Post-cold war China-Uzbekistan relationship under bilateral and multilateral framework : 2006-2018

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Graduate School of Social Sciences

Post-Cold War China-Uzbekistan Relationship under Bilateral and

Multilateral Framework

2006 – 2018

Author: Dimitrios Psomiadis Student number: 12290866 Thesis type: Master Thesis

Programme: The Political Economy of Energy Supervisor: Dr. M.P. Amineh

Second Reader: Dr. László Marácz Date: 24-06-16

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3 Table of Contents

Acknowledgements

First and foremost, I would like to express my deep and sincere gratitude to my research supervisor Dr. M.P. Amineh for offering me the opportunity to do this research and providing valuable guidance during this project. His dynamism, motivation, discipline and sincerity have deeply inspired and helped me during my entire research. He has taught me one of the most important and relevant topics of our era: the centrality of energy of modern civilization and the ensuing of fierce antagonism in every means of gaining access to natural resources. Furthermore, he has taught me how to carry out research which was one of the most daunting and demanding undertakings during my masters. It was a great privilege and honor to work and study under his guidance and I am exceedingly thankful for what he has offered me. I was, am and will always be impressed by his willingness and eagerness to put in the additional effort and time needed for any student to complete their research. Furthermore, I would also like to thank Dr. László Marácz for his time and willingness to read and assess my work.

Finally, I would like to express my deepest respect and gratitude to my parents, for their love, patience, prayers, and sacrifices they have made for educating and preparing me for my future.

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Map 1: China

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Map 2: Uzbekistan

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Map 3: Central Asia

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List of tables and figures

Tables

Table. 2.1: The 19th PSC (elected October 2017); 32

Table 3.1: Oil and Gas Reserves and share of world total in the Caspian Region-Central Asia (2016-2017); 48 Table 3.2:Export-earning and state-budget based on oil and gas in Russia-Iran-Azerbaijan-

Turkmentistan-Kazakhstan and Uzbekistan (2017); 49

Table 4.3: Trade between China and Uzbekistan (2000-2017); 69 Table 5.1: Russian Foreign Direct Investments in Uzbekistan and the CIS Countries; 94

Table 5.2: U.S. foreign direct investment (FDI) in Uzbekistan (stock) in million USD; 101 Table 5.3: U.S. Goods Trade with Uzbekistan in Million USD; 102 Table 5.4: U.S. assistance towards Uzbekistan in Million USD; 103

Table 5.5: Total trade between EU and Central Asia, 2007-2017, in billion USD; 107

Table 5.6: EU trade with Uzbekistan 2008-2018; 107

Figures

Figure 2.2: China’s GDP growth; 35

Figure 2.3: China’s energy mix 2017; 38

Figure 2.4: China’s Oil Production and Consumption; 40 Figure. 2.5: The Governance structure of Chinese National Oil Companies; 43 Figure 4.1: «Uzbekneftegaz» National Holding Company Shareholders Capital Structure; 58 Figure 4.2: The structure of Uzbekneftegaz National Holding Company; 59

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List of abbreviations

ADB Asian Development Bank

AIIB Asian Infrastructure Investment Bank b/d Barrels per day

bcm Billion cubic meter BRI Belt and Road Initiative

CACO Central Asian Cooperation Organisation CCP Chinese Communist Party

CDB China Development Bank CEIB China Export-Import Bank

CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation CSTO Collective Security Treaty Organization CIS Commonwealth Independent States CU Customs Union

E&P Exploration and Production FDI Foreign Direct Investment EAEC Eurasian Economic Community

EEU Eurasian Economic Union

EIA Energy Information Administration EU European Union

FDI Foreign Direct Investment FTA Free Trade Agreements GDP Gross Domestic Product

GUUAM Georgia, Uzbekistan, Ukraine, Azerbaijan, Moldova IEA International Energy Agency

IMF International Monetary Fund IOCs International Oil Companies IPE International Political Economy MOFA Ministry of Foreign Affairs mtoe Million tonnes of oil equivalent NATO North Atlantic Organisation

NDRC National Development and Reform Commission NEA National Energy Administration

NEC National Energy Commission NOCs National Oil Companies

OEC Observatory for Economic Complexity

OECD Organization for Economic Cooperation and Development PBSC Politburo Standing Committee

PCA Partnership Cooperation Agreement PRC People’s Republic of China

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11 PSAs Production Sharing Agreements

RATS Regional Anti-Terrorist Structure

SASAC State-owned Assets Supervision and Administration Commission SCO Shanghai Cooperation Organization

SEZ Special Economic Zone SOEs State-Owned Enterprises SREB Silk Road Economic Belt tb/d Thousand barrels per day

UN United Nations

US United States

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Chapter 1 Introduction

1.1 Objectives

The rapid growth of China, since the late 1970s, deteriorated its energy situation, through increasing energy demand that ultimately resulted in oil imports in 1993. The same has happened with natural gas in 2006. As a result, China was forced to implement the ‘going out’ strategy to access the resources of resource-rich countries and markets as well. To achieve these goals China deployed a combination of enhanced bilateral relations with individual countries and build-up of multilateral mechanisms like Shanghai Cooperation Organization (SCO) and Belt and Road Initiative (BRI).

The objective of this thesis will be the examination of the post-Cold War China-Uzbekistan relationship in diplomatic, economic and security level in the broader context of China’s strategic interests in Central Asia – regional stability, access to resources and markets to underpin its rapid development and to facilitate China’s peaceful development. Since the collapse of the Soviet Union, China has established and thereafter has been developing strong bilateral relations with Uzbekistan. To create a favorable strategic environment in the Central Asia, Beijing co-founded the Shanghai Five in 1996 and with the accession of Uzbekistan in 2001; the Shanghai Cooperation Organisation was established. Although the SCO was initiated as a security platform, cooperation in economic area was gradually incorporated. In 2013, Beijing took a step further toward the attainment of its national development and foreign policy goals by the announcing the Belt and Road Initiative. It can be said that BRI underpins economic integration and development among SCO members. Central Asia plays a key role in China’s attempt to connect the Eurasian landmass because of its strategic location at the center of the super-continent. Uzbekistan was selected because it is the most populous country in the region, due to its rich natural and mineral reserves and strategic position between East and West.

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13 Summing up, the main focus of this research project is related to the post-Cold War China-Uzbekistan relationships (e.g. diplomacy, economic and security) in the context of China’s strategic interests in Central Asia as they have been served by the SCO and BRI. It is worth mentioning that special attention will be given to the energy dimension with the involvement of CNPC in the energy sector of Uzbekistan.

