Power use, freight volume show positive change amid economic restructuring

Wang Bao'an, the director of the National Bureau of Statistics.[Photo/IC]

In recent years, the relationship between China's economic growth and two key indicators - power consumption and freight volume - has attracted extensive attention both at home and abroad. In the "new normal", elasticity coefficient between economic growth and the two indicators is undergoing some changes, where the discrepancy, to some extent, reflects the progress made in industrial restructuring and upgrade. However, their orientation significance and logical relations, as well as rules and effectiveness, tend to remain unchanged.

Changes consistent with economic growth in general

Power consumption growth is basically synchronized with economic growth. From 1998 to 2007, China's year-on-year GDP growth rate increased from 7.8 percent to 14.2 percent, while the overall power consumption also took on a growing trend. In 2008, due to the international financial crisis, the country's economic growth rate dropped sharply, so did the growth of power use. Backed by massive stimulus policies, economic growth picked up from 2009 to 2010, when the power consumption also grew faster. From 2011 to 2015, both economic growth and power consumption slowed. Econometric analysis shows the correlation coefficient between total power consumption and GDP growth stood at 0.741 during 1998-2014, and that between industrial power use and industrial value-add growth hit 0.898.

Freight transportation moves similarly to economic growth. From 1998 to 2007 when China's economy experienced a sustained rapid development, the railway freight volume grew from the bottom point of 1988 and kept increasing rapidly despite some fluctuations. From 2008 to 2009, due to economic slowdown, the freight volume growth rate dropped significantly. From 2011 to 2015, economic growth and freight volume growth both fell. Econometric analysis shows the correlation coefficient between freight volume and GDP growth reached 0.646 during 1998-2014, and that between the freight volume and the industrial value-add growth reached 0.760.

Higher fluctuation conforms to economic laws

China's power consumption grows faster than GDP when the country's economy gains momentum, while drops more sharply amid economic slowdown. During 2000 and 2007, with the rapid economic development, the power consumption grew rapidly, with the elasticity coefficient of power consumption higher than 1. In 2008-2009, economic growth declined significantly, so the elasticity coefficient of power consumption dropped to 0.58 and 0.78 respectively.

The main reason is that power consumption varies from industry to industry. Electricity consumption per output unit in heavy industries is relatively higher, while in light industries is lower. Industrial power use, 70 percent by six major high-energy-consuming industries, accounts for more than 70 percent of that of the whole society. Generally speaking, when an economy recovers, heavy industries develop more rapidly, driving power consumption; when the economy slows, heavy industries grows more slowly leading to a sharper drop in power consumption. As a result, the fluctuation of power consumption is greater than that of the industrial output value.

Freight transportation in China, however, increases slower than GDP growth due to railway capacity restriction, but drops faster amid economic slowdown. When an economy picks up, surging commodities demand leads to rapid freight volume growth. When the economy slows down, demand for commodities and raw materials will be largely weakened, resulting in a sharp decrease of railway freight elasticity, even to a negative value. In 2009 when the global financial crisis stroke, the freight volume growth fell to 0.9 percent, with the elasticity coefficient being only 0.1; from 2010 to 2011, it increased rapidly alongside with the economic recovery; since 2012, it slows significantly or even decreased amid economic downturn.

New changes reflect restructuring progress

China's economy has entered "new normal" in recent years, with certain discrepancy between different indicators. When economic growth experiences a slight decline, growth of power use and freight volume dropped rapidly. It does not mean that the logic of economic operation has changed or that the data is questionable. Instead, it reflects that progress has been made in China's structural adjustment and upgrading in the past few years.

First, power consumption slowdown is a result of the growing service sector, accelerating industrial upgrade and improved energy efficiency.

Since 2012, China's economy has been shifting from manufacturing-oriented to service sector-oriented, with the service sector overtaking the secondary to become the largest one. The service sector often consumes less electricity than the manufacturing industry, with per unit of added value in the tertiary industry accounting for less than 20 percent of that in the secondary industry. Therefore, power consumption per unit GDP tends to drop when manufacturing slows and the service sector gains momentum. In 2014, the added value of the tertiary industry accounted for 48.1 percent, 3.9 percentage points higher than that in 2010.

Preliminary calculation proves that power consumption per unit of GDP in 2014 is about 5.4 percent lower than that in 2010, considering only the impact of economic structural changes. In the first half of this year, the added value of the service industry grew 8.4 percent year on year, up from 7.9 percent last year. The manufacturing added value grew 6 percent, down from 7.2 percent a year earlier. Accordingly, the whole society's power consumption increased by 1.3 percent, down from 5.3 percent posted last year.

