Chief China Strategist
China has set goals of gradually slowing the growth of carbon emissions toward 2030, when emissions are expected to reach their peak and then start falling, reaching carbon neutrality by 2060 . As early as 2007, China launched its first National Climate Change Programme which raised questions about the country’s long-adopted development model since the 1980s of exporting energy-intensive, pollution-intensive, and resource-intensive products. In a subsequent 2008 policy paper, the Chinese policymakers spelled out plans to limit the growth of high energy-intensive and emission-intensive export industries. China started rolling out measures in 2007 to close down some of the country’s thermal electrical generating, iron-smelting, and steelmaking capacities, as well as thousands of small coal mines, papermaking and chemical plants, and printing and dyeing mills. At the same time, it promoted renewable energy, aiming to bring it up to 10 percent of national primary energy consumption . The proportion of coal in China’s primary energy consumption fell from 72.4 percent in 2005 to 55 percent in 2021; the proportion of renewables reached 15 percent (of which 8 percent was hydropower, and 7 percent mainly solar and wind) . The proportion of oil and natural gas accounted for 19 percent and 9 percent of total primary oil consumption respectively in 2021. (Figure 1)
Source: Saxo Markets & BP Statistical Review of World Energy 2022
The output of oil and natural gas in China peaked in 2015. Finding economically viable domestic new oil and natural gas resources has been difficult, and China’s three oil and gas giants have seen their capital expenditures in oil and gas exploration and development declining since 2014 (Figure 2).
Source: Source: Collins, G (2022). China’s Energy Import Dependency: Potential impacts on sourcing practices, infrastructure decisions, and military posture.
While China has abundant coal reserves and is close to being self-sufficient in coal, this is not the case for oil and natural gas. As the economy grows, China has become increasingly reliant on importing oil and natural gas (Figure 3). China is importing over 70 percent of its oil consumption and more than 40 percent of its natural gas . Combining these oil and gas imports and presenting them as crude oil equivalent, it will take 2,400 super tankers to ship them annually. Most of the oil and natural gas imports are in fact seaborne (oil tankers or LNG vessels), and not through overland pipelines. Without a formidable blue ocean navy, China’s policymakers are wary about the national security implications of having been so dependent on importing seaborne energy cargos. A question that often comes up is what if adversarial sea powers deny China access to the Strait of Malacca?
Source: Collins, G (2022). China’s Energy Import Dependency: Potential impacts on sourcing practices, infrastructure decisions, and military posture.
National security aside, oil and natural gas are priced and settled in US dollars. The rise in the prices of oil and natural gas, together with increases in the prices of other commodities, have contributed to a sharp deterioration in China’s commodity terms of trade. IMF economists estimated this to have subtracted 4.7 percentage points from China’s GDP between April 2020 and April 2022 (Figure 4).
Source: IMF. https://data.imf.org/?sk=2CDDCCB8-0B59-43E9-B6A0-59210D5605D2
The rise in oil and natural gas prices has further increased China’s determination to accelerate its green transformation, not only resorting to the use of a larger proportion of renewables and nuclear power, but also the development of clean coal technology. Policymakers in China emphasise the reliance on coal as the primary source of energy; the focus of the green transformation is to develop and apply more advanced technology to increase efficiency, lower emissions, and capture carbon when burning coal to generate power . China’s President Xi said carbon reduction in China “must be based on the basic national conditions of rich coal, poor oil and little gas” and that the “coal-dominated energy structure is difficult to fundamentally change in the short term”.
China’s solar plants have on average 1,450 to 1,750 hours a year in which they have sufficient sunlight to generate power. In other words, 80–84 percent of the time solar plants do not have sufficient sunlight to generate power. Windmills fare only slightly better with about 2,000 hours a year (i.e., about 23 percent of the time) on average where the wind is strong enough for power generation; for the other 77 percent of the time windmills are idle . The intermittent nature of solar and wind power requires energy storage which is very expensive. The energy density of a battery is only 260 kWh/m3—much lower than the 8600 kWh/m3 of gasoline. Using batteries to store energy from solar and wind plants will require a huge number of batteries, and will drive the price of lithium, cobalt, and nickel to prohibitive levels . Pumped hydro storage is more economical but it requires lots of space and water if applied on large scale. Both water and space are scarce in China.
Nuclear is a reliable source of baseload electricity, but it has its disadvantages. These include the large amount of initial investment, lengthy years of construction, reliance on imports (on average 15 percent of key components and technology are imported), and the need for a lot of water for cooling. As water is scarce in China, most of China’s nuclear plants are located in coastal areas in which cooling can be done with seawater. In inland China, nuclear power is not feasible.
The recent drought in Sichuan showed very well the limitations of hydropower in China. Per capita available water supply in the North China Plain is about 250 cubic meters, which is nearly 50 percent below the UN definition of acute water scarcity . While hydropower is contributing 8 percent to China’s primary energy, growing it further will be difficult due to the lack of water resources in China.
Replacing fossil fuel vehicles with electric vehicles contributes to improving the air quality in cities, but it does not solve the energy problem of generating the electricity that powers the vehicles. In addition, an electric vehicle needs 53.2 kg copper, 8.9 kg lithium, 39.9 kg nickel, 24.5 kg magnesium, and 13.3 kg graphite. If shifting to hydrogen vehicles, it is important to note that hydrogen is not energy itself but a medium of carrying energy that still needs to be generated in the first place.
While China targets bringing the proportion of non-fossil energy, (hydro, solar, wind and nuclear power) to 25 percent of primary energy consumption by 2035 , coal is here to stay at the centre of China’s mix of energy sources and the backbone of baseload electricity generation for the foreseeable future.
China is determined to pursue green transformation and is pouring both spending and credits into infrastructure related to green transformation. As illustrated in this article, companies that have solid technology and strong market positions in clean coal technology, energy storage, hydropower, nuclear power, battery metals, solar and wind will tend to benefit. An important point to note is that green transformation is not just about renewable energy, i.e., hydro, solar, and wind, as well as electric vehicles. Clean coal, copper and battery metal mining, nuclear power, electric grids and electric equipment makers will also be potential beneficiaries during the green transformation. In addition, oil and natural gas, even during the green transformation, will still do well as China is going to beef up investment in domestic oil and gas exploration and development, while trying to reduce the amount of oil and natural gas that the country needs to import from overseas. Fossil energy, nuclear power, and renewable energy will coexist and prosper together, and the journey of green transformation will be long and gradual.
Quarterly Outlook
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Chief Investment Strategist
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Chief Investment Strategist
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy