The market for energy in China

Abstract

Since 1979, China embarked on an economic reform to modernize the country. The reform was so successful that China was able to grow by an impressive rate of 9 percent per anum between 1979 and 1997. The rapid development of the economy leads to a drastic increase in demand for energy. Since China has the largest population in the world, its energy demand is nothing but huge. Each year, for example, China needs to install as much as 10,000 MW of new electricity generation capacity, which equals the curent capacity of Netherlands. This increase in demand for energy, which is likely to continue, wil have implications for global energy markets, the world price of energy and for the global environment as emissions of greenhouse gases grow rapidly. Against this background, there is an urgent need for the country to better manage the energy sector so that the market can function in an orderly manner. To tackle this issue, I single out three important energy problems to study. First, I wil examine the current situation of the energy imbalance in China. Second, I wil forecast how rapid the energy demand wil grow in future so that the deficit between the demand and domestic supply can be identified. Lastly, I wil discuss some methods that can be used to manage the demand. My finding shows that energy-capital and energy-material inputs are complementary, whereas the relationship of energy and labour is insignificant. In addition, the simulation exercises also reveals that a high energy pricing policy might not be effective in mitigating the demand and in encouraging firms to employ labour intensive techniques. Also, rising energy prices may bring spiral inflation and deterioration in the balance of payments and foreign resources. Therefore, government should act cautiously when increasing energy prices.