David Daokui Li: Reducing the Costs of Non-fossil Energy is the Key to Addressing the Energy Shortage, Which Depends on China
This article was originally published in Chinese by Tencent Finance on October 31, 2021. Text by Xinyu Guo. Translated by ACCEPT. For the original article in Chinese, click here.
Key Points:
1. The root cause of the energy shortage is a lack of coal supply.
2. In the long run, prices of fossil energy are bound to continue to rise.
3. Reducing the costs of non-fossil energy is the key to addressing the energy shortage, which depends on China.
4. Regulatory policies in the real estate sector may not necessarily be eased, but will gradually stabilize.
5. The GDP growth rate in Q4 is likely to be slightly lower than that in Q3, but exports will remain a bright spot.
Text / Xinyu Guo
Guest of Dialogue / David Daokui Li, President of ACCEPT, Tsinghua University
“In the long run, I think the most crucial task is to significantly reduce the costs of non-fossil energy, which is the key to addressing the current energy shortage. This depends on China.”
In a recent conversation with Tencent Finance, David D. Li, Director of the Academic Center for Chinese Economic Practice and Thinking (ACCEPT) at Tsinghua University, shared his insights on the current round of fluctuations in the global energy sector as well as the potential solutions.
Recently, against the backdrop of “crazily surging” oil and natural gas prices, there has been a heated debate on the potential “energy crisis,” touching on numerous aspects including economic growth, inflation, and even policy orientation. David D. Li holds that the root cause of the energy shortage lies in the lack of coal supply. China’s coal production capacity experienced negative growth year-on-year from March to August 2021. Meanwhile, the national carbon neutrality goal and carbon reduction targets set by other countries are merely background factors.
In addition, David D. Li elaborated on regulatory policies in the real estate sector, the economic and policy outlook for Q4, and recommendations for the post-90’s generation. He said that people of each generation face their own challenges as well as their own opportunities. Although the post-90’s generation is now under a huge amount of pressure, they also enjoy rather optimal material, health, and economic conditions. Complex problems often coexist with happiness, and each generation enjoys better living standards than the last.
The following is the edited transcript of the dialogue, which has been reviewed by me:
Q: With respect to the current economic pattern, you tend to believe that the global economy is expected to experience a recession in the post-pandemic era, and such a recession is already taking shape. In fact, the market is increasingly concerned about stagflation. Numerous economic indicators, including social financing and PMI, are experiencing declines, whereas PPI has risen to 10.7%. What are your insights on the risks of stagflation?
David D. Li: China’s manufacturing enterprises have proven to be relatively resilient. At present, it seems that they are able to cope with the surging prices of upstream raw materials including iron ore, crude oil, and electricity (which is expected to see rising prices soon). However, if such price hikes continue, they are likely to be reflected in CPI, which is a worrying trend that ought to be taken seriously.
The good news is that China’s central government attaches great importance to the rising prices of raw materials, and has taken measures to speed up coal production. This round of power shortage has been due to a lack of coal supply. From March to August this year, China’s coal production capacity experienced negative growth year-on-year.
Q: What exactly are the contributing factors to the global energy shortage?
David D. Li: The factors are slightly different at home and abroad.
At home, as I just mentioned, the shortage of coal supply contributed to the surging coal prices, which in turn led to a reduction in power generation due to the heightened costs of power plants.
Globally, an increasing number of energy enterprises are curbing their levels of crude oil production, believing that the demand for natural gas and crude oil may never return to pre-pandemic levels. In addition, under the impact of global carbon reduction, these enterprises are promoting the transition to non-fossil energy. However, in the short term, the cost of non-fossil energy is too high and supply cannot keep up. Under these circumstances, reducing the capacity of crude oil production has inevitably led to a surge in crude oil prices.
Q: From your perspective, is this a short-term mismatch of resources, or is an energy crisis indeed on the horizon?
