Geopolitical shifts and China’s energy policy priorities
At the end of February, the China Energy Research Programme at the Oxford Institute for Energy Studies hosted its first ‘China Day’, bringing together programme sponsors alongside a number of experts to discuss some of the key trends in China and their implications for energy policies and markets. At the outset, discussions during the day were to revolve around the policy priorities for the final year of the 13th Five Year plan and drafting for the next plan, including questions such as environmental policies, reform and liberalisation, and to what extent US-China trade tensions would alter these priorities. The outbreak of COVID-19 changed both attendance and the focus of the day, as markets grapple with the uncertainty surrounding the global response to COVID-19. Despite this, discussions covered both the short-term challenges associated with COVID-19 and the medium-term policy priorities for China’s energy policy and markets. While the richness of the day’s discussions cannot be captured in a few pages, this comment covers some of the key points raised in the discussion.
Beijing’s efforts to contain the spread of the virus is set to take a massive toll on the economy and on energy demand in Q1 20, weighing on global supply chains and growth. As the virus spreads globally, China’s ability to lead a V-shaped recovery is increasingly uncertain. What is clear, though, is that already the focus on COVID-19 has slowed progress on other policy priorities including environmental policies and liberalisation, and a strong fossil-fuel heavy stimulus—which is not necessarily Beijing’s policy choice—would further delay them. A targeted stimulus through the state-owned economy would also complicate future negotiations between the US and China on the structural issues that were left out of the ‘phase one’ deal. The latter is also marred with uncertainty as markets struggle to see how trade flows can adjust to meet the lofty buying targets set out in the deal, and question whether they actually need to look at the details of what, in essence, is a political deal. At the same time, the need to tackle COVID-19 and reinvigorate the economy could reinforce the role of the state in the economy, delaying an already protracted liberalisation process. While in the gas market such delays could end up benefitting the incumbent state-owned majors, in the oil market their role continues to be challenged by both the Shandong independents and the new mega-refineries. The long-awaited consolidation in the oil downstream may not happen this year, but if it does, the Shandong teapots may not be the first to go.