To understand this dimension, it is necessary to examine the relation between the Chinese state and the Chinese National Oil Companies at domestic and international levels. Specifically, the extent will be clarified to which state controls NOCs when they invest abroad. Whether they are pursuing strictly with statist interests or if they are investing having profitability as their primary goal. to put it otherwise, are they simply agents of the state or are they autonomous players? Furthermore, the relation of CNOCs will be examined in regards to economic, diplomatic and security efforts by other Chinese governmental entities in the case of Uzbekistan. It is postulated that they are the main tools that have been facilitated in the Chinese involvement with Uzbekistan.

The main social actors and entities under study will be the Chinese and Uzbek political-elite and regarding energy sector in their National Oil Companies i.e. CNPC and Uzbekneftegaz, respectively. CNPC was selected as the main actor because of the Chinese NOC with the most extensive and active presence in Uzbekistan and due to the traditional close relations with the Chinese state. Uzbekneftegaz was selected because it is the only company which is controlling oil and gas fields in Uzbekistan and because it is controlled by the state.

The examination of political elites is a crucial step to start with, since they play a vital role concerning the domestic level by controlling their NOCs and at the international level by using the policy tools of economy, diplomacy and security to project power. The time frame ranges from 2006 to 2018. The year 2006 was chosen as a starting point because then CNPC began to invest in the energy sector of Uzbekistan, by exploring and developing oil and gas fields while at that time energy deals relating to the construction of the Central Asia-China gas pipeline with a capacity of 55 billion cubic meters (bcm) were signed with the Uzbekneftegaz .

1.2 Social and academic relevance.

In terms of social relevance, this research is relevant because energy resources are considered a strategic commodity in the political economy (Amineh & Yang, 2018, 14) due to

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14 their finite and non-renewable nature. Hence, the access to oil and gas reserves will continue to play the key role for every industrialized or industrializing country as they struggle to achieve energy supply security. According to projections, energy demand will keep increasing (IEA, 2018; 28). Thus, as the world is and will remain dependent on fossil fuels for the foreseeable future, the examination of strategic competition for cross-border access into resource-rich countries between big energy consuming states is the utmost importance for the understanding of international political economy.

The stunning growth of China and the ensuing demand for energy has deteriorated the situation and will continue to worsen as China is expected to be the world’s biggest energy consumer till 2040 (BP, 2019). Thus, trying to understand Beijing’s quest beyond its borders for energy resources is a decisive step to depict its willingness to promote domestic growth and provide an alternative world order model.

The main contribution of the research stems from the comprehensive examination of diplomatic, economic and security tools in bilateral level which have been deployed by the Chinese state in order to facilitate the involvement of China in Uzbekistan and CNPC in the energy sector of Uzbekistan in particular. Furthermore, the research is centered on the examination of China-led multilateral institutions. Although, SCO is primarily an intergovernmental organisation aiming at the security area, it also has an energy facet; secondly, OBOR albeit is a plan promoting interconnectivity and development, it includes the construction of oil and natural gas infrastructure. Thus, this thesis will contribute in academe by examining and grasping this unexplored connection between bilateral relations and multilateral institutions of China towards a comprehensive engagement with Uzbekistan and its energy sector.

1.3 Research Questions

To grasp the reasons of China’s involvement in Uzbekistan in the context of Central Asia the research is based on and revolves around the following research question: Why China’s strategic interests prompted it to get involved in Uzbekistan and how the relations between Uzbekistan and SCO and BRI in the context of the post-Cold War Central Asia facilitate China’s involvement?

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15 To further elaborate and answer the main question, this thesis will be separated in the following chapters; each of them contains question(s) that need to be answered. The current research proposal is considered as the first chapter thus the following chapters are:

Chapter 2. How has China’s growth affected its energy security?

Chapter 3. What is the significance of Central Asia for China and what policy tools it has deployed in order to achieve its goals?

Chapter 4. What diplomatic, economic and security activities has China's state-class and CNPC implemented in Uzbekistan between 2006 and 2018?

Chapter 5. How the Russia, US and the EU are involved in Central Asia and what are the implications for China’s involvement in the region and Uzbekistan in particular?

Chapter 6. Conclusion

1.4. Literature review

To place this research into the academic debate the following literature review will embark on with the examination of correlation of China’s economic development and the ensuing resource scarcity and the reasons of the strategic importance of resources. It then proceeds to the discussion of the relation of the Chinese state and the NOCs and the logic behind the actions for access to resources beyond the borders. After that, to specify this broad field of inquiry, the review will focus on the SCO and the Chinese strategy in relation to the Central Asian states. In the final section of the review, the China-Uzbekistan relation in regards to energy cooperation will be discussed.

Energy security

After the establishment of independence in 1949, China attempted to reach the level of industrialized Western powers. The new regime was deeply concerned about resources and treated their control as the absolute and ultimate strategic imperative (Jian, 2011: 186). The driving logic behind this decision was the attainment of energy independence, which was achieved during the 1950s by domestic labored efforts and the discovery of oil fields (Meidan, 2016: 4). China thus became self-sufficient and net exporter during the time-span from the 60s until the 90s (ibid, 5; 7), but its tremendous economic growth increased energy demand and, as a

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16 result, it became a net importer of a variety of energy resources namely oil in 1993, gas in 2007 and coal in 2007 (Wu, 2014: 4). Beijing is now the biggest consumer of energy in the world (ibid: 5).

Development and Resource scarcity

Over the last three decades China has managed to achieve an astounding annual growth of roughly 9% in terms of Gross Domestic Product (GDP) and in particular 9.6% and 8.7% in 8% in 2008 and 2009, respectively (IMF, 2010). As a result, 500 million people were lifted out of poverty, and China became the world’s largest exporter and manufacturer and climbed to the second tier of the global economy (World Bank, 2013). Industrialization, urbanization and the growing population boosted the demand for energy over this period especially in oil, along with the emergence of the middle class who was increasingly using energy for daily life., thus boosting the energy demand (Chen, & Qin. 2014; Leung et al. 2014: 319).

Leung argues that gas and coal imports are important but not as crucial for the survival of the Chinese regime as oil. For instance, natural gas which the smallest percentage in the energy mix has its secured supply by long-term contracts with Resource-Rich Countries and the fact that it has many substitutes, renders gas a less vital commodity (Leung 2011: 1331). Consequently, oil alone has become a primary concern for the Chinese leadership; a ‘‘strategic material’’ which supports the PRC‟s long-term strategy and the China Communist Party’s core values (ibid: 1332).

In order to understand why China is facing resource scarcity, this section of the literature review will examine in detail how this situation emerged. The reforms of Deng Xiaoping opened up China to the world, terminating a long period of isolation from the then- dominant Western System and laying the foundations for its gradual industrialization (McKay, 2016:304; Wang, 2015) which changed and restructured the state, society and had severe, irreversible impact on the global stage, aiming to avoid exclusion and to catch-up with the advanced countries (Amineh and Yang, 2018: 13-14). The strategic cost of this was a growing dependency on imports from abroad.