Industrial upgrade also contributed to the slowing power consumption growth. Electricity demand is stronger in high energy-consuming industries than in high-tech industries whose increasingly larger share in China's economic growth leads to a decline of total industrial power use. Energy-intensive industries often consume more than 60 percent of total industrial electricity. But with their added value dropping, power consumption per added value last year decreased 4.8 percent than that in 2010. At the same time, high-tech development tends to bring down the power consumption.

Meanwhile, slowing power use reflects improvements in energy efficiency and consumption structure, due to government policies that encourage energy conservation and emission reduction, and market forces that drive companies to seek technological innovations and boost energy efficiency. In 2011-2014, energy consumed by per unit copper smelting capacity dropped by 22.6 percent, per ton cement by 12.7 percent, per unit crude oil processing 3 percent, thermal power in standard coal by 3.5 percent, and per ton steel by 6.4 percent. Energy consumption by per unit GDP fell 13.1 percent. Higher energy efficiency to some extent led to the slowdown of electricity consumption, especially the industrial power use. It's estimated that technological upgrade brought down 4.1 percent of the power consumption in all industries last year than in 2010.

Second, freight volume drop resulted from economic restructuring, optimized energy structure, diversified transportation and improved regional productivity layout.

Traditional industries have been transforming rapidly in the economic "new normal", in which weakened demand for commodities and raw materials has led to the decline of railway freight volume. For example, "black commodities" such as coal and steel, which account for more than 85 percent of total freight volume, dropped for the third consecutive year in 2014 and fell further 11.2 percent in the first eight months this year. In 2012-14, coal transportation decreased 79.95 million tons, steel and non-ferrous metal 31.14 million tons and metal ores 24.39 million tons.

The optimization of energy consumption structure has weakened coal demand. In recent years, the proportion of clean energy consumption is increasing. In 2014, consumption of clean energy such as hydro-power, wind power, nuclear power and natural gas accounted for 16.9 percent, 3.5 percent higher than that of 2010. Such development brought down thermal power demand, coal in particular. In 2014, the raw coal accounted for 66 percent of the total energy consumption, 3.2 percent lower than that in 2010. Coal consumption dropped 2.9 percent from a year earlier, for the first time in over a decade.

In addition, the Chinese government has advocated to transform coal into electricity on the same site, and changed "shipping western coal to the east" to "transmitting electricity from the west to the east", which has reduced coal freight volume to some extent. In 2014, coal freight volume fell by 2.3 percent over the previous year, making the railway freight volume drop by 1.2 percent. From January 2015 to August2015, the coal freight volume dropped by 11.4 percent, leading to the decrease in railway freight volume by 6.1 percent.

Diversified transportation offered more choices and cut railway freight volume. As China's infrastructure improves gradually, the rapid development of highway, waterway and civil aviation has diverted demand for railway freight. Compared with railway freight, the highway transportation has a significant advantage in its flexibility and convenience, leading to a lower percentage of railway freight in the transportation of light industry products. In 2014, the light industry products accounted for 13.6 percent in the railway freight volume, down 0.9 percent over 2010. The proportion of railway freight volume to the total freight volume dropped to 8.7 percent, down 2.5 percent over 2010. The proportion of highway transportation volume is 76.1 percent, 0.6 percent up from 2010.

Optimization of the import and industrial layout of resource products diminished demand for railway freight to some extent. As commodity prices in the international market remain low, companies in the eastern coastal areas increase imports resource products such as coal and iron ores, which reduced the demand to transport resource products from mid-western regions by rail. In 2014, China's import of iron ore increased by 50.7 percent, grain by 2.4 times, and crude oil 28.9 percent over 2010. The imports were mostly by water, so waterway transportation in 2014 accounted for 13.7 percent, 2 percentage points higher than that of 2010.

At the same time, the mid-western regions give full play to their late-development advantage, attracting labor-intensive companies to move away from the east. As the manufacturing companies become closer to the origins of raw materials, demands for long-distance railway freight transportation also decrease. In a word, as the market mechanism plays a bigger role in allocation of resources, the companies, project arrangements, import sites and transportation means are all changing quickly. Therefore, the volume of different transportation means will definitely adjust accordingly.

In conclusion, the relationship of between China's economic growth and power consumption as well as railway freight volume is given new connotation in the "new normal" phase. The elasticity between them has changed, but the inherent logic has not changed. It is not negation of application of indicators, but is an objective manifestation of the progress made amid the structural adjustment when economic development enters a new stage.

In recent years, as China's economic development enters the "new normal" phase and the economic environment both at home and abroad experience profound changes, the endowment conditions of element resources gradually change. The economic restructuring and transformation in China steps up, leading to historic, long-term trend and regular changes of the relationship between different indicators formed in the high-growth-rate period. This change marks the shifts of growth pace, of optimized structure and of driving force, and it is in line with the direction of macro-management and policy objectives.

The author is the director of the National Bureau of Statistics.