The Chinese economy is back.
After a year dominated by COVID lockdowns, China earlier this week released economic statistics for the first quarter of 2023, reporting robust GDP growth of 4.5%. Given that China is the world’s number one greenhouse gas emitter — by far — what does this news mean for the climate?
Overall, China’s two long-time growth engines — exports and investment — seem to be moving in different directions while its long-desired third growth pillar — consumption — might finally be solidifying.
There are definitely climate bright spots in the data, but also a lot of coal. Let’s dig in.
The property sector is adrift in the doldrums — but emissions-producing steel and cement are up anyway.
Construction has been a major piece of China’s growth — and emissions — for decades. But developers have overbuilt — tens of millions of apartments remain vacant — and some are beginning to default. Local governments rely on revenue from developers to pay their own bills, and households have trillions of dollars tied up in speculative bets on real estate. It’s a deeply convoluted political economy mess that I call “China’s carbon triangle” — carbon because the vast amount of steel and cement that go into these buildings cause huge amounts of emissions. Right-sizing the sector could save up to a gigaton a year of CO2 emissions, equivalent to the combined emissions of Canada and Mexico.
The new quarterly data suggests this might be happening, but a big asterisk is needed. Real estate investment dropped almost 6% this quarter, and housing starts fell even faster — “diving 19.2 percent year on year.”
While this might lead one to expect that steel and cement — the key emissions sources of that construction — would be down as well, the data confounds. The reason here is that state fixed asset investments were up significantly (10%). So, despite the private sector remaining cautious in its investments (only up 0.6%), overall investment ticked up, leading to growth in steel and cement production (6% and 4% this quarter, respectively). Infrastructure, even if underutilized, at least provides more benefits to people than ghostly empty towers of apartments.
Exports — notably EVs — boomed.
While they slipped in January and February, in March exports boomed, growing 14.8% year-on-year. It’s possible that this data point is just a blip – an artifact of last year’s Shanghai lockdown as economists expected exports to fall in March as well — but peering into the sectoral makeup of the export data points to some important emerging trends that seem unlikely to dissipate. Most notable in the positive direction are vehicles, specifically electric vehicles. Electronics — hit by U.S. policies — slumped though.
In the first quarter, China’s total vehicle production was down 5% to 6.26 million. By contrast, electric vehicle production grew 22.5% to 1.63 million, over 25% of the total. That’s compared to total U.S. sales in 2022 of only around 800,000 units. Fewer cars with EVs taking an increasingly bigger slice of the pie is key to decarbonizing the transportation sector. The export of inexpensive EVs (like BYD’s Seagull and the ludicrously cheap Changli) makes electrifying autos and transportation possible at a global scale today rather than in 2035.
But consumption was a surprising spark.
It is generally acknowledged by both external observers and Chinese government officials that the country needs to move beyond its export and investment dependence. Household consumption is seen as the necessary growth driver of the future in China, but the transition has been difficult. The recent economic data suggests that perhaps the gears are finally turning in this direction. Retail sales jumped 10.6% in March and 5.8% for the quarter overall. There is again a base year effect given the Shanghai lockdown a year ago, but the high level of activity here is probably enough to keep the government from committing to additional stimulus.
While this is good news for China, it might not be good news for the planet. Contrary to expectations for the world’s biggest trader, most of Chinese emissions actually arise from domestic consumption. Trade-adjusted emissions statistics suggest that around 90% of China’s greenhouse gas emissions come from activities consumed in China.
Solar and wind are still rising, but droughts are slamming hydro. Coal is shifting to being a backstop.
The climate conversation has, for good reason, become dominated by the mantra electrify everything. With clean energy increasingly cheap, we can maintain or even expand energy consumption without emitting greenhouse gases and perhaps achieve abundance.
China has been a key part of this puzzle. Its massive expansion of wind and especially solar PV production has been critical to price declines in these types of renewables. Beyond production, China leads the world in renewable generating capacity, last year installing 87.4 GW of solar and 37.6 GW of wind.
But Beijing’s electricity news isn’t only green. China simultaneously dominated the world in 2022 in new coal power plants. China’s coal fleet is already the world’s largest at over 1,100 GW. That represents more than half of the world’s coal plants, and it’s adding more than the rest of the world combined.
That being said, what matters more than capacity is generation. How much electricity are these plants and facilities actually generating? In recent years, China’s coal plants haven’t been running at full tilt and are shifting to a role of backing-up renewables. In the first quarter, we see that both wind and solar generation continued their rapid growth: 18% and 12% respectively. Total electricity production is up just 2.4%, with thermal power — which is coal-dominated — increasing just 1.7%.
However, the quarterly data masks some interesting patterns in the monthly data. One difficulty with intermittent renewables is, of course, that the sun doesn’t always shine and, in this case the wind doesn’t always blow. And in China, the wind was blowing in January and February much more than it was in March. Wind generation grew in January and February by around 30% but then was flat in March.
More troubling news is in the March data. Last year, China faced droughts so severe that people could walk across the Yangtze. The lack of water meant that the dams which provide so much clean hydropower to the Chinese grid became inoperable, leading to power failures and ramped up coal generation. Unfortunately, we’re already seeing similar dynamics taking place. A major drought in southwest China led to hydropower dropping over 15% in March and more coal was burnt to make up the gap.
All in all it’s a mixed bag: Lots of electric vehicles, lots of renewables, but also lots of cement and lots of coal.
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