Tag Archives: China slowdown

Chart of the Day, 29 Jan 2015: China Slowdown a CO2 Emissions Silver Lining

If you follow the climate change debate over time, it is difficult not to get depressed: it’s the feeling of helplessness as the slow-motion cash crash takes place before your eyes.

So when a little bit of light shines through, it comes as a relief. And sometimes, hope comes from the most unlikely of sources–in this case China. It is almost a truism that as go China’s CO2 emissions, so go the world’s. See the chart below (Source: Trends in Global C02 Emissions Report; click for larger image):

Global CO2 Emissions jpeg

Very roughly, global CO2 emissions have gone from around 24 billion tonnes per annum in the early 1990s to around 36 billion tonnes today: an increase of 12 billion, or 50%.

Taking the top six emitters, we see can China’s prime role in this growth more clearly (click for larger image):

Top 6 Emitters jpeg

So we have seen China move from emitting around three billion tonnes of CO2 in the 1990s to around 10 billion tonnes today. Thus of the extra 12 billion tonnes of CO2 emitted per annum globally after 20 years, 7 billion has come from China.

The Global Carbon Project sees emissions continuing to grow to 43 billion tonnes in 2019 (note giga is equivalent to billion).

CO2 Emissions to 2019 jpeg

And again it is China leading the trend:

Regional Emissions to 2019 jpeg

And keep in mind that we have a CO2 budget of around 1,200 billion tonnes of CO2 before we commit the earth to 2 degrees Celsius of warming with a 66% probability. On current trends, that budget will be used up by about 2041, or in around 27 years.

Carbon Budget 2014 jpeg

Over that period, China is likely to emit approximately 15 billion tonnes of CO2 per year on average on present trends. That would mean that by 2041, China would have emitted about 400 billion tonnes of CO2, or a third of the total budget available. Next question: is there any way China can free up more of the budget?

A paper by Luukkanen et al provides us with a detailed decomposition of China’s future emissions using a Kaya identify with a sectoral overlay. To refresh your memory, the Kaya identity allows us to estimate future emissions based on population growth, GDP growth per person, energy intensity per unit of GDP, and carbon intensity per unit of energy (see my post “The Unbearable Logic of the Kaya Identity” for a little more detail).

The paper sets out three fuel-related emission scenarios: reference (business as usual), policy (following the government’s developmental plans) and industry (a  focus on heavy industry and investment-led growth).

China CO2 Scenarios jpeg

Note that the above charts are only looking at fuel combustion emissions. Accordingly, these numbers don’t tally with the Global Carbon Budget numbers that also add in agriculture and industry-related emissions. Nonetheless, where fuel emissions go, so will total emissions.

Here is where the silver lining comes: the most-muted emissions scenario above, termed ‘policy’, still looks far too high growth-oriented to me. Here are the assumptions that underpin this scenario `click for larger image):

China Sectoral Annual Growth Rates jpeg

In the policy scenario, a GDP growth rate of 7.4% is still forecast between 2016 and 2020, and then 5.2% growth  between 2021 and 2030. If you believe in a much quicker slow-down scenario, which I do, then these numbers look hopelessly optimistic (from a growth rather than climate perspective). See my post referring to Michael Pettis’ work.

If you then combine a much swifter descent to growth rates of 3-5%, plus a continued pivot from investment-led growth to consumption-led growth, and then add on an aggressive renewables roll out (which we are seeing), then China could free up an additional 100 billion tonnes of the carbon budget.

Frankly, that still doesn’t get us anywhere near capping climate change to 2 degrees of warming, but it gives us a little bit of extra time. And given where we are, every little bit helps.

Chart of the Day, 27 Jan 2015: What Is Dr Copper Trying to Tell Us?

Many have been transfixed by the collapse in the price of oil, but that downturn has been paced by what is going on with copper and iron ore. Note: you can’t frack for copper (click for larger image):

Historical Price on Copper jpeg

And since the beginning of January, things have speeded up:

30 Day Copper Price jpeg

In market lore, copper is dubbed the metal with a Phd in economics due its reputed ability to portend the coming of recessions. But given China’s outsized role in providing almost all incremental demand for the commodity complex, is Dr Copper just signalling a hard-landing in China?

One observer who flagged this development well in advance is Michael Pettis, a professor of finance who blogs at China Financial Markets. Pettis wrote a piece entitled “By 2015 Hard Commodity Prices Will Have Collapsed” in September 2012 (here), in which he gave four reasons for his forecast:

  1. Supply was being massively ramped up, but with a substantial lag relative to demand
  2. The incremental increase in demand was almost all from China
  3. The Chinese growth model is severely imbalanced, being overly fixed investment, and so commodity, intensive
  4. Chinese inventories have also spiralled out of control

Pettis has long argued that countries that maintain repressive, or skewed, financial regimes that over-emphasise investment always hit a brick wall. Prime exhibits for this thesis are the Soviet Union and Japan. Moreover, the longer you pump up growth with state-directed credit, the more bone-crunching the final adjustment will be. This is what he said back in 2012:

The consensus on expected economic growth among Chinese and foreign economist living in China has already declined sharply in the past few years. From 8-10% just two years ago, the consensus for average growth rates in China over the next decade has dropped to 5-7%. But the historical precedents suggest we should be wary even of these lower estimates. Throughout the last 100 years countries that have enjoyed investment-driven growth miracles have always had much more difficult adjustments than even the greatest skeptics had predicted.

And further on in the article:

The current consensus for Chinese growth over the next decade is almost certainly too high. Even if Beijing is able to keep household income growing at the same pace it has grown during the past decade, when Chinese and global conditions were as good as they ever could be, it will prove almost impossible for the economy to rebalance at average GDP growth rates over the next decade of much above 3 percent.

Moving closer to the present day, Pettis published a thoughtful piece last month titled “How might a China slowdown affect the world?”. In the post he restates his China hard-landing scenario–nothing new there. However, he goes on to question the common description of China as the world’s ‘growth engine’.

For him, while this characterisation may be true when disaggregating the main contributors to global GDP growth, it does not correctly describe China’s role in stimulating growth in other economies. Indeed, China is more a deflationary force at present, since the suppression of consumption and the continued expansion of production have led to successive current account surpluses and a surfeit of savings seeking a home abroad.

Should the descent from GDP growth rates of 10% plus down to 3 or 4% within a decade take place in an orderly manner, it is possible that the economy could rebalance, consumption pick up and savings fall. The net effect would be mildly positive for the global economy. Should a hard landing be accompanied by chaos in the credit markets, you could see households actually increase savings and the authorities crash the yuan in a desperate attempt to use export demand to absorb excess capacity. China would then transform from being a minor deflationary influence to become a deflation monster. Nonetheless, Pettis errs on the side of optimism:

A slowing Chinese economy might be good or bad for the world, depending on how it affects the relationship between domestic savings and domestic investment, and this itself depends on whether Beijing drives the rebalancing process in an orderly way or is forced into a disorderly rebalancing by excess debt. My best guess is that Beijing will drive an orderly rebalancing of the Chinese economy, even as it drives growth rates down to levels that most analysts would find unexpectedly low, and this will be net positive for the global economy.

I am not so sure.