While its economic growth has slowed down in recent years, its energy demand is projected to grow at a lesser pace of 1.5%, accounting for a quarter of the world’s consumption by 2040 (BP, 2018), rendering supplies a strategically important issue (Downs, 2000). After domestic reserves started depleting and China became a net importer, energy security was

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17 perceived as a primary national security concern by the Chinese ruling elite. Because economic growth cannot be sustainably continued, without affordable and uninterrupted input of energy, the legitimacy of the Communist Party could be ultimately in danger (Cao and Bluth, 2013; Wu, 2014: 5-6). Oil and gas are predominately necessary for a modern country’s transportation system, national, and food sector; neither of them can be replaced in the medium or long term (Cao and Bluth 2013: 382). Finally, as Lee argues, China’s strive for energy security motivated from political and geostrategic imperatives depend on domestic and foreign factors, namely its reliance on State Own Enterprises (SOEs) for the attainment of economic and especially energy goals, due to the dominance of CCP in the state, articulating thus a centralized state-society-complex (Amineh and Yang, 2018:11). Regarding the foreign domain, Beijing participates in international markets, albeit trying to secure its supply by the ‘‘China-first’’ agenda with ‘‘going out’’ strategy of its own NOCs (Lee, 2012: 75; Jakobson and Daojiong, 2006). Last, but not at least, to deal with its increasing dependency on imports China implements a three-pillar strategy based on a) overseas investments in Resource-Rich Countries by its NOCs, b) reinforcement of its strategic petroleum reserves (SPRs) and c) development of unconventional gas (Wu, 2014:7). From the aforementioned, it can be inferred that the public sector dominates, regulates and is involved in the securitization of energy supplies which is highly politicized and became a first priority issue among the energy debate and decision makers of China (Lee, 2012:77).

Energy sector reforms

The energy sector has witnessed many centralizations and decentralizations since its founding. The aim of decentralization was to gain greater autonomy in the decision-making process and flexibility to adapt easily to the ‘‘market economy’’, adopting a commercial-driven logic (Yao, & Chang, 2015: 133-134; Meidan, 2016, 55). The successive stages of reforms resulted in the abolition of the Ministry of Petroleum Industry (MPI) (Jiang, 2011: 387), the creation of the three major champion state-led oil companies China National Petroleum Company (CNPC), China Petrochemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC) (Yao, & Chang, 2015: 135), and the decreased control of central government over these NOCs (Kong, 2011, 55; IEA, 2006:50). Now, Beijing is obliged to seek cooperation with local governments and semi-autonomous NOCs, which leads to the lack of a comprehensive approach to deal with its energy demands (ibid: 56). In spite of these efforts and

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18 reforms, the Chinese regime has set access to oil as a prerequisite for constant and sustainable growth with its legitimacy and longevity. Beijing, as Lee concludes, ‘‘links energy policy, regime security, and national interest’’ (2012: 79).

All things considered, Andrew-Speed maintains that the persistence of China in its model of development with high growth rates, investments in heavy industry and infrastructure and a preference towards exports has contributed to a structural demand for energy which prohibits policies aiming at reforms (Andrew-Speed, 2010, 37). It is needless to say that energy security is affected by what economic development models China has chosen to implement; thus this utmost goal has not been achieved (Lixia & Youngho, 2015, 137).

The Chinese state and Chinese National Oil Companies

Beginning in the 1970s, the inquiry into NOCs was a significant focus for the academic community; which was sought to understand the necessity of the existence of NOCs, their relationship with the government and the modes of their operation. Steele suggested ‘‘a NOC increases a government’s ability to implement a more effective energy policy and environmental protection’’ (Steele, 2003: 8). Other scholars argued that the driving imperative behind the creation of SOEs, such as NOCs, was to attain support domestically, while the profitability goal could be an important reason but it was not the primary concern which led to the formation of these enterprises (Smith and Trebilcock 2001, 218). A third branch maintains that the relation with the government is more blurred. Specifically, in the Chinese case, NOCs derived from the dismantling of Ministries (Jiang, 2011:382, Andrews-Speed, 2012:11) which resulted in a remaining link between the government and the enterprises (Liao, 2014: 47). Thus, as it is argued, the state possesses, in terms of ownership, its NOCs but simultaneously, they have acquired autonomy in pursuit of the two-fold goal granted/assigned by state i.e. securitization of energy supply and efficiency and profitability (Liao, 2014: 47). The result is a vicious circle by the virtue of monopoly status and preferential treatment of the state, as long as enterprises aiming at growth and consequently, the legitimacy of CCP rule (Milhaupt, & Zheng 2015). Last but not least, Amineh and Yang cogently argue that most NOCs are hybrids operating in a perplexed mode of „„corporate governance, public administration and societal regulation‟‟ (Amineh and Yang, 2014: 517). It is, therefore, clear that CNOCs are not functioning in a strictly

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political-19 driven way and they are not simple political institutions which implement state’s strategies. (Álvarez, 2015: 60).

The ‘going out’ strategy

China has been deployed ‘going-out’ strategy in order to increase its energy supply security (Meidan, 2016a: 2; Wu, 2014: 7; Jakobson and Daojiong, 2006: 64). For the realization of this strategy Beijing implements a comprehensive approach, making it easier for its NOCs to invest in a host country (Chalmers and Mocker, 2017), creating a ‘‘good environment for developing overseas oil cooperation’’ (Meidan, 2016b: 21). The state offers trade deals, investments and financial aid in coordination with its NOCs and state-led banks. Examples of this holistic approach are the ‘projects-for-oil’ and ‘loans-for-oil’. Regarding the first model, Chinese banks - China Export and Import Bank (China Exim) or China Development Bank (CDB) offer privileged loans for infrastructure projects in oil-rich countries, which in turn cede access to Chinese NOCs to the host country’s resources, and host countries repay their debts with long-term oil production (Meidan, 2016a, 1). The second model is based on similar loans provision from the aforementioned banks in oil-rich countries which lack capital, and these countries repay again with a concession of long-run oil supplies (Kong, 2011: 60; IEA, 2015). But, all things considered, these Outward Foreign Direct Investments (OFDI) have created skepticism in many host countries among governments, entrepreneurs and civil society (Sauvant and Nolan, 2015: 9-19). This closing section will examine briefly the rationale and motivations behind investments made by NOCs abroad. The literature review splits into two interrelated discussions. The first refers to whether Chinese OFDI is motivated by economic considerations (Chen, 2008; Chen, 2011; Chalmers & Mocker, 2017) or energy supply security considerations (Lai et al., 2014; Ma and Andrews-Speed, 2006) and the second focuses on the effectiveness of conducted OFDI in regard to China’s energy security. In conclusion, many scholars postulate that ‘going-out’ strategy has not achieved its primary target of energy supply security (Lai et al., 2014; Chen, 2011).

