China Growth Peaking – 4/7/16

Searching China on this site should give you about a dozen articles illustrating the importance of China’s demand to the energy industry; its meteoric rise in economic strength has been fueled by massive increases in fossil fuel consumption. Now that the country’s economic growth is slowing, its leadership are moving in an interesting direction. Whereas, previously, Chinese officials seemed like the last people who would concern themselves with environmental issues, they now pursue green policies like a national carbon-trading plan set to begin in 2017 or the Paris Climate agreement on fighting climate change. The new five-year plan even includes a cap on annual energy consumption that would have only 5 billion tonnes of coal, or equivalent source, used annually by 2020, up from 4.3 billion now.

Of course, there are a few caveats to this sudden change of heart. Researchers Nicholas Stern and Fergus Green, in the journal Climate Policy, are suggesting that the targets are actually pretty modest given current conditions. After tripling between 2000 and 2013, the country’s coal consumption and its emissions may have already peaked as far back as 2014. Stern and Green say it is unlikely that emissions could rise anywhere near as fast as before. That is even assuming GDP growth in line with official targets of 6.5% a year for ten years, and 5.5% the next five years. Economists are skeptical that such levels could be maintained, to say the least. Given that the government has only been partially successful in propping up growth through a flood of credit and reforms of the resulting “zombie companies” are looking toothless, it is hard to believe that China will keep up its rapid growth. Additionally, the shift away from manufacturing as the primary driver of growth, also outlined in the five-year plan, will result in less fossil fuel demand, as would the planned increase of the share of natural gas in its energy mix from 6% to 10% by the end of the decade. Such factors indicate that the cuts to coal use and emissions are much more conservative than the bloated numbers suggest.

If official figures are any indication, historically unreliable as they may be, China’s emissions intensity is already falling. Coal production fell 2.5% in 2014 and that imports dropped by 10.9% as less carbon intensive fuels like natural gas, wind, and solar made gains. Investments in renewable energy sources like wind and solar by the Chinese government already eclipse those of America and Japan combined as party officials seek increased energy security and decreased air pollution. Still, wind and solar farms often end up taking the backseat to more influential coal interests. But many analysts still think it is likely that China is underselling its emissions-reducing abilities, something that may bring pressure to be more ambitious in 2020, when the new Paris accord carbon-cutting goals are set.

It is looking as though Beijing will stick to its growth targets even as it pushes ahead with some substantial structural reforms. In a bid to guide expectations about the growth slowdown, Prime Minister Li Keqiang, compared his country’s economy to a bullet train in a speech, saying that Beijing must run it at “reasonably high speed” while calling for economic and financial coordination as an solution to market volatility. Economists, however, see serious issues in Beijing’s quest for 6.5% growth over the next five years. Like Beijing’s spending binge in the wake of the 2009 crisis, which created massive overcapacity and debt burdens, reaching politically motivated growth targets is likely to result in excessive stimulus of inefficient state enterprises.

“They have to stick to the target,” said economist Jianguang Shen  before the speech. “Without huge stimulus, I don’t know how to achieve it.”

Non-stimulus policy tools are already hitting the point of diminishing marginal returns. Many of the Chinese governments old fallbacks like market interventions, capital flow controls, and state-owned enterprise direction are already proving to be temporary fixes at best.

Market interventions have probably been the biggest source of embarrassment so far. A prominent official has already been removed from their position overseeing the badly battered Chinese stock market after a botched attempt to set “circuit breaker” shutdown thresholds for trading led to markets closing almost as soon as they opened. And though capital flow controls helped stem the flood of investment money out of the country, the outflows are still a slow bleed on reserves representing how far confidence in the government’s management ability has fallen.

PM Li promised China will gradually address excess industrial capacity in state-owned steel and coal industries while retraining and relocating approximately 1.8 million workers. But industry officials say planned cuts of 10% of overcapacity won’t come close to what is needed in sectors where excess exceeds 30%.  President Xi seems most challenged by the reform of China’s many inefficient, debt-laden and overstaffed state-owned enterprises (SOE). In spite of his vast power, he has not been able to best the vested interests of SOE managers and their political friends or the fear of unrest caused by mass layoffs. This apparent weakness may also come from a reluctance to give up power over the economy by letting privately owned firms rise in prominence.

“I fear that the current top leadership doesn’t realize how important national and international credibility on economic reforms and management is,” said Pieter Bottelier, formerly with the World Bank, in comments before Mr. Li’s presentation.

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