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China’s reopening is not a blossoming of energy markets

After months of shutdowns inspired by the zero covid policy, China has declared it is open for business. Just days after that statement, Shanghai and Beijing stepped up pandemic control measures and re-entered a partial lockdown. Chinese experts may wonder whether or not this is a setback for President Xi Jinping. In the face of faltering growth and energy crises, this anarchic reopening will cause upheaval in global energy markets, but not for the reasons you might think. Optimists who hope that even a partial reopening of China will alleviate logistical problems and increase production are expecting a rude awakening, as it does not appear that the usual market mechanisms of Chinese consumption or production are easing. apply. However, the pessimists who fear that the reopening of the country will weigh on the market due to increased energy demand are not quite right either.

The unclear relationship between Chinese shutdowns and global energy turmoil stems from confusing and contradictory signals from Beijing. Although the government is loath to admit it, there is a scientific rationale for the closures. The relative ineffectiveness of the Sinovac vaccine, particularly against Omicron, and the lagging vaccination rates in the elderly are the most obvious culprits. Despite this, it should never be forgotten that zero-covid is fundamentally one of Xi’s key political projects. As such, Chinese domestic politics dictated its implementation and will dictate its end.

China’s 20 Vitalse the party congress is approaching and Xi is not in an unassailable position. Critical CCP members are breaking party discipline, including Premier Li Keqiang embarking on a very public charm offensive and former ambassador to Ukraine Gao YuSheng criticizing Chinese foreign policy. As general discontent boils over, President Xi Jinping has every interest in tightening his grip and embarking on a political project to cement his position. This political project is zero-covid.

Zero-covid will persist as long as Xi deems it politically useful, although this policy is now both a blessing and a curse for him. By helping Xi, zero-covid has enabled the central government to discipline disobedient local governments, which coincidentally happen to be the most anti-Xi. Zero-covid has also allowed Xi to use party discipline to shore up his position, revamp the economy, and push his “energy revolution” forward as he sees fit. However, the curses are many. Unemployment among recent graduates is at record levels. Logistics bottlenecks persist, with the Port of Shanghai having a backlog of 260,000 cargo containers as of April 2022. Overall energy demand decreased by 1.3% from April 2021 to April 2022, the per capita energy consumption increased to 2.6 toe/cap, and labor force participation declined precipitously.

With zero-covid causing trouble, Xi is also continuing his “energy revolution.” Despite covid pressures and global energy trends, China’s energy consumption has diversified significantly, with demand for renewable energy expected to reach 1 billion tons of coal per year. While coal and gas production decreased by 11% and 29%, respectively, in April 2022, wind and solar power consumption increased by 25% and 15%. China has invested 137 billion in renewable energy and 110 billion in electrified transport in 2021 alone. Despite this series of long-term green investments, China is still heavily dependent on coal, and recently gave the green light an expansion of its coal capacity by an additional 300 million metric tons per year. Xi’s energy revolution, another cornerstone of his tenure, is something he is less willing to compromise on than easing the lockdown.

With growing energy shortages, shrinking growth and political dangers, Xi seems to want to have his cake and eat it too through the new wave of near-term lockdowns. While the central government recently agreed to Shanghai introducing 33 new stimulus policies to reduce covid zero and help economic growth, this does not guarantee economic recovery. Half of the working population is still unable to return to work, and foreign investors already in China are expressing serious doubts about the plan and the impact of the continued lockdowns.

Xi’s zero-covid and energy revolution is progressing, even if the march has stumbled due to economics and party politics. Faced with market pressures, Xi decided that politics, not economics, should dictate China’s energy markets. Stakeholders should take the president’s calculations seriously and remember that China’s reopening and its impacts on global energy markets will be determined less by its market dynamics and more by Xi.

With the help of Wesley A. Hill

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Post expires at 8:00pm on Thursday June 30th, 2022