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20 The dissolution of the USSR led to the independence of Central Asian states. The new reality allowed China to implement a new approach which was based on the recognition of newly independent states and the establishment of bilateral relations as well as the SCO (Swanström, 2015; Aris, 2011) Many reasons attributed to the increasing importance of the area. Proximity to China and the existence of vast oil and natural gas reserves rendered Central Asia as an alternative source of supply for energy-thirsty China (Pop, 2010: 197; Song, 2016, 14). Another factor is the urgent will to establish regional stability through stronger statist relations (Sheives, 2006: 222). While Central Asia and Russia are crucial for China’s energy security, overall oil imports cannot be fulfilled from this area, but this route could decrease dependency from Middle East (Ziegler, 2006) and the partial avoidance of the Malacca Strait (Zhang, 2011). With regard to natural gas, Central Asia and Russia present some decisive advantages; the geographical proximity and the fact that natural gas is a regional negotiating commodity (Amineh and Yang, 2014). Therefore, China has developed a pattern of ‘‘strategic relationships’’ with Russia (Røseth, 2017) and the Central Asia democracies in order to maintain regional stability, the defeat of terrorism and separatism and Islamic radicalization and deals with narcotics trafficking (Amineh and Driel, 2018).

China- Uzbekistan strategic relations

China and Uzbekistan have established diplomatic relations in the 1990s, after the collapse of the Soviet Union. Since then bilateral relations have strengthened significantly in many sectors such trade, investments and security at bilateral as well as multilateral levels (ÖĞÜTCÜ, 2018: 2; Cheng, 2011) with special emphasis on energy sector (Madiyev, 2017). Uzbekistan is the third natural gas producer in Eurasia with 65 tcf of proven reserves (EIA, 2016). One of the major aims of Uzbekistan’s energy strategy is to preserve its energy independence (World Bank, 2003: 4).

Uzbekistan in the international academic literature categorized as authoritarian political system (March 2003; Murtazashvili, 2012; Spechler, 2007) and as patrimonial and rent-seeking regime (Ilkhamov, 2007; Collins, 2009) a signification similar to definition issued by Amineh; this regime namely relies on natural resources for the economic well-being and personal survival of its leaders (Amineh and Van Driel, 2018: 70) and is based on ‘‘a carefully maintained balance of personalities, interest groups, and regional clans’’ (Stronski, 2016).

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21 The Uzbekistani state created its NOC – Uzbekneftegaz – in 1992, which later transformed to Uzbekneftegaz Corporation in 1993 so as to manage the oil and gas sector implementing the state’s strategy for autarky which had been achieved in four years since the independence (Bayulgen, 2012: 85-86). The ‘Center for State Assets Management’ a governmental entity holds 99.9 percent of the company shares (Uzbekneftegaz, 2017). New legislative framework which was issued in 2001 allowed the participation of foreign companies into the energy sector of the country (Bayulgen, 2012, 86).

In 2012, ‘‘Strategic Partnership’’ pact was signed between Beijing and Tashkent (Koparkar, 2017). Many loans have been signed by high-profile Chinese and Uzbek officials. Contracts have been signed between CNPC and Uzbekneftegaz – Uzbekistan’s SOE – related to many oil fields in Uzbekistan, to the amount of US$ 600 million (Madiyev, 2017: 9). Sinopec also signed an agreement with Uzbekneftegaz which concluded to a joint venture for oil exploration and development of oilfields of Uzbekistan that was worth US$ 100 million (ibid: 10). Another important factor in the bilateral relationship is that China is the biggest investor since 2012 and became the biggest trading partner of Uzbekistan in 2018 (Xinhua, 2018).

The most prominent project is the pipeline that connects Turkmenistan-Uzbekistan-Kazakhstan-China or the ‘Central Asia-China gas pipeline’. The agreement was signed in 2003 with 25 bcm capacity per annum (Fazilov and Chen, 2013: 42); its second stage was completed in 2011, thereafter Uzbekistan started to export 10 bcm of gas annually. It must be mentioned that the project is a common consortium between CNPC and Uzbekneftgas. In 2012, the construction of Line C began with the capacity 25 bcm delivery. Uzbekistan has China as a dual utility, first for its rich oil resources which can be used as potential diversification source and secondly, it is a transit country which facilitates the transfer of natural gas from Turkmenistan (ÖĞÜTCÜ, 2017).

Assessment of current review

All in all, I postulate that the aforementioned theoretical framework, as well as the concepts, can be perfectly applied in the case of China and Uzbekistan. There are several reasons for this choice. First of all, critical geopolitics provides an adequate explanatory framework that includes the state as an actor in the global economy and international relations, contrary to

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22 scholars who have been asserting that the role of the state had decreased in a globalized world (see Yeung, 1998). On the contrary, the ‘state-market-military-complex’ allows scholars to take into consideration the state and its vital function for the capitalist economy (Yeung, 1998; Weiss, 1998; Graaff, 2017) in parallel with sub-state actors or market forces i.e. in our case, the Chinese National Oil Companies.

Regarding the concepts of Geo-political Economy, the sequential industrialization will enable us to examine in-detail how state-led urban-industrial development led to resource scarcity and how the conditions of lateral pressure obliged China’s state-class to project power by the cross-border activities using diplomatic, economic and security tools in the post-Cold War Central Asia with special focus on Uzbekistan. Finally, power projection with its territorial logic of power and the capitalistic logic of power will provide the research with a clear-cut understanding of China’s efforts to facilitate CNPC’s involvement in the energy sector of Uzbekistan.

1.5. Delineation of Research

This research will examine the energy relations of China and Uzbekistan between 2006 and 2018 in the context of Central Asia geographical framework.

1.6. Theoretical Framework

Reality is a complex phenomenon, thus its understanding cannot derive from strict dichotomies. Contrariwise the inherent ambiguity must be compartmentalized for the sake of the analysis, understanding and action. I postulate that the most suitable theory for this ambitious undertaking is the Geo-political Economy. But, on the onset, I will look upon previous theories examining the positive facets and limitations emerged in the course of time inside academe, then I will introduce Geo-political Economy and finally, followed by the assessment of its importance for my research.

International Relations and International Political Economy Theories

To begin with, structural realism is merely taken as the unit of the analysis state and most importantly, it is assumed that all states are alike as black boxes operating under anarchy, consequently it is expected that they always act in similar and predictable ways (Mearsheimer,

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23 2013). The weakness of this theory has been vividly and convincingly illustrated by the unexpected collapse of the Soviet Union. On the other hand, the so-called domestic schools, namely Liberalism and Marxism, respectively take the business class and workers class as their unit of analysis. Both postulate that the course towards development is inherent. Each of these three theories is considered to be one-sided in the virtue of taking account only one actor and neglecting or downgrading the others. (Houweling and Amineh, 2003: 321).

