China’s Two Sessions: Implications for energy markets and policies

All eyes have been on the “Two Sessions”, an important annual political gathering which ended on 11 March, for clues into macroeconomic policy and energy policy this year. But the guidance suggests a status quo of mixed messages. The government is emphasising support for new industries to achieve its “around 5%” GDP growth target again, although it is also planning a fiscal contraction given the dire situation of local government debt. Meeting the 5% growth target will not be easy, but it is not impossible with efforts to stabilise the real estate market, more industrial support and modest increases in consumption.

The outlook for oil demand in 2024 remains solid: We expect a 0.6-0.7 mb/d y/y increase driven by chemicals, with middle distillates providing further support. But LNG in freight poses downside risks to diesel, just as lower LNG prices suggest upside for gas demand. Industrial activity combined with more gas in power suggest over 25 bcm of y/y gas demand growth in 2024, and low LNG prices could favour spot, potentially at the expense of term contracts. We currently expect LNG imports to rise by 10 bcm y/y but there is upside, mostly from spot.

Energy policy guidance suggests an “all of the above” approach, with coal still looming large. Renewable additions will grow strongly again, but will likely slow from the record year in 2023. Meanwhile, China’s emissions trading system (ETS) is expanding and carbon prices are rising but from modest levels. Despite its anticipated expansion to additional sectors this year, and record carbon prices currently, its impact will be limited. Renewable curtailment rates are set to rise again this year because of the coal overcapacity and the recently introduced capacity payment mechanism. The end goal is to encourage coal as back up for renewables, but the short-term impact is a potential drag on their dispatch.

Importantly, mixed policy messages will create confusion at the local level. The Two Sessions issued softer environmental targets, even as the country is not on track to meeting its 2025 goals. There is room to kick the can to 2025, but that also raises the risk of last-minute production cuts.

By: Michal Meidan , Anders Hove , Yan Qin