Key takeaways from China’s Communist Party congress [Gas in Transition]
Xi Jinping’s precedent-breaking consolidation of power as the core of the Chinese Communist Party dominated headlines from a party congress in October, but the landmark meeting also provided clues about the country’s energy strategy going forward that will make for mixed reading for global energy exporters.
Xi – who will be 74 years old if he completes an unprecedented third five-year term as general secretary in 2027 – unveiled a core leadership group packed with loyalist officials at the end of the weeklong congress, extending his formidable dominance of Chinese politics.
Xi’s nearly two hour-long speech to kick off the weeklong congress in Beijing contained little in the way of new developments as far as commodities were concerned, with no big announcements of government stimulus or a major shift in economic priorities.
Policy continuity was one of the main takeaways from the full report, along with various topics covered by Xi’s speech that ranged from foreign policy to the party’s internal governance. The emphasis on persisting with current policies left little immediate upside for China’s demand for commodities and energy, and is likely to mean subdued energy consumption over the winter and into spring.
With Xi now empowered to a greater degree than any other Chinese leader in decades, his agenda from the last few years unsurprisingly already reflects his preferences and thus is not prone to sudden change.
Xi repeated rhetoric that China, the world’s biggest carbon polluter, would move prudently to peak and eventually zero out CO2 emissions, to avoid the risks of an energy supply crunch. The caution – summed up by Xi as "building the new before discarding the old” – reflects energy security concerns following a spate of high-profile power shortages over the past year and soaring global energy costs after Russia invaded Ukraine.
This was underlined by the congress report’s proposal for China to accelerate the planning and building a ‘new-type’ energy system. No official interpretation of this has been released yet, but content from the congress and public analysis from energy experts suggests it comprises two core parts – ensuring energy security and steady development, and continuing to promote the “leap-forward” development of renewables, hydropower and nuclear to replace fossil fuels.
When it comes to ensuring energy security and steady development, coal will remain China’s main energy source for a certain period going forward – the dirtiest fossil fuel contributed 56% of China’s primary energy consumption last year, more than twice the global average of 27%.
At the same time it is necessary to continue to reduce inefficient coal consumption, such as phasing out so-called “scattered” coal burning and accelerating coal-to-electricity switching, while improving the coal utilisation rate and reducing CO2 emissions through technological innovation and industrial policies.
The leap-forward development of clean energy meanwhile refers to the incremental replacement of fossil fuels by promoting the construction of large-scale wind power and solar photovoltaic bases, and major hydropower and nuclear power projects.
Structural support for gas
Xi’s specific pledge that China “will make further efforts to keep our skies blue, waters clear, and lands clean” firmly establishes gas and LNG as key components of the country’s energy transition. Extensive coal-to-gas switching since 2016 has played a key role in lifting the toxic smog choking Chinese cities.
China’s apparent gas consumption declined by 1.4% in the first nine months of 2022, with LNG imports down by 20.2% over the same period. But most industry analysts expect China’s gas demand to grow in the long term on the pivot to a cleaner domestic energy mix.
The continuation of the ‘blue sky’ smog reduction campaign, together with ongoing urbanisation and relatively aggressive economic growth targets, will underpin the structural growth of Chinese gas demand – to the benefit of major gas exporters around the world, from Russia and Qatar to the US and Australia.
On the supply side Xi said “greater efforts will be made to explore and develop petroleum and natural gas, discover more untapped reserves, and increase production”. This indicates China’s three NOCs will be encouraged to focus on increasing domestic gas output amid energy security concerns and their own energy transition targets.
China’s gas production in October grew by 12.3% year on year to 18.48bn m³, the biggest gain since June 2021, according to official data released on November 16. Additionally, Chinese companies have contracted 34.8mn metric tons of term LNG in the past 12 months, securing stable LNG supply amid extreme volatility in global gas markets. This large wave of new term LNG provides headroom for Chinese LNG demand growth without requiring importers to buy on the volatile spot market.
Chinese LNG imports from February to September were below contracted levels, indicating Chinese buyers were reselling cargoes under term contracts back to the spot market. These importers – especially the NOCs – will need to ensure sufficient gas is available domestically to meet winter heating demand and any requirements from economic growth, meaning further resales are likely to be limited.
Xi’s speech doubled down on Beijing’s self-sufficiency rhetoric, emphasising that China will ensure its energy security and focus on energy transition and green development. Xi also pledged to “intensify pollution prevention control” and work “actively and prudently” to achieve peak carbon emissions and carbon neutrality.
These top-level statements would appear to confirm that recent uncertainty over China’s relatively large quotas for exporting refined oil products marked a short-term compromise to support the economy. If overall growth indicators strengthen later next year, China may return to its long-term emissions control targets and reduce product quotas again.
A bias towards economic risk management will continue. Financial-sector risk received prominent mention in the latest report – Xi warned again of the need to prevent “black swan” and “grey rhino” disruptions and avoid systemic financial sector risks – while the need to suppress those risks under a separate national security section was also repeated.
But there have been some signs that Xi is softening his positions on high-profile problems that have weighed on the Chinese economy. For instance, in his congress speech Xi reiterated his political slogan that “housing is for living rather than speculation” – a hint that there would be no major risk-on shift in housing-sector policy in the near future.
But on November 18, China’s central bank and banking regulator jointly issued a 16-point rescue package of policies to boost financial support for the housing market, a move well-received by investors at home and abroad.
Xi’s reaffirmation of a longstanding goal for China to be a mid-level developed country in terms of GDP per capita by 2035 could provide some quantifiable insights. Achieving this would require China to maintain a relatively aggressive growth path, averaging an expansion rate of 4.6% for the rest of this decade and exceeding 3% in the first half of the 2030s.
Given its already massive economy, China may not meet the goal but Xi’s reaffirmation during the congress will almost certainly shape the country’s annual growth targets and corresponding stimulus measures to get the country as close to the necessary growth as possible.
China’s GDP expanded by just 3% in the first nine months of 2022, which puts this year’s official target of 5.5% out of reach. But this does not mean Beijing will abandon the growth concept entirely – more pro-growth programmes are anticipated once China starts to exit its zero-COVID strategy later next year.
Zero-COVID through winter
Xi has staked the Communist Party’s political future on the success of the zero-Covid strategy, but it stands out as his most contentious policy. China has “tenaciously pursued a dynamic zero-COVID policy” for which it should be praised, as it has “protected the people’s health and safety to the greatest extent possible”, Xi said in his speech.
But even with zero-COVID again there has been a willingness to relax policies to shore up flagging economic growth. Last week China’s cabinet announced 20 measures to reduce the economic and social impact of containing COVID, including shortening quarantines for inbound travellers and scrapping a ban on China-bound flights if they carried too many infected passengers.
The policy easing is another step towards an eventual reopening, but the timing and shape of this remains unclear. The completion of Xi’s once-a-decade reshuffle of China’s leadership team at annual parliamentary and political advisory meetings next March should allow for an off-ramp from zero-Covid, with upside for Chinese energy demand.
Until then China’s energy demand is likely to stay subdued while industrial and economic activity remains restrained by zero-COVID. Virus caseloads surged in November, with major outbreaks in cities from Zhengzhou in central Henan province to Guangzhou in the south and Chongqing in the southwest.