The turning point has occurred by Cox’s recognition that a stark distinction between state and civil society shall be rejected in favor of a more inclusive perspective. (Cox, 1981: 127). That being said, I think that the most suitable and applicable theory to start with is the critical geopolitics. The theoretical roots of this theory can be traced in the critical theory of Frankfurt School in which writers such as Horkheimer, Adorno, Habermas, Foucault, Derrida as well as Gramsci (Gartman, 2012; Kelly, 2006, 28) aimed at encouraging ‘‘an equal chance of self-development’’ given the existing material capabilities (Wellmer, 2014, 706). Emancipatory efforts towards social transformation could be seen as the quintessence of this theory (Kelly, 2006, 28).

In the classical phase of geopolitics, it was assumed that geography is a reality and the power structures are thought to be granted. They tried to apply the geographical observations upon the foreign policy analysis and practice. Thus, under this declarative analysis, states have to follow some of the ‘‘geo-imperatives’’ to operate in an antagonistic arena. The world was conceived as objectified – the reality is out there – hence, it was easy for a rational state to analyze, grasp, and interpret it and to act accordingly. Main proponents of this strand were Mackinder, Haushofer, and Spykman. (Ó Tuathail et al. 1998; Tuathail, 1999, 107). The same underlining logic applied to Cold War geopolitics; geopolitics culminated in being synonymous with national security (Kelly, 2006, 27).

It was only in the 1970s, when critical geopolitics came to the forefront, as an attempt to contest and to expose the flaws of classical and Cold War geopolitics. Critical theory is thought to be the opposite of ‘‘problem-solving theories’’ since it rejects classical geopolitics’ positivist methodology and its attitude to legitimize existing social and political structures (Cox, 1981). On the contrary, it adopts a post-structural stance, assuming that objective reality cannot exist and political and social structures derive from power relations as well knowledge considered to be embedded into a society (Devetak, 2005, 143). Also, it is important to note that critical

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24 geopolitics lent from critical theory the Foucaultian concept of discourse, which is now under the label of critical geopolitics is known as ‘‘geopolitical discourse’’ (Agnew and Corbridge, 1995, chapter 3).

Geo-political Economy

Critical geopolitics, due to the collapse of the Soviet Union and mainly the dynamics of the global economy, incorporated International Political Economy (Cox and Schechter, 2002, Tuathail, 2000; Dodds, 1998) as well as spatial variables under the scope of the study (Yeung, 1998). This synthesis resulted in Geo-Political Economy. Also, this later strand clearly recognizes the obvious significance of energy for the sustainable survival of an industrialized society (Strange, 1988:186). Unlike the ‘grand’ theories of IR and classical geopolitics, this approach includes states as well as non- or sub-state actors whose influence has been augmented through globalization. Both recognize and facilitate the necessity of capital to expand outward in order to transcend overproduction and devaluation. Following that logic, a web of interdependence and geopolitical order is constructed. Consequently, Geo-political Economy tries to grasp these procedures and interactions which are in a situation of constant flux. It is, therefore, a theory of action.

The unit of analysis under this theory is the ‘state-society-military-complex’ which is an institutionalized relation reflecting the existing division of power into a given society (Houweling and Amineh, 2003: 322). It is worth mentioning that Amineh and Guang posit that two ideal types of that concept can be discerned; the ‘‘liberal state-society-complex’’ which is a self-regulating social system allowing private actors – capitalist class – to operate freely and in relative autonomy from the state for the exploitation of human and natural resources. The other social system is the authoritarian or centralized, contender ‘‘state-society-complex’’ in which a sole state-class is exercising centralized power by imposing the regulation context and dictating entirely development from above, in parallel, the civil society is undeveloped (Amineh and Guang, 2017: 12). China matches to the latter ideal type.

Below the concepts that are important for the Geo-political Economy will be examined . A crucial concept for the research is that of sequential industrialization or – passive revolution – which is defined as ‘‘a series of interrelated and comprehensive social processes of change and upheavals in state, economy, and in the global system’’ (Amineh and Guang, 2017, 16). Hence,

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25 it is obvious that changes in social relations at the domestic level have a decisive impact on international or world order level (Cox, 1983: 169). Every society aiming at the implementation of industrialization struggles to catch-up with the advanced economies, because this societal reorganization is firstly perceived as the precondition for closing the ‘‘productivity-power gap’’ and secondly, as the prerequisite of the maintenance of its independence. From the 1970s Chinese state-class from implemented ‘‘opening up’’ and market reforms, having in mind the above twofold objective, which transformed Chinese society from an agrarian to an industrializing one (Roberts, 2011, chapter 8). As industrialization was increasing power through the accumulation of wealth, at the same time, it was creating what it is called ‘lateral pressure’. According to that concept, governments see themselves confronted with population growth, rising incomes, technological change, domestic resource-scarcity, and the social pressure of unfulfilled demands (Amineh and Guang, 2018: 23). At this point, this thesis is concerned about resource scarcity. The extensive usage of fuel fossils for industrialization and their non-renewable nature has as result their treatment as strategic commodity (Amineh and Yang, 2017: 17). Their strategic significance and potential disruption of supply chain trigger fierce geo-political and geo-economic competition for their reach and acquisition by major players at the global level. Resource scarcity is comprised from three types of scarcities; supply-induced, demand-induced and structural scarcity. The first refers to the reserves available that can be recovered by the technology of extraction and the market prices of the refined product. The second is calculated by the pace of population growth, the rising per capital income, and the price substitutes. Supply and demand-induced scarcities combined form the market prices. Finally, structural scarcity can be induced by other actors from such as industrialized states or POCs/NOCs, who could cut-off the supply chain of energy to the final recipient. (ibid: 15-16). The options energy-dependent countries have are; either to reduce its energy dependency or to get access outward. To fulfill the domestic growing demands and deficiencies, countries try to get access to foreign resources and markets. The cross-border activity which connects the domestic ‘state-market-military complex’ with the rest of the world is called “power projection”. (Houweling and Amineh, 2003: 325). The ‘power projection’ refers to two interwoven logics namely that of territorial logic of power political) and the capitalistic logic of power (geo-economic); both constitute the core of Geo-Political Economy. Simply put, Geo-political Economy is about the examination of these two logics which will be elaborated below.

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26 The territorial logic of power is political – i.e. politicians exercise it – at domestic and inter-state levels as well as having geographical reach, furthermore it aims at controlling the population through state power and mechanisms and also aims at maintaining international credibility. The capitalistic logic of power, exercised by capitalists, refers to creation, accumulation, and flows of capital across the world in order to deal with overproduction and consequently, devaluation of capital in a territory-bounded basis. Political elite, on the one hand, has a strong interest in maintaining socio-economic stability and revenues creation via taxation of business as well international credibility in terms of the determination of defense of state interests; both of them presuppose long-term policy planning. On the other hand, capitalists are driven by profit-seeking with a short-term horizon, although they need state regulation and protection. (Amineh and Guang, 2017, 28-31; Mercille, 2008; 576, 577-578). All things considered, both social actors operate in a dialectical – interdependent and simultaneously divergent – way.