David D. Li: In the short term, energy prices are surging at an unexpected level. Coal prices have soared by 200% within the year, whereas natural gas prices have soared by 600% within the year, which is unsustainable. Nevertheless, in the long run, fossil energy prices are bound to continue rising. This is because carbon reduction is a global trend, and the costs associated with carbon taxes or carbon trading will eventually be transferred to fossil energy prices.
Q: Some people hold that the carbon reduction targets set by different countries have made the energy shortage worse. What is your perspective?
David D. Li: This is merely a background factor. The more crucial reason for the shortage is that the pandemic has led to economic stagnation and undermined energy production capacity. As a result, there is a gap between supply and demand.
Q: What is the core solution to addressing this round of energy crisis?
David D. Li: In the short term, we need to ensure the supply of conventional sources of energy. In the long run, we need to significantly reduce the costs of non-fossil energy, which is the key to addressing the energy shortage.
This will depend on China. China is a vital producer and consumer of green energy. The installed capacity of hydropower, wind power, and solar photovoltaic power generation in China ranks top around the globe. China is therefore fully capable of contributing to a reduction of green energy costs.
Q: Back to the macroeconomy, what is your outlook on China’s economic performance for Q4?
David D. Li: In Q4, the GDP growth rate is likely to be slightly lower than that of Q3. Exports and the foreign exchange balance of payments are still bright spots. Debt restructuring may also transition from a source of panic to order.
Q: What about the real estate sector? Recently, there have been several signs of easing policies in real estate financing. Under the economic slowdown, do you believe the real estate adjustment policies will be eased in Q4?
David D. Li: The term easing is not necessarily accurate, but I believe the relevant policies will gradually stabilize.
Q: Is the correction of the trend in real estate loans sufficient to reverse the economic downturn in Q4?
David D. Li: It is hard to reverse the economic slowdown in merely one quarter. This will take at least half a year.
Q: Previously, there was a heated debate on the Evergrande crisis, and there have been concerns about whether this crisis would be a Lehman moment for China. Prior to the Evergrande crisis, there was no precedent of a national champion enterprise in the real estate sector falling into an all-round liquidity crisis. What is the root cause of the Evergrande crisis? Is this a sporadic crisis limited to an individual enterprise, or does it indicate an industry-wide downside risk of housing prices due to high inventory and shrinking demands?
David D. Li: There are both industry-wide issues and individual challenges. I tend to believe that the Evergrande crisis is primarily an individual issue, given that in the past four or five years or even longer, Evergrande believed that the golden age of the real estate sector had passed, and thus took steps to promote transition into the automobile and mineral water manufacturing industries, etc. However, each industry has its own operational modes, and Evergrande’s diversified expansion was rolled out at an excessively rapid pace.
Q: What are the driving forces of monetary and fiscal policies in Q4, and what are the “bottlenecks” to economic growth that need to be addressed?
David D. Li: First, we need to properly facilitate debt restructuring and provide necessary liquidity to the market, so as to prevent the contagion of debt issues that might trigger crises in other industries. Second, in Q4, we need to step up our efforts in launching the major projects specified in the 14th Five Year Plan. Third, we need to speed up the implementation of policies related to urbanization.
Q: The post-90’s generation has often joked that they have been the generation to encounter the one-child policy, the delayed retirement policy, and the three-child policy. What are your comments?
David D. Li: The post-90’s generation is under a huge amount of pressure, and I fully understand their circumstances.
People of each generation are faced with their respective challenges, but at the same time, they enjoy their own opportunities. Challenges often accompany opportunities, just as perplexity oftentimes coexists with happiness.
The post-90’s generation enjoys better living standards, with rather optimal material, housing, education, health, economic, and social conditions.
They also live in the era of the new technological boom, with an ample supply of liquidity. If they happen to have a good idea and the spirit of entrepreneurship, investments will flood in.
Each generation has its own difficult problems to solve and opportunities to enjoy, but it’s certainly true that each generation enjoys better living standards than the last. Society is constantly evolving and advancing.
