Morgan Stanley
  • Thoughts on the Market Podcast
  • Mar 30, 2021

China’s Green (Investment) Revolution


Welcome to Thoughts on the market. I'm Robin Xing, Chief China Economist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I will be talking about China's green revolution, and what does it mean for investors. It's Tuesday, March 30th, at 8:00 p.m. in Hong Kong.

China's recent pledge of peak emissions by 2030 and the carbon neutrality by 2060 implies a steep energy transition, marked by near-term disruptions, but also long-term opportunities. China will use administrative production controls, but looking beyond the near-term, we see a green revolution, , with massive green investment, instead of production cuts, to facilitate this energy transition.

In the short run, we will see production cuts to control the emissions, which have kicked off in heavy industry hubs such as Tangshan - the largest steel production base in China - which could lead to a 2% decline in national steel production this year. A lasting impact on China's growth, however, the magnitude should be manageable at around 0.1% of annual GDP.

In the meantime, this reduced supply could drive steel prices in China to rise a lot this year, feeding into upstream prices. This could mean producer price inflation in China would rebound quickly to around 7-8% in the second quarter.

But looking beyond the near term, we see an all-around and coordinated efforts on green revolution in coming decades, with China leaning on massive green investment, rather than production cuts, to facilitate this energy transition.

So the first leg of this green investment will be electrifying everything. Namely to use electricity as the main energy source for the entire economy, from transportation to residential buildings, from industries to consumers. So China targets an electrification ratio of 35% by 2030 and 60% by 2055 from 26% right now.

The second pillar will be renewable energy. China has already gained global competitiveness in wind and the solar power capacity. They will further step up investments on this front. This will also involve significant ramp up in smart grid electricity storage systems in order to cope with the volatile power output from these new energy sources.

All in all, the potential investment needed for this energy transition would be around 1.5-2% of GDP annually in the next 30 years. How are they going to finance this green shift? The PBOC, China's central bank, would promote green financing, including these credit policies, relending policies towards green assets. While China's sovereign wealth fund would adopt ESG into its investment framework, basically favoring green assets, some initial groundwork on these green financing standards, such as a review of the green bond category, would also be completed this year. Another important pillar is to use carbon quota and carbon trading to discover the price of carbon emissions, which can incentivize markets to increase green investment.

And finally, China is also working with the US and Europe on these green investment standards and financing, leading accordingly to the global efforts on the climate change. In short, investment, not divestment, is China's path forward to green revolution, focusing on a full-blown electrification process with rebuilt power networks based on new energy, smart grid, and electricity storage. And in that process we think the tech progress, the carbon pricing, and green financing will be the key enablers.

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As China moves to make good on carbon targets, it will turn increasingly toward a large scale green investment strategy across its economy.

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