Assessment of the theory and concepts

All in all, I postulate that the aforementioned theoretical framework, as well as the concepts, can perfectly be applied in the case of China and Uzbekistan. Several reasons for this choice exist. First of all, critical geopolitics provides an adequate explanatory framework that includes the state as an actor in the global economy and international relations, contrary to scholars who have been asserting that the role of state had decreased in a globalized world (see Yeung, 1998). On the contrary, the ‘state-market-military-complex’ allows scholars to take into consideration the state and its vital function for the capitalist economy (Yeung, 1998; Weiss, 1998; Graaff, 2017) in parallel with sub-state actors or market forces i.e. in our case, the Chinese National Oil Companies.

Regarding the concepts of Geo-political Economy, the sequential industrialization will enable us to examine in-detail how state-led urban-industrial development led to resource scarcity and how the conditions of lateral pressure obliged China’s state-class to project power by the cross-border activities using diplomatic, economic and security tools in the post-Cold War Central Asia with special focus on Uzbekistan. Finally, power projection with its territorial logic of power and the capitalistic logic of power will provide the research with a clear-cut

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27 understanding of China’s efforts to facilitate CNPC’s involvement in the energy sector of Uzbekistan.

1.7. Hypotheses

In accordance with the aforementioned theoretical and conceptual framework everything pointing to the energy supply security thus, two hypotheses emerge:

Η1. Strong bilateral relations between China and Uzbekistan facilitate CNPC’s involvement in Uzbekistan’s energy sector and ergo enhanced China’s energy supply security.

H2. By using bilateral and multilateral relations China facilitates its involvement in Uzbekistan and thus has acquired a dominant position in relation to other competitor major powers.

1.8. Operationalization

Within this thesis, energy supply security is defined as ‘‘the reliable and available energy in various forms, in sufficient quantities and at affordable prices at all times’’ (Amineh and Yang, 2018, 14). Reliability means that the threats to disrupt the energy supply are marginal; availability means that energy can be accessible whether its fossil fuels or renewable sources of energy; sufficiency means that these different forms of energy can cover the demand in a given time period and lastly, affordability means energy prices that can preserve and bolster economic growth. Last but not least, there is a distinction between short-term and long-term, the former refers to abrupt disruption in supply and demand and the latter refers to reliance on fossil fuels for development in the virtue of their finite nature (Cao and Bluth, 2013: 381).

For the purposes of this thesis cross-border activities are deemed as CNPC’s involvement in energy sector of Uzbekistan in the form of merges and acquisitions with the aim of financing and investments as well as bilateral relations between the Chinese and Uzbek ruling elites and the establishment of the multilateral institution of SCO. The Chinese state as an authoritarian system controls CNPC and this can be considered as a tool for the ruling elite to project power outward. Regarding the involvement of CNPC in Uzbekistan, this research will look at the aforementioned merges and acquisitions and loans for oil or loans for gas financed by state banks or state-owned and financial institutions. Also, diplomatic means that in the form of agreements, declarations and visits by state-officials in bilateral and multilateral level will be examined.

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28 Furthermore, a very important aspect of power projection is that of security ties between the parties. In this case, the efforts of the Chinese ruling-elite in bilateral and multilateral level are intertwined since one of most prominent goals of SCO is the promotion and enhancement of security. It is not accidental that the headquarters of the anti-terrorist agency of SCO are located in Uzbekistan.

All in all, the close examination of the economic, diplomatic and security tools made by the Chinese ruling-elite in the form of bilateral cooperation and multilateral institutions towards the Uzbekistan, the research will provide a clear understanding regarding the China’s efforts to secure its energy supply. The research finally, will try to grasp the challenges that these Chinese efforts face by the intersection of other industrialized countries’ involvement as they attempt to secure their energy supply.

1.9 Data

This thesis will use both primary and secondary data. To analyze the results of domestic overhaul in the Chinese economy and society, primary indicator from IMF, World Bank will be used to analyse the increased wealth in terms of GDP and GDP per capita. Regarding the energy scarcity, data for energy production, consumption, imports and per capita energy consumption will be retrieved from International Energy Agency, Energy Information Administration and British Petroleum. For the analysis of the Chinese state-class and its relation with NOCs (in particular with the CNPC), official documents such as the Constitution of PRC, the official webpage of the State-owned Assets Supervision and Administration Commission (SASAC) and the annual reports of CNPC will be used. Secondary data will be gained from, among others, the works of Xu (2012, The Political Economy of State-owned Enterprises in China and India,

Palgrave Macmillan, Meidan Michal, (2016b), McGregor James, (2012), Ancient Wisdom, No Followers, and Victor et al. 2012, Oil and Governance, Cambridge University Press.

Furthermore, sources for the analysis of China’s energy policy will be: The Oxford Institute for Energy Studies. Also, peer-reviewed journals will be used, but not restricted to Energy Policy, Energy and Environment and Journal of Chinese Political Science. To examine SCO primary data will be found in the official webpage of the organization with the most important to be the Charter of SCO. Additional data from the works of Song (2016) and Laruelle and Peyrouse (2012) will be provided. Regarding BRI, the document Vision and Actions on Jointly Building

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Silk Road Economic Belt and 21st-Century Maritime Silk Road, the Silk Road Fund, books and

peer-reviewed articles will be used.

To analyze the political-economy of Uzbekistan the Constitution, governmental websites, and several databases – such as the IEA, World Bank and the Observatory for Economic Complexity will be combined with books and peer-reviewed articles from scholarly works, data for the mechanisms of control used in the energy sector will be provided by the official website of Uzbekneftegaz and World Bank’s report: Uzbekistan Energy/Power Sector Issues Note. China-Uzbekistan diplomacy will predominantly be examined by drawing on official documents, such as reports of bilateral visits and policy documents. To analyze bilateral trade and CNPCs acquisitions, joint ventures and operations and state trade and investments in Uzbekistan, several databases, including UN Comtrade, WTO, China Aid Data, OEC and the World Bank, as well as primary reports made by CNPC and Uzbekneftegaz will provide the basis for examination. Finally, for security relations, official reporting through governmental websites and SCO webpage, as well as international databases such as SIPRI, The Central Asia-Caucasus Analyst, and scholarly articles will provide the basis.

Finally, a qualitative case study will be used because it permits a strong focus on the unit of analysis for in-depth analysis and inferences. The case study gives the opportunity to the researcher to acquire a holistic view of the research problem by giving adequate explanations.

