Sustainable Growth in China: Spotlight on Energy

AUG 2012 Source: Global Markets Institute

Rapid growth has created an enormous demand for energy

The rapid pace of economic growth in China has raised concerns about the country’s large consumption of energy and the environmental impact. The transition from an agricultural- to an industrial-based economy has meant that growth is extremely energy-intensive. At the same time, industrialization raised working wages, helping spur the growth of the Chinese middle class as the population continued to urbanize; these demographic changes have created an additional boost in energy demand. Consequently, energy use increased by more than 150% during the past ten years and China became the world’s largest consumer of energy by 2010, surpassing the United States. The country’s energy demand is expected to continue on an upward trajectory.

Coal remains the dominant source of energy

This rise in energy demand has primarily been met by “dirty” sources, particularly coal, which accounted for roughly 70% of the country’s energy use in 2011. China is both the world’s largest producer and consumer of coal. In order to diversify the country’s fuel mix, the Chinese government has announced plans to encourage the development of alternative sources, such as nuclear and hydroelectric. China aims to fulfill 15% of its energy needs with non-fossil fuels by 2020, up from 8.3% in 2010. As a result, renewable energy is a major area of investment. This steady stream of investments, along with the supportive policy environment, has helped China become the global leader in clean energy capacity in 2011. However, despite the focus on alternative energy sources, they remain overshadowed by capacity from thermal (i.e., carbon-based) sources.

Increasing government focus on sustainable growth leads to opportunities for key strategic industries

The 12th Five-Year Plan (FYP), which covers the years 2011 to 2015, emphasizes achieving growth in an environmentally sustainable manner. It includes targets to improve energy efficiency, as well as ambitious goals to increase renewable energy capacity. However, these national targets rely on implementation by provincial officials who tend to prioritize economic growth over environmental targets. The 12th FYP also outlines strategic emerging industries, including clean energy technology and alternative energy, which are expected to benefit from the favorable government policy.

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Abby Cohen, CFA
Senior Investment Strategist and President, Global Markets Institute
Rachel Siu
Analyst, Global Markets Institute