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Finance & Economy

Economic motivation behind China’s dam building


Dadu River, China

Dadu River, China

The Chinese government has given preliminary environmental approval for construction of what would eventually be the country’s largest hydroelectric dam. The project, on the Dadu river in the southwestern province of Sichuan, is expected to take 10 years to construct at an estimated cost of a little over $4 billion. At 314 meters tall, it will end up being taller than the current world-record holder, the 300 meter Nurek dam in Tajikistan (although other dams are currently in progress which would also be taller than the Nurek dam).

Early presumptions are that the China is simply trying to boost its green image. Being a voracious consumer of energy, all sources of power are required in order to feed its appetite. In spite of this, however, China has vowed to raise the share of non-fossil fuels in its energy mix to 15% by 2020, up from 9.4% in 2011.

However, it is interesting to see how the Chinese environment ministry has given its OK to decreasing China’s environmental footprint by green-lighting a massive project which even it recognized will have a negative impact on rare fish and plant life, as well as protected local nature reserves.

This project, of course, isn’t the only one that Beijing has its hands on. And in spite of environmental protests, China is moving forward on numerous dam projects, with over 300 being completed, in production, or proposed by China’s state-run enterprises.

Project sites range from Algeria  to Myanmar, and include dams on the Tatay river in Cambodia, the Magdalene river in Columbia, and the Nam Ou in Laos.

China is now the world’s number one dam builder, and is willing to go where most Western countries and the World Bank won’t go, because of concerns over environmental, social, and political problems.

China isn’t known for its sterling reputation for environmental consideration, and so it is not surprising that the Chinese government has given the green light to these projects, even in spite of all the concern and protest over the destruction of habitat and native species.

But there is more to the motivation than just simply wanting to boost its energy production and forge political ties with its poorer neighbors.

Stimulus projects beget the need for stimulus projects.

The Chinese government has little real interest in market economics and helping its businesses. Nor does it care much about the environment or the welfare of its people.

What it does care about, though, is its standing on the stage of world opinion.

It wants to be famous as the holder of the records for production of the tallest buildings, largest cities, longest bridges, and fastest trains. It wants to have the world’s most vigorous economy. It wants to be producer of the greatest amount of goods, largest amount of energy, green or otherwise, and employer of the greatest amount of people.

And right now, to do those things, it needs these dams.

For the past several years, back to at least as far as 2005, China has been outproducing its neighbors and overproducing everything it can. Steel, cement, aluminum, coal, charcoal, and textiles all have been topping the lists and piling up looking for buyers.

Massive government stimulus has brought about massive production. The Chinese government wanted to build the greatest factory-nation on earth. And it succeeded in doing so, producing growth and production numbers that are currently the envy of all other nations. The problem is, however, that although those figures look great on paper, they don’t have much meaning when there is not enough demand to justify them.

With the excessive production, inventories began piling up, bringing about the tremors of economic crisis. And so the government, in trying to alleviate the problem, ended up bringing about more stimulus, in order to promote expansion of the business sectors that could “sop up” the excess inventory. Roads, bridges, buildings, and even entire cities were commissioned in order to push the economy ever farther forward.

But the Keynesian formula of government stimulus is, in reality, a temporary one, and increased spending only pushed the problem down the road. With inventories alleviated by an increase in demand, prices recovered and profits rose, encouraging a continuation of too much production.

In addition, new problems eventually arose. The industries picking up the slack began to face their own problem of overdevelopment, for growth had been promoted without consideration of the size of the market these businesses would sell to. Further, as the problem of overproduction in the initial industries never ended up being addressed, they, themselves, continued to expand to fill the new demand under the influence of the easy money they were given. Instead of stabilizing the situation, the situation was allowed to grow even worse.

When the world economy went off the rails in 2008, it should have signaled the beginning of a serious economic predicament that China was going to have to face. Reduced global demand for the commodities for which China was growing production began to cut into prices and profits. It didn’t matter that most of China’s production was consumed domestically, because most of these commodities, being global commodities, were affected by shrinking global demand and the associated decline in global pricing.

To combat the downturn, the Chinese government continued spending, either directly through government commodity purchasing or indirectly through infrastructure projects and easy loans to industry. This helped to keep things going, which is why China has been able to maintain nearly double digit growth for the past few years.

But maintaining stimulus growth requires an ever-growing requirement of stimulus spending. An economy is a dynamic, and not a static phenomenon, and is driven by the push of the demand requirements of the millions of participants in its patterns of exchange, and not by the pull of the government’s policies.