1.10 The organization of the Thesis

This thesis is composed of 6 chapters, apart from the introduction; each of them will answer sub-question(s). Firstly, chapter two examines how China’ s growth affected its energy supply security, also what the relation of the state-market complex in China is, and which is the relation between state-class and NOCs in relation to energy policy. Chapter three examines the significance of Central Asia for China and what policy tools it has deployed in order to achieve its goals. Chapter four examines the diplomatic, economic and security tools of China's state-class and CNPC implemented in Uzbekistan between 2006 and 2018. Chapter five examines how the US and EU involved in Central Asia and what are the implications for China’s involvement in the region and Uzbekistan in particular. Finally, Chapter 6 presents the conclusions of this research.

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Chapter 2 State, Development, Energy Situation and Chinese National Oil Companies

2.1 Introduction

This chapter will try to provide a full-fledged answer to the question: how has China’s growth

affected its energy security?, thus firstly, it will analyse the state (society)-market relations in

China and in particular the relation between state-class and the economy to grasp the power constellation, secondly, as the mode of economic development was a state-led industrialization, at this point of thesis it will attempt to give an overall picture of this transformation – meaning the domestic ‘reconfiguration’ of productive forces from the primary to the secondary sector – mainly by looking at economic indicators of annual growth of GDP, per capita GDP, GDP by sector and finally of specific sectors of economy (industry, and transportation).

This radical change had resulted as an augmented demand for energy that forced the Chinese authorities to deal with this ever-growing problem in order to make certain that continuation of development will not be impeded by increased energy consumption. Since the domestic reserves declined and production couldn’t meet the demand, China started importing oil in 1993. Energy-imports rendered Beijing making it prone to challenges in regards to energy supply security and forced Chinese officials to formulate an energy policy (reduction of energy intensity, renewables, strategic reserves, and diversification of imports. Finally, this chapter tries to answer the second question: what is the relation between the Chinese state-class and its

National Oil Companies – especially CNPC – in relation to energy policy?

The purpose of this chapter is to analyse in-detail the theoretical and conceptual framework of this research by examining the indicators that constitute the concepts. Finally, this chapter will try to examine how the state-led industrialization led to resource scarcity and what policy responses selected and why.

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2.2 Relations between state and market in China

After the victorious civil war, China’s Communist Party established the People’s Republic of China in October 1949, commencing the communist period of the long-lasting Chinese history. The starting point of this research is the centralized Chinese ‘state-(society)-market complex’, because as Amineh and Yang have argued that in modern industrialized societies the state-made institutions determine the promotion or restriction of economic growth and connect market at domestic and external level constructing order by their rule-setting capacity (2014: 498). It must be noted that frictions emerge between rival factions and interests inside this strictly centralized complex (ibid: 499; Lawrence, 2013, 1). Thus, Amineh and Yang in order to understand the gravity center and who is wielding the power in China have created the concept of state-class. They assume that state-class or political class exercise power in executive, legislative and judicial branches of government and it is able to overcome civil society demands minimizing the ability and the will to establish free market separate from the state (Amineh and Yang, 2014: 499).

The Constitution of PRC explicitly defines the relations between the state and the market as follows: ‘‘The PRC is a socialist state under the people’s democratic Dictatorship […] apply the principle of democratic centralism […] The basis of the socialist economic system of the People's Republic of China is socialist public ownership of the means of production […] The State-owned economy, that is, the socialist economy under ownership by the whole people, is the leading force in the national economy. The State ensures the consolidation and growth of the State-owned economy […] Individual, private and other non-public economies that exist within the limits prescribed by law are major components of the socialist market economy’’1

. Thus, according to the provisions of the Constitution it is crystal-clear that political power is centered on the CCP –actually it has the monopoly of power – while it possesses decisive power as decision-maker and it has the authority to intervene into every sphere of political, economic and social issues by the centralized hierarchy.(Heilmann, 2017: 47-48). It can actually be argued that, the power structure in China articulated in what it is called the Party-State as the Party dominates state and society (Lawrence and Martin, 2013: 3).The top State officials hold major Party offices at the same time, to assure Party’s control in every aspect of administration (ibid: 4). By 2017, the CCP was totaled at roughly 88 million members (Heilmann, 2017: 62).

1

Source: Constitution of the People’s Republic of China, combination of article 1, 3, 6, 7 and 11 chapter I, amendments on which were approved in 2004

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The Chinese State class

National People’s Congress and its Standing Committee

After the death of Mao Zedong and the initiation of the reforms, the 1982 Constitution, chapter III, article 57, designated the National People’s Congress (3000 members) and its Standing Committee (150 members) as ‘the highest organ of the state’ and ‘exercise the legislative power’ (article 58). When the NPC is not in session2 the Standing Committee (art. 65-78) which convenes every two months has the broad mandate to regulate and influence almost every aspect of public life in China and among others, has the authority to amend the Constitution, to elect (as well as to remove) the President, Vice-President and high ranking officials of the military and of judicial system(article 62 and 63). The Chairman currently is Li Zhanshu; he concurrently holds the third ranking position in the Politburo Standing Committee.

Politburo and Politburo Standing Committee

Table. 2.1: The 19th PSC (elected October 2017)

No. Name Party position (s) State position (s) Portfolio 1st Xi

Jinping

General Secretary of the Communist Party of China Chairman of the Central Military Commission of CPC

President of the People's Republic of China

Chairman of the Central Military Commission of PRC

The Communist Party and foreign and military affairs

2nd Li Keqiang

Party Secretary of the State

Council of the People's Republic

of China

Premier of the People's Republic of China Government administration and the economy 3rd Li Zhanshu

Party Secretary of the Standing Committee of the National People's Congress

Chairman of the Standing

Committee of the National People's Congress

Legislative affairs

4th Wang Yang

Party Secretary of the Chinese People's Political Consultative Conference

Chairman of the Chinese People's Political Consultative Conference

Relations with non-communists

5th Wang Huning

Top-ranked Secretary of the Central Secretariat of the CPC

Party affairs

6th Zhao Leji

Secretary of the Central Commission for Discipline Inspection

Party discipline and fighting corruption

7th Han Zheng

Deputy Party Secretary of the State Council of the People's Republic of China

First Vice Premier of the People's Republic of China

Assisting the Premier; the economy

Source: Cheng 2017 and Lawrence, 2013; Compiled by the author

2

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33 Despite the fact that NPC, nominally, exercises power in China, the de facto governing body is the PBSC (7 members). To put it otherwise, the PBSC is the supreme decision-making body and it is considered as the leading body of CCP. The head of Committee is Xi Jinping who is CCP general secretary, president of PRC and chairman of the Central Military Commission (CMC) (Heilmann, 2017: 66-67; Lawrence and Martin, 2013: 2). The second in hierarchy is the Premier of State Council Li Keqiang. The State Council is the Chinese central government and is characterized as the ‘‘executive body’’ of NPC and as the ‘‘highest organ of state administration (article 85; peopledaily.com.cn) and consists of 35 members, of which 25 are ministers and chairs of major agencies3 (Gov.cn). Han Zheng, the 7th ranking official of PBSCs is Li Keqiang’s first vice-premier. Li Keqiang and Han Zheng are considered to be responsible the economy (Lawrence, 2013: 14). The supervision of the State-Owned Asset Supervision and Administration Council (SASAC) is included under the broad mandate of the State Council. Finally, moving down towards the lower echelons of the power structure stands the Politburo which iscomprised of 25 members (including the 7 of the PBSC), the Central Committee of the CCP (currently consists of 205 members including leaders of provisional government, military, State-Owned Enterprises (SOEs)) and the National Party Congress.

