29 May 2023
Consumption, particularly services, continues to fuel China’s economic recovery
Looking ahead, China’s renewable energy transition is well underway with the adoption of ‘green’ hydrogen set to rise
China’s activity in April showed that the recovery momentum seen in consumption has not yet spilled over to broader economic activity. The consumption revival was held up by the strong services recovery, but the manufacturing and property sectors weakened.
Retail sales rose by 18.4% y-o-y as the revival in consumption continued to lead the way, helped in part by the increased demand ahead of the Labour Day Holidays. Catering sales saw a rebound to 44% y-o-y, while other discretionary items and those related to going out more also saw an ongoing pick-up (e.g. clothing and jewellery sales all rose by over 30% y-o-y).
Relatedly, the services production index picked up to 13.5% y-o-y in April (from 9.2% in May) as the rotation continued to services consumption from goods consumption, the latter of which was boosted during the pandemic. This will likely keep demand for downstream consumer goods relatively more subdued in the coming months.
Fixed Asset Investment growth slowed to 4.7% year-to-date y-o-y, dragged down by a deeper contraction in property investment (-7.2% y-o-y in April), while manufacturing investment (+5.3% y-o-y in April) also showed some slowdown in momentum. However, ongoing policy support for infrastructure investment (+11.5% y-o-y in April) provided a modest cushion.
China’s trade flows saw a divergence in flows between exports and imports.Exports maintained strong positive growth of 8.5% y-o-y in April, helped by a low base, while imports saw a deeper contraction of 7.9% y-o-y as the domestic revival has yet to fully broaden out with property investment still in contraction.
CPI inflation fell to its lowest reading in over two years, rising by 0.1% y-o-y in April, given weaker food and fuel prices. Core CPI inflation remained steady, however, as demand for services consumption picked up. Meanwhile, PPI inflation sank deeper into deflation, falling 3.6% y-o-y, dragged down by a fall in global commodity prices and ongoing weakness in the property sector.
China’s clean energy transition is important for global climate targets
As the world’s largest consumer of energy, the largest producer and consumer of coal, and the largest emitter of carbon dioxide, China’s transition towards clean energy is important for achieving global climate goals. The country aims to achieve peak CO2 emissions by 2030,carbon neutrality by 2060, and to increase the share of non-fossil fuels in its energy mix to 25% by 2030. Its energy transition, therefore, presents significant opportunities for investors looking to capitalise on the growing demand for renewable energy sources and storage systems.
Wind and solar installations may pick up
The expansion of renewable energy and related sectors is well underway. We expect to see a pick-up in wind and solar installations on the back of recent bidding activity. The acceleration in renewable energy subsidies should also improve utility companies’ appetite to expand, while lower turbine and module costs should support industry profitability. Some investors, however,have been considering the risk of trade tariffs and the potential for independent supply chains in developed markets, but we believe value in much of the renewable energy utility space is still solid in China.
Energy security and climate ambition need balance
As tight fuel supply and geopolitical tensions keep oil and gas prices above historical levels,China needs to strike a balance between energy security and its climate ambitions. The country’s growing but unstable renewable power supply also requires support from additional baseload power to minimise disruptions from extreme weather. This could lead to more fossil fuel and nuclear power investment in the near term. However, the government’s focus on renewables remains, with grid investment and energy storage in focus during the transition away from fossil fuels – the ‘green’ solution for energy security.
Sustainable fuel and smart grids are work in progress
The quest for decarbonisation can be segmented into ‘solved’ and ‘unsolved’ problems. The ‘solved’ problems include adoption, scale economics and competitiveness. ‘Partly solved’ or ‘unsolved’ problems relate to technology, where we have a broad sense of potential solutions, but there are significant challenges. For China, this includes sustainable fuel, smart grids, and the recycling of renewable equipment. The connection of renewables to the grid, for example, leads to unstable power supply, resulting in a mismatch of supply and demand, which requires IT systems to achieve load shedding.
‘Green’ hydrogen is on the cusp of wide adoption
‘Green’ hydrogen, a pure form of hydrogen produced via renewable energy sources, which emits no carbon dioxide when converted into electricity, is on the cusp of becoming far more widely adopted in China as costs tumble. This is being driven by falling costs of electrolysers, equipment that splits water to make hydrogen, and solar energy. We expect the average number of annual electrolyser system installations in China to dramatically increase in the coming years, driven by the next batch of mass green hydrogen projects that will likely be completed in 2024.
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Recovery momentum continued to ease while services and related consumption remained the...[4 Aug]
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