Milan (AsiaNews) - The Shaanxi mining disaster and what has subsequently emerged about workers being forced back underground, under the threat of losing their jobs, despite the high risk of further catastrophe given ongoing fires, confirm China's great thirst for energy: either the economy keeps growing at breakneck speed or everything collapses. The fact is that, with GDP growing at a rate of 9%, energy consumption has increased by 16% over the past two years and, in this year's first semester, petroleum imports increased by almost 40%. To be able to significantly diversify energy supply sources, China needs huge investments that its financial system, however, cannot simply afford.
Currently, China's coal production, which already supplies some 61% of energy needs, cannot be increased, not because tens of thousands of miners are killed on the job each year, but for two purely economic and political reasons. Output at coal power plants cannot be expanded: the country's entire transportation system is already overwhelmed by the coal industry's transport needs; furthermore, pollution from such plants has already an exceedingly negative effect on climate, which is determining flooding of China's great rivers and insufficient food, especially cereal, production. Nor is a switch to hydro or nuclear energy a solution in the short run, not only for the time it would take to build new plants, but also for the enormous fixed capital investment that China cannot afford to make and that its banks cannot fully raise.
China's financial system is, in fact, in very bad shape, considering that the banking system has born the brunt of half of century of collectivistic economic disasters. Due also to shortfalls in tax revenues, political leaders are forced to continually use bank budgets to finance essential public works: there is a considerable backlog of such infrastructure projects that has accumulated over past decades and that can no longer be postponed. It is a question of often non-discretionary public works and infrastructure spending, on which public consensus, especially in the provinces, also depends.
A weak financial system
The weakness of China's financial system in terms of defaulted loans is such that the government is forced to refinance banks by using a considerable amount of foreign exchange reserves which have been accumulated thanks to the highly-undervalued yuan renminbi fixed exchange rate. Given also that, especially in the provinces, the criteria for granting loans has not changed (loans are granted on the basis of political considerations), it is likely that the government will have to continue, over time, to cover bank losses on defaulted loans. This means, that in all likelihood, authorities will have to continue imposing on China and the rest of the world an exchange rate that seriously undervalues its currency. In other words, as long as China maintains, along with a semi-privatized economy, a Communist state apparatus, the banking system will continue to need periodic refinancing. It is of course very likely that such future refinancing will occur in an indirect fashion as not to loose face with the World Trade Organization (WTO), with which China has undertaken to fulfill specific measures for the liberalization of credit. However, it seems that, in substance, the financial and banking system's intrinsic weaknesses are destined to persist. It is therefore realistically unthinkable that the financial resources for an adequate program of fixed investments in the hydro and nuclear energy sectors can be raised internally.
The international community has its doubts
Nor can the big international banks make up for the investment shortfall. Investments for hydro or nuclear plants, as is the case for any kind of infrastructure, need to be amortized over a period of 30, 40 and, in some cases, as much as 50 years. It is likely that, as a consequence, the international banks, despite a façade of praise, are taking into consideration at least two types of systemic risks: either the system in China collapses under the enormous weight of its already perceptible contradictions or they coordinate with Western countries in reply to these contradictions. The international banks could, however, in the future offer a minimum of financial support over the long run, at least for the sake of appearances. The point is that to be truly effective, the level of required investment is so high that China would have to be able to afford a level of public debt similar to those carried by Western countries. Such a scenario, however, is currently unrealistic, at least as long as China is considered, or rather, wants to be considered among the so-called emerging countries. In fact, according to a study conducted by the International Monetary Fund, the critical level for public debt that must not be surpassed by emerging countries is 60% of GDP. Beyond that threshold, the risk of bankruptcy and financial collapse becomes statistically excessive. As an example, at the time of Argentina's financial crack, its debt was 54% of GDP.
It seems that this rule does not apply to Western countries. For examples, Japan's public debt amounts to 170% of GDP, while Italy's has gone as high as 110%. The United States, for that matter, along with its substantial public debt, has been withstanding the cumulative effects of decades of trade deficits without the least repercussions on the dollar's role as a currency of reference for international trade. The fact of the matter is that Western debts go from liabilities for international finance to being worth primary activity, i.e. cash, for the rest of the world. This is, in a way, the premium on international monetary sovereignty, to which China has forgone access by its own choice. In fact, China was given the chance to join the G8, the informal grouping of Western economies which acts as a veritable master of world economy, but turned down the offer. As a result, despite China's aspirations for fast-paced modernization and the desperate need to get through its energy crunch, the country is well aware of not being able to go beyond a modest level of foreign debt, whether public or private, without the risk of being strangled in the clenches of repayment deadlines.