There is a lot at risk with the recent political developments to come out of China. Xi Jinping not only secured a third five-year term, in what many Western observers characterize as a power grab, but he is also giving signs that he will flex China’s muscles and force a reunification with Taiwan, while putting more regulatory pressure on Chinese private enterprises. On October 16th Xi Jinping opened the week long 20th Chinese communist party congress, a key event that takes place every five years gathering 2,000 delegates who together represent 100 million members of the Communist Party. The event solidified his leadership and set Xi Jinping up for a third consecutive term as President, with the six Standing Committee members now being all loyalists to him. On October 24th, the same day that Rishi Sunak became the first Asian born UK Prime Minister, and after Xi got a third term as Chinese president, China’s GDP figures were released. Although the figure of 3.9% economic output growth over the same quarter in 2021 was not as bad as some economists feared, the consensus is that zero tolerance Covid policy will remain in place until 2024, which will continue to disrupt production and economic activity. A Reuters poll shows that China's growth is expected to slow to 3.2% in 2022, a figure materially below the official target of 5.5%, the slowest economic growth in the country for the last 50 years. Capital markets priced in all of these developments and foreign investors sold massive positions. The Hong Kong stock market had its worst day since the 2008 financial crisis, with the Hang Seng Index down 7.3%.
Being a heavy emitter of greenhouse gases, with so many coal fired power plants in operation, China’s own efforts to decarbonize their grid and economy are paramount to global targets. When it comes to the development of new green solutions and technology, from electrolysers for green hydrogen, to battery manufacturing, to EV assembly, to solar panel production, China leads by both volume and IP.
From driving the deflationary curve to making solar panels out of solar energy
Often at webinars and events that talk about how solar energy has come down in prices dramatically, presenters like to show a graph that summarizes Swanson's law, the empirical observation made by former SunPower founder Richard Swanson, that the price of solar PM modules drops ca 20% for every doubling of cumulative shipped volume. What is not often mentioned is that China is the reason that we have been able to materially increase the volume of manufactured solar PV panels. The International Energy Association (IEA) recently pointed out that since 2011 China has invested over $50 billion in new solar PV manufacturing capacity, ten times greater than Europe, created 300,000 new jobs and now has a share of the total production chain (from polysilicon to ingots, wafers, cells and modules) that adds to more than 80% of global capacity. It is also often not emphasized that China themselves demand half of all the solar panels they manufacture. Solar energy and its deflationary trends, combined with batteries (also a deflationary technology benefiting from Chinese foresight), are the key solutions enabling the energy transition. We have China to thank for them.
Naysayers often like to point out that most Chinese solar PV is manufactured using electricity from coal fired sources and therefore has a material scope 2 carbon footprint. While that remains true, there have been remarkable improvements. For example, Jinko Solar Holding Company (JKS) is one of the largest producers of solar PV panels, and is based in China. The company announcedthat its second factory (they operate seven plants) in China is now powered 100% by renewable energy, a material milestone in the transition to solar panels made exclusively using solar energy. Jinko had committed to the Climate Group’s RE100, a global initiative of companies that have pledged to use 100% renewable energy. It is important to note that part of the clean energy of the second facility comes from on-site solar PV arrays installed on the plant’s large rooftop.
Offshore wind advances have predominantly been in China
Offshore wind is another extremely relevant energy transition solution where China is also further ahead in accelerating adoption. World Forum Offshore Wind recently released a report that points out that6,759 MW of offshore wind capacity began operation in the first half of 2022, a fourfold increase over the 1,627 MW commissioned in the first six months of 2021. Of all the new offshore wind added this year, 75% is in China. China added 5,100 GW across 25 different offshore wind farms (the total number of offshore farms added in the first half of the year came to 33 discrete projects). The new additions bring the global installed capacity of offshore wind in operation to 54.9 GW, of which 24.8 GW are in China, followed by 13.6 GW in the UK, 7.7 GW in Germany and 3.0 GW in the Netherlands.
Of the top 10 wind turbine manufacturers in the world in 2022, six are Chinese. European Vestas (VWS.CO) and Siemens Gamesa (SGRE.MC) are still the two largest wind turbine names with 9.6 GW and 8.8 GW of annual production capacity, but are now followed by Chinese Xinjiang Goldwind (2208.HK) that has an annual capacity of 8.25 GW. Goldwind has been relentless in bringing down the cost of wind turbines from $700,000 per MW in 2020 to the current $370,000 per MW.
