Studies Rebalancing could help As the economy matures Slow down of incremental energy demand with shift to services Demand shifts to lower carbon fuels Fuel supply structure changes Policy intervention is more affordable

Oxford Institute forEnergy Studies But there could still be problems Development of inland regions may promote transport demand and oil use Services and higher domestic living standards lead to increased share of electricity Construction has been major energy demand driver; inland development requires more construction Difficulties with fuel diversification

Oxford Institute forEnergy Studies Managing the change Economic rebalancing – can be used to shift to a new growth path Global challenge creates global opportunities “Pollute now, clean up later” could be very expensive Many policies can help meet social and economic objectives – eg energy efficiency. Pricing could also be used proactively.

Oxford Institute forEnergy Studies Policies that promote rebalanced development Energy efficiency Low carbon electricity (clean coal; renewables; nuclear) Transport – efficient vehicles and effective public transport Use of CDM Other forms of joint responsibility Technology issues

Oxford Institute forEnergy Studies Climate Change communications Climate change is an environmental issue as well as a development issue Behaviour change is very important Tackling myths and confusion about climate change is a long journey Climate Change Journalists Club