China: Key Themes for 2020

In 2019, markets focused on China’s slowing GDP growth and on the trade war with the US. In the meantime, bilateral relations soured, highlighting the structural nature of competition between the US and China with the Trump administration working, for example, to limit Huawei’s role in Western telecom networks. Washington’s ‘zero tolerance’ campaign on Iran included sanctions on Chinese traders and shippers just as sanctions on Venezuela further constrained China’s crude supplies. The combination of a slowing economy and an uncertain geopolitical outlook meant that markets had to contend with slowing demand growth, especially for natural gas, alongside shifting trade flows and new sanctions-related risks. Within China, concerns about import dependency prompted a focus on domestic resources and particularly on ‘clean’ coal.

In 2020, many of these themes will remain relevant, although the focus will change. The ‘phase 1’ deal signed between the US and China will give Beijing time to review its reliance on US technologies, the US-dominated financial system and commodity markets, as we discuss in our first theme. China’s leadership will also be able to focus on some of its growth and development targets for 2020 and wrap up the 13th Five Year Plan (2016-2020), before it reassesses its energy and industrial policies ahead of the next plan, (2021-2025). As we detail in our second theme, the government’s need to deliver growth of around 6 per cent could support oil and gas demand—as the broader economic slowdown is likely to be softer than in 2019—although there are downside risks (from the spread of the coronavirus) and from structural reforms. The end of subsidies (that we discuss in theme four) could weigh on some of the emerging industries such as renewables and new energy vehicles (NEV). A slowdown in the NEV market and in the pace of renewable capacity additions will raise concerns about China’s commitment to its environmental goals. These will be exacerbated by the fact that import dependency woes have also led China to refocus on domestic resources, especially ‘clean’ coal. While this notion seems like an oxymoron, Beijing’s focus is on air quality, rather than carbon emissions, and the widespread use of both pollution abatement equipment and ultra-low emissions technology in its coal-fired power plants allow the government to meet its twin goals of energy security and the war on pollution

Finally, the decelerating economy and escalating geopolitical tensions with the US have raised concerns that China’s structural reforms—the shakeup of state-owned enterprises; price reform and market liberalisation—have all but stalled as Beijing retreats into even more deeply entrenched state control. While some progress has been made on creating new opportunities for private and foreign companies, limited movement on ‘mixed ownership’ and price reforms—that were also listed as priorities in the 13th FYP—suggests additional change is forthcoming, as we explain in our fifth and final theme.