China’s annual Central Economic Work Conference concluded on Friday, with a statement laying out the key economic priorities for the next year. Amid the real estate and industrial slowdown, as well as the upcoming top-level Communist Party Congress, the overriding message is stability, stability, stability, meaning a return to acceptable economic growth rates. In the context of China’s economic policymaking, this means a new wave of investment projects, with several key implications for the country’s emissions trajectory.
The Central Economic Work Conference is an annual meeting convened by the Politburo Central Committee and setting the economic agenda for the coming year.
A steep drop-off in emissions
China’s construction sector activity contracted steeply and emissions started to fall in recent months, as found in my recent analysis. The slowdown started when the government tightened credit to real estate, under the slogan “apartments are for living in, not for speculation”.
The Economic Work Conference statement recognizes the key reason for the slowdown: “the withdrawal of the extraordinary fiscal and monetary policy response to the epidemic, leading to a significant fall in consumer and investment demand”.
The construction sector is a key driver of GDP growth, household wealth and local government income, through land sales. Tolerating a permanent slowdown would require increased taxation to plug the major hole left in local government budgets, most naturally a real estate tax, a highly contentious measure and one that is only starting to be piloted.
The new economic policy direction will mean front-loading local government infrastructure spending and generous bank lending for new projects early next year. This is in no way unexpected: new loans already bottomed out in the summer, and with the top political event, the once-in-five-years Party Congress awaiting in late 2022, economic performance is going to be important and any fundamental or controversial reforms will have to wait.
Party Congresses are preceded by spikes in credit — and emissions
CO2 emissions in China are largely driven by construction volumes, with construction material industries (steel, cement and non-ferrous metals) the largest emitting sectors. Construction is driven by new financing for projects, with a time lag of six to eighteen months.
New lending has spiked in the run-up to each of the previous three Party Congresses, in 2007, 2012 and 2017. In each case, new lending started to fall as soon as the event was wrapped up, and CO2 emissions soon followed. The 2002 Congress was followed by the SARS construction boom, engineered to offset the economic hit from measures to suppress the epidemic in 2003.
The 2022 Congress, simply called the “20th Big” in Chinese, is significant because it is slated to grant Xi his third term at the helm, upending the earlier two-term limit. The Work Conference noted this explicitly, calling for ensuring a “stable and healthy” economic environment, because of the importance of the event.
Green infrastructure?
As a new wave of infrastructure spending seems inevitable, the essential question from the emissions perspective is whether all this investment can be directed at green projects. Signals are as mixed as ever – infrastructure should be high quality, and carbon neutrality is a prerequisite of high-quality development, but coal is the mainstay and the country should not rush towards carbon neutrality.
When the government was preparing the stimulus measures in response to COVID-19, there was also a lot of talk about “new infrastructure”, “high-quality development” and restraint in the size of the stimulus, none of which were borne out: late 2020 and early 2021 witnessed blistering growth-rates in very old-school industrial output and construction projects, and a rapid increase in emissions.
The restraint took the form of an abrupt exit from the stimulus and sharp deceleration in the second half of 2021.
The result of these signals will be a wave of investment in both clean and dirty energy projects next year, and a lot of investment in generic gray infrastructure and real-estate that will push up the demand for construction materials.
The volume of spending could however be limited by the poor financial state of local governments after previous rounds of stimulus and after the steep drop in revenue from land sales this year.
Renewable energy and other headline low-carbon technologies will receive a massive boost, aided by the lending facility that provides low-interest rate credit covering 60% of clean energy loans granted by the banks.
A huge concern is that the major project lists of the provinces are still very fossil heavy, and it’s the provincial governments that are expected to carry out the spending. Our research looked at the 2020 lists, and iGDP found that 2021 lists look quite similar.
One striking omission in the Work Conference statement is the control of “high-energy, high-emissions” projects, a prominent slogan in Xi’s speeches on climate earlier this year. This is not a great sign of the party’s priorities.
This is a recurring theme in China’s stimulus-tightening cycles: once the call goes out to spend again, the urgency of getting money out the door leaves little margin to squabble over where spending should go.
All of this is a big test of how much the emphasis on climate, decarbonization and high-quality development has filtered to local government decision-making.
Carbon neutrality on the economic agenda
The economic work conference statement also has a major focus on carbon neutrality and energy, which is in no way a given, and in itself shows the heightened political importance of the issue.
One of the sentences that jumps out is: “The phase-out of conventional energy must be based on secure and reliable replacement with new energy.” I believe this is the first time phase-out of (unabated) fossil fuel is included in a high-level official document.
However, the very next sentence in the readout emphases that coal is the foundation of China’s energy system and promises to promote “clean coal”, so there is lots of ambiguation. Whether fossil gas is included in “new energy” also varies.
The statement says the aim is to move as soon as possible to controlling the total CO2 emissions and CO2 intensity instead of energy consumption, which will lay the groundwork for China’s emission peak and for emissions reductions after the peak.
Early this year, Xi Jinping himself intervened to raise the priority of controlling total energy consumption, after the target was dropped from the country’s five-year plan. This drive is now being softened, and the emphasis is shifting from controlling energy consumption to promoting clean energy. The government will exclude renewable energy consumption and energy for raw materials from energy consumption control, creating a significant incentive for local governments to increase clean energy consumption. The reference to raw materials presumably means energy use for manufacturing low-carbon tech such as polysilicon and batteries.
The joint control of pollution and CO2 through incentives and restrictions is also mentioned, which gives the environmental ministry a mandate to act. In contrast, the carbon market is not mentioned at all, once again suggesting the system is somewhat side-tracked in China’s climate efforts.
Summing up
In case you thought this is one of those articles that open with a question and conveniently forget to answer it, I’ll try to surprise you positively.
The “economic stability” agenda for 2022 likely means another year of increasing emissions, although year-on-year growth rates will be negative in the first half. Both clean energy and coal mining, power generation and smokestack industry projects will receive a boost. However, the stimulus is likely to be short-lived, similar to the one executed in the run-up to the 2012 party congress. 2012 was also a time when new coal power, coal-to-chemicals, coal mining expansion and other high-emissions projects were in vogue, at a much larger scale than now. Yet, China’s coal use peaked in 2013 and fell in 2014-2016. The government’s longer-term priority remains high-quality growth and peaking carbon emissions, so after enough money has gone put the door and enough concrete has been poured to smooth things over for the Party’s big event, structural reforms will be back with a vengeance.