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Feature: China and the New Energy Economy

Prepared in collaboration with the World Economic Forum

Empowering Public-Private Collaboration in Infrastructure National Infrastructure Acceleration (NIA) approach

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

S&P Global Ratings

Global Economic Outlook 2019 Autumn Is Coming

Feature: China and the New Energy Economy

There is an increasingly inescapable sense that an energy transition of enormous proportions is taking place. The number of 'bans' announced on Internal Combustion Engine (ICE) vehicles is growing, even if governments are placing them relatively far out on the political horizon.

More and more car manufacturers are taking note and shifting R&D spending into Electric Vehicles (EVs), a move which has profound implications for the development curves, and thus future cost, of EVs versus ICE vehicles.

In October, US automaker General Motors said that it would launch two new pure electric models in 2018 and a further 18 by 2023.

Its competitor Ford announced the creation of a new internal team to "think big and move fast" in order to accelerate the electrification of its auto production. Both are some way behind their European counterparts.

It is not hard to see why such decisions are being made now. While the number of EVs on the road remains just a fraction of the total parc, global sales are growing by about 40% year-on-year, making EVs the biggest growth story in the auto market in decades.

And, if governments are going to regulate against ICE vehicles and subsidize EVs, thereby changing the consumer choices which otherwise might be made, then what other path is there to tread?

Chinese Whispers

What has rocked the car world most has been a potential ban on ICE vehicles in China. Talk of such a move may be overblown as nothing has been said yet by the country's top policy-making body, the National Development and Reform Commission, but just floating such an idea in China is significant.

The country is both the world's largest car market and the world's biggest maker and consumer of EVs -- not just passenger cars, but also electric buses and trucks.

Moreover, there is some meat behind the speculation. Beijing has promoted EVs heavily to date.

It is cutting back on passenger car subsidies, but has also announced that car makers in China producing or importing more than 30,000 cars a year must ensure that, by 2020, 12% of them are all-electric, plug-in hybrid or hydrogen powered.

If a company wants a stake in the world's largest car market, then, at the very least, it will have to offer consumers a choice of both EV and ICE vehicles.

Key Drivers

Urban air pollution and security of supply are key issues in this equation.

Coal stands alone among the fossil fuels as the only one for which China has avoided a burgeoning import bill, owing to the expansion of a huge domestic mining industry.

But this has come at the price of chronic urban air pollution, the three primary ingredients of which are coal-fired power generation, heavy industry and ICE vehicles, the latter being particularly noticeable given China's rapid urbanization over the last 20 years.

China's leaders therefore have a series of tough, interlinked problems to resolve.

They need to reduce the country's reliance on heavy industry as the engine of economic growth and on coal-fired electricity generation as the backbone of the electricity system; and they need to deliver on the growing demand for transportation that the process of urbanization promotes while at the same time reducing air pollution.

China's Relationship With Oil

The idea of an ICE ban in China is clearly at odds with some aspects of Chinese industrial policy and observers have been quick to note the obvious tensions with the country's massive expansion of its refining capacity.

China has thrown billions of dollars into this industry over the past two decades, just as it has into becoming the world's largest ICE car manufacturer. Chinese refining capacity rose from 4.2 million b/d in 1996 to 8.5 million b/d in 2006 and 14.2 million b/d in 2016.


Yet the expansion of Chinese refining has been a game of constant catch-up; refinery throughput has never quite matched oil product consumption, and domestic crude output has fallen far behind demand, owing to the country's limited domestic oil reserves.

The success of Chinese refining is that it has minimized the bill from oil product imports, capturing within the domestic economy the refining margin, but this will only ever be a modest gain given the expense of growing crude imports.

These imports cost China somewhere in the region of $134 billion in 2016 and a whopping $1.9 trillion over the past decade in 2016 dollars.

It is a massive outflow of capital, and the supply chains involved leave China vulnerable to price and physical supply shocks that can have serious repercussions for its export industries.

Moreover, the country is quickly heading in the same direction with natural gas, imports of which rose from next to nothing in 2006 to 72.3 Bcm in 2016.


Fossil Fuel Dependence

Dependence on fossil fuel imports is an economic vulnerability, but more often than not a sign of economic strength rather than weakness.

It reflects the capacity of an economy to add value to raw material inputs through manufacturing and processing.

The world's strongest and most diversified economies are all net fossil fuel importers.

But the outflow of capital spent on fossil fuel imports must be balanced by the export of value-added goods.

An economy dependent on raw material imports must also be an export economy, and China has long recognized that this creates a second weakness; it is dependent on extended international raw material supply chains on the one hand, and the health of export markets on the other.

Both are factors beyond China's control, as it discovered with the rise in oil and other commodity prices from 2004, and then, in terms of export demand, during and after the global financial crisis of 2007/08.

Beijing has gone a long way to rebalance its export-oriented economy over the past decade, boosting domestic consumption and services at the expense of further expansion in export-oriented industry.

Services accounted for 51.6% of Chinese GDP in 2016, compared with 44.1% in 2010, while industry's share fell from 46.4% in 2010 to 39.8% last year.