Since the stimulus injections attempt to override the natural state of an economy, the economy, driven by forces outside of those providing the stimulus, will immediately and always attempt to revert back to its natural state.

The more and stronger the attempts that are made to direct the economy, the more and stronger are the forces that come into play to resist that direction. And so ever greater and more powerful stimulants need to be brought into play, lest the economy fall away from its directed path.

Recent months’ dreary industrial reports have implied that the most recent rounds of stimulus are beginning to wear off and the Chinese economy is beginning to revert to its more natural level of development.

The overdeveloped markets are sitting on too much inventory while at the same time expanding production as if there was a dearth and not a glut of product available. Natural economic forces based on the true market demand are asserting themselves through declining prices and plummeting profits.

Chinese industry-wide steel profits were down 98% in 2012 over 2011, while Asia Cement Corp, one of Taiwan’s leading cement suppliers saw its profits plummet 71% in 2012 over 2011.

In 2012, China had more than 160 million tons of surplus steel, and over 300 million tons of excess cement, while aluminum is expected to face its biggest global glut since 2009. And the members of each of these industries are racing to add capacity in order to stay ahead of their competition.

With so much material looking for a market, and no decline in production in sight, either new markets need to be created or the politically undesirable economic decline must be faced.

And so, since it is politically undesirable to rein in the country’s growth, new massive civil projects are being green-lighted. Regardless of necessity, regardless of property, regardless of the plants and animals destroyed, and regardless of the environmental impact they will have on its surroundings.

How many millions of tons of concrete will need to be poured? How many tons of steel will be needed for rebar and structural purposes? How much copper for wiring and timber for supports, scaffolding, and power lines? How much fuel will be needed to power the earth movers and transport fleet? And how many people will need to be employed to make it all work?

By green-lighting these projects and many others, China is assuring itself of a market for its own goods, now that it finds its industrial production faltering for lack of demand. Growth in GDP can continue, and even be accentuated by the new projects as the statistical benefits compound one another.

Unfortunately for China, it hasn’t learned the lessons from all the other countries, from America to the USSR, who strove to boost their economies through government projects in an effort to override the natural market.

While GDP can be made to increase by growing the government component, that growth has to come from somewhere, and the government’s actions end up sacrificing balance in the private sector and destroying the wealth of its population through devaluation of the currency from all the money printing that is going on.

The stimulus projects and their associated boosts are only temporary. But the misdirection and misallocation of resources is permanent. As more and more stimulus is applied, the results will become smaller and smaller and the period of expansion will become shorter and shorter.

Already this is happening, as the purported flirtations with “recovery” are becoming measured in months instead of years.

The dam projects are simply attempts to boost the Chinese economy through new construction and through price supports via government-sponsored liquidation of excess inventories of construction materials.

But the resources to forge such projects have to come from somewhere, and the private sector is where they necessarily must be drawn from. Wealth is being drawn away from stable growth areas which would better support the public and their needs in order to promote the pet projects of the government bureaucrats.

Sooner or later, the private sector base will become overwhelmed by the imbalances and no amount of spending or lending will be able to hold back the inevitable correction coming due.

About colyapi

Colyapi lives in Grand Rapids, Michigan, the United States. Has an engineering background and works as a metal fabricator while advancing economic knowledge during these turbulent times. Specializes in custom problem solving and analytics, and can be heard more often at shadetreeeconomist.wordpress.com

Discussion

4 thoughts on “Economic motivation behind China’s dam building

  1. Reblogged this on Oyia Brown.

    Like

    Posted by OyiaBrown | June 1, 2013, 7:10 pm
  2. Reblogged this on Welcome To My World (My Life My Way ツ. My Destiny).

    Like

    Posted by LissaCaldina | June 1, 2013, 8:40 pm
  3. Reblogged this on middlekingdom1of10boyz and commented:
    The interesting thing I picked up from the discussions I have heard about the recent earthquakes is that there might be a correlation between the extreme “weight” of the water behind the dams and the increased frequency of large earthquakes. I could easily see how that is feasible given that the weight of the water behind the dam would change how the fault reacts to movement. I am going to have to do some research and digging on what has actually been scientifically proven in this regard.

    Like

    Posted by 1of10boyz | June 1, 2013, 9:51 pm

Trackbacks/Pingbacks

  1. Pingback: Economic drivers of China’s dam building. | Shade Tree Economist - June 8, 2013

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