A remarkable leader in Electric Vehicles
It is well known that the largest EV market is that of China, where sales have benefited from a fiscal stimulus promoting EV adoption. Our own iClima forecast back in Autumn 2021 was that 55% of all passenger vehicles to be sold in 2030 would be BEVs. Now BloombergNEF forecasts EVs to represent 60% of all new units sold in 2030. Data recently released showed global BEV sales in August were 66% over August 2021 (exact figure was 622,000 BEVs sold in that month), with 5.7 million EV units sold in the first eight months of the year and 10 million units still expected to be sold in 2022. Sales of EVs in China were up 92% year over year and in August the country accounted for 30% of all global sales.
Three pioneering Chinese EV companies have their stories tied to the remarkable entrepreneurship of their founders. XPeng Inc. (XPEV) was founded in 2014 by Xia Heng and He Tao, two automotive veterans with experience in R&D. The founders wanted a technology company that made electric cars, and XPeng just reported 8,500 vehicles delivered in September and 29,500 units delivered in third quarter, 15% up year over year. Another example of Chinese entrepreneurship is that of William Li whofounded NIO (NIO), also in 2014. William is now referred to as the “Godfather of the Chinese EV industry”. The battery swap EV maker reached sales of 10,900 cars in September and 32,000 in the third quarter, a 29% year over year growth. Lastly, BYD (BYDDF) that was founded by Wang Chuanfu in 1995, as a maker of batteries for mobile phones. The company is known for having Warren Buffett’s Berkshire Hathaway as a shareholder. BYD is the largest EV maker in China and in early September the company celebrated 1 million units (including PHEVs) produced in the year.
The successful story of EVs in China is down to a variety of reasons, but a major factor was clearly the determination, vision and commitment of the now billionaire founders of Xpeng, NIO and BYD. Since August last year President Xi Jinping’s call for “common prosperity” has resulted in attacks on some of China’s richest businesspeople, especially in technology. It is unclear what repercussion there could be from potential closer oversight of the Communist Party in the business activities of these EV companies.
Recent Infrastructure Plan is a sign of commitment to green build up
Last summer, China announced 19 new measures with a huge focus on infrastructure growth. Covid lockdowns and a property downturn triggered by the Evergrande default earlier in the year may be part of the impetus to revive the Chinese economy, with a new deal infrastructure package that will generate economic growth and employment. Having suffered a persistent drought in the worst heat wave in the last 60 years, the Chinese infrastructure plan elevated water infrastructure as a climate change adaptation strategy to deal with “the worsening of both floods and droughts”. Projects that move water around China represent a third of the water budget, while ca. 30,000 water conservation projects are also seen as a way to employ over one million workers.
Bloomberg estimates that ca. $1 trillion of Chinese government funds will be available to support the several infrastructure projects, with the total capex reaching three times that amount when considering bank lending and corporate funding on top of the $1 trillion. North Chinese deserts are to host an unprecedented amount of utility scale solar and wind, with a first phase of 100 GW of both wind and solar being added by 2023 and a second phase with over 450 GW starting as early as late 2022. Ultra-high voltage transmission lines are to be built to connect the new green electricity to demand centres in the more populated Eastern region. High speed rail has already been elevated in China and the country currently has over 40,000 km of high-speed rail that Bloomberg estimates to be more than twice that of all other countries combined. Yet, this plan considers an additional 30,000 km of high-speed rail to be in operation by 2035. The new infrastructure plan in China is evidence of further acceleration of the energy transition in the second largest global economy, but China had already been focusing on the relevant solutions. Another indication of that comes from the inauguration, also in August, of what is now the largest building integrated PV (BIPV) system. A 120 MW multi-roof solar project built across 11 different locations, covering 665,000 m2 of rooftop space and capable of supplying 100% of the industrial park’s electricity needs.
All Eyes on China
To structurally solve our current energy crisis, we will need to see the material acceleration of adoption of utility scale solar and wind energy, the electrification of transportation and heat. Germany is the largest economy in Europe and is determined to move away from the reliance on Russian fossil fuels. President Biden in the US has passed supportive climate legislation with the IRA, and the demand destruction of high fossil fuels will make American consumers – buyers of EVs and solar rooftops – embrace the solutions.
China is the third large economy that will very much dictate our global fate, particularly the success in accelerating adoption of decarbonizing solutions. As we saw, the country has a fundamental position both in the supply side of the key components and technologies, but also in the demand and adoption of lower emission alternatives that decarbonize their own economy. Despite Xi’s autocratic stance, the ten years he has been in power saw China advance its green agenda. Our future ability to decarbonize the planet in line with the Paris Agreement is very much tied to China.
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