The previous analysis showed that CCP and its cadres infiltrate every level of the political structure in China due to the monopoly of power and thus the lack of division between the executive, legislative and juridicial branches of governance as long as the state class core-elite of Politburo reassures the unitary nature of the Chinese state and its domination upon the state and consequently market (Heilmann, 2017: 61). An additional indicator of the close relation between the party-state and the market is the growing number of entrepreneurs that have joined the CPC (Marquis and Qiao, 2018).

2.3 Reform and ‘Opening up’ policies

Having examined the political power structure in China, it is now imperative to concentrate our attention to the worldwide well-known economic transformation of China over the last 4 decades.

3

The State Council convenes only once every six months and in between it is guided by a Politburo that meets weekly

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34 By 1978, centrally planned economy has wrecked the economy and society in China. Moreover, policy-makers were well aware that China was militarily, economically and technologically behind other major power as well regional countries like South Korea and Taiwan (Garnaut, 2018, 31). This backwardness had made China weak and vulnerable in this dynamic changing strategic environment. After power struggle came to an end, reformists, headed by Deng Xiaoping, initiated reform and opening up policies to connect China with the world economy (Roberts, 2011, 290-291) and to catch-up with the advanced nations. Hongyi argues that Party state has the ability to be flexible and adaptive in many different situations thus, China’s pragmatic authoritarianism aimed at stimulating economic growth in order to maintain primarily CCP’s legitimacy and leadership and social stability (2016: 57, 60). It can thus be inferred that economic development is state-led.

This is exemplary in the chosen mode of development which was characterised by gradualism or as Amineh and Yang have coined the term sequential capitalist industrialization. The concept refers to ‘a series of interrelated and comprehensive social processes of change and upheavals in state, economy and in the global system’ (2014: 503). In 1978, the third plenum of 11th Central Committee of the Communist Party of China decided to embark on reform and opening up policies. It is obvious that economic development was state-led as the state took the lead in the initiation of the transition to industrialization. The first experimental sector was the rural economy where market mechanism for pricing of the products and incentives of profit-seeking raised productivity and overall output (Xiaolu, 2018: 170). After the initial success, reforms have expanded in township and village enterprises (TVEs) and in State-Owned Enterprises by introducing market mechanisms, encouraging production and managerial incentives and they started to engage in partial market antagonism. Two other reforms were the establishment of Special Economic Zones (SEZs) and fiscal reforms (ibid: 171). Industry had gained the lion’s share in economic growth; the industrial output between 1981 and 1986 doubled. The SEZ helped China to acquire the sought-after foreign exchange, new technology and managerial practices. (Roberts, 2011: 293). All in all, China’s stunning economic development was based on exports, foreign investment and joint ventures all related to industrial sector (Xiaolu, 2018)

Despite this, the government had not abandoned the vital role of central planning, it had recognised the necessity of greater involvement of market forces and thus imposed gradual

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35 policies towards industry and prices liberalisation and acceleration of opening up reforms (Bramall, 2009: 330). Consequently, the Chinese state-class recognizes the simple fact that the state-driven economic development is closely intertwined with globalisation.

The results of industrialization during the past four decades were at a stunning increase of an annual growth of roughly 9.6 percent (Xiaolu, 2018: 167), although in last couple of years the pace has slowed down; in 2018 it achieved an annual real GDP growth of 6.6 percent (IMF, 2019).

Figure 2.2: China’s GDP growth

Source: World Bank, 2019

In the starting year of reforms China’s GDP (in current US$) was 149.541 billion dollars and by 2017 it had skyrocketed to 12.238 trillion. This increase also had an impact on annual GDP per capita which during the time-span between 1978-2017 rose from 156 (current US$) to 8.826 dollars (World Bank, 2018).

Also, the portion of population with less than 2$ a day (PPP) declined from 97.8 percent in 1981 to 27.2 in 2009; a 70 percent decline in just 28 years. This achievement has no precedent in modern history (Hongyi, 2016: 22-23). Currently, the Chinese economy in terms of GDP (PPP) is ranked as the biggest of the world.

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36 It is claimed that energy consumption had been strictly intertwined with industrialization of China and rising living standards of its citizens (Dong et al. 2017: 214). This part will provide a brief account of key characteristics of the energy sector of China, with a special focus on drivers of rising energy demand, the supply and demand sides and on government’s policies to constrain energy demand and to secure energy supply.

Since its establishment the People’s Republic of China has encountered pressuring problems of economic reconstruction and built-up of the industrial infrastructure. Towards these goals it was imperative to raise the energy production again which had fallen by half from its pre-war levels. Thus the Ministry of Fuel and Industry was set up and the 1st Five Year Plan (FYP) was commenced through which the government aimed at focusing on energy production and heavy industry. Industrial output grew faster than anticipated/expected and consequently the government had to meet the demand for energy, imposing greater control in the energy sector and trying to impose energy conservation measures (Zhang, 2017: 635-636). The government’s control upon energy sector became much stricter during the 2nd FYP and its primary goal was for the steel production to become the primary sector which would lead to industrialization and modernization. It was then, 1958-1961, where vast coal and oil reserves were discovered (ibid: 636). By and large, the period between 1949 and 1978 was characterized as the pursuit of self-sufficiency, especially in oil sector, after the Sino-Soviet split in 1959 (Meidan, 2016, 4).

Economic reforms and the ‘opening up’ policies of 1978 had considerable impact on every aspect of energy policy of China. As mentioned above China’s economic growth ranged from, on average, roughly between 9.6% and 11% and was led by the industrial sector (Xiaolu, 2018: 167; Andrews-Speed, 2012: 12). The more economy grew the greater the need for energy was. As a result, energy reforms between 1978 and 2000 had the maintenance of government’s prominent role in economic planning and in the energy market; energy production was allowed to be determined by market demand and permitted non-state actors to get involved in the energy market. The outcome of liberalisation, marketization and competition was a reduced governmental control over the energy sector (Zhang, 2017: 637). This reshuffle meant that the government’s authority over energy sector was decentralized between several departments and central government and local authorities (Yao and Chang, 2015: 135).

During the same period China introduced several measures and rules to reduce its energy intensity and improve its energy conservation. On the one hand, consecutive FYPs (the 7th, 8th