However, it wants to go further and at the same time address the problem of air pollution.

It can only do this by embracing the New Energy Economy, based upon renewables and the electrification of transport.

Developing EVs and renewables in tandem cuts pollution and redresses the issue of capital outflows and supply insecurity, while at the same time capturing more value-added internally, strengthening the domestic economy vis-a-vis the export-oriented economic model of the past.


Solar Success

Solar power has been an extraordinary success for China.

The industry has benefited from what has in effect been multiple layers of subsidization -- at home through state assistance for building and deploying production capacity, as well as R&D spending, and abroad as governments in a number of Western and other countries have sought to incentivize renewables as a growing part of the energy mix.

These subsidies are being reduced, but largely because they are no longer needed -- solar is competitive with fossil fuels for power generation in an increasing number of countries.

Moreover, the reduction of subsidies spurs innovation in what has become a cut-throat business.

As a result, China's solar industry is entering a new phase in which it is focused on innovation and making its huge solar deployment capacities more economically efficient.

A number of recent studies, such as Stanford University's The New Solar System, show that the West has misconceived the nature of the solar industry in China.

It is not a subsidized monolith on the verge of financial collapse, and it is increasingly innovative.

Notably, Trina Solar has achieved the world efficiency record for laboratory scale multicrystalline-silicon solar cells.

This technology dominates the global market for solar power, making up 70% of global PV production in 2016.

However, in terms of the New Energy Economy, it is the direct link that has been created between manufacturing and energy generation that is significant, challenging supply chains based on mining and oil and gas extraction.

China is now able to leverage its manufacturing capacities and low wage costs in the generation of energy.

Rare Earth Elements

China's venture in to the New Energy Economy is backed by its natural resource advantage in Rare Earth Elements.

REEs are used in multiple applications from medicine and defense to electronics, but some are specifically used in batteries for hybrid and fully electric cars.

Their use in permanent magnets also means they are required for wind turbine generators, as well as numerous electrical and electronic components. Like lithium and cobalt, they are key ingredients in the New Energy Economy.

REEs are not, despite their name, that rare, but they are distributed in low concentrations, which makes economic recovery difficult.

However, China is far and away the world's number one producer of REEs.

The concentration of REE production in China may be a cause for concern for other countries, as is the concentration of cobalt production in the Democratic Republic of Congo, but for China it means that an important part of the new supply chain is kept in-house.


Electric Vehicles

Similar factors apply to EVs. Here again the idea that Chinese industry is not innovative is misguided.

According to research by McKinsey, Chinese consumers can already choose from about 75 different EV models made by both domestic and foreign manufacturers, more than any other country in the world.

As with solar, some foreign observers have concluded that China's EV industry is unsustainable because of the level of subsidy -- China currently subsidizes about 23% of the total EV price in various ways.

However, as with the solar market, increased competition and a reduction in subsidies will force more efficient use of resources and increase the focus on innovation and manufacturing gains.

China is already a significant innovator in this sphere. BYD, China's principal EV manufacturer, uses its own lithium iron-phosphate (LFP) technology, underlining that China's EV industry is not dependent on Western technology or intellectual property.

Moreover, by many measures BYD is far in advance of iconic US EV maker Tesla, which uses lithium nickel cobalt aluminum-oxide battery technology.

BYD has twice the battery production capacity of Tesla and more than eight times the battery storage technology deployment.

Its passenger car sales are higher and it has already commercialized e-buses and e-trucks, which Tesla only hopes to do around 2020.

While LFP batteries have lower energy density than Tesla's, their stability allows faster charging and greater durability.

According to Wood Mackenzie, BYD recharges its buses at 300 kW without cooling, faster than Tesla's superchargers, formerly the fastest recharging system in the world.

EVS and Solar Combined

China's investment in EVs is as significant as its investment in solar power, where it dominates the market.

According to Germany's Fraunhofer Institute, China and Taiwan accounted for 68% of solar PV module production in 2016, compared with 4% in Europe and 6% in Canada and the US combined.

For China, EVs and solar are both policies designed to strengthen the domestic economy and combat air pollution.

In combination with other renewables, such as wind and hydro, they are designed to create a New Energy Economy, which retains maximum value within the domestic economy and reduces its exposure to external shocks.

Despite China being the biggest market for solar power and EVs, both are still small in terms of electricity consumption and generation.

However, the number of EVs on the road in China now exceeds 1 million, according to, split between 634,794 passenger vehicles and 362,120 heavy vehicles, mainly buses.

The figures include both pure EVs and plug-in hybrid electric vehicles.

According to S&P Global Platts calculations, China's fleet of EVs consumed about 20-25 TWh of electricity in 2016, accounting for less than 0.5% of total electricity generated in China that year.

China's solar power generation in 2016 was 66.2 TWh, about 1% of electricity generated, so in a slightly surreal sense China's EV fleet was powered entirely by solar power.

EV electricity consumption rose by 143% (15.7 TWh) in 2016, while solar power generation grew by 72% (27.7 TWh).

China's EVs will also be displacing close to 300,000 b/d of oil products demand, primarily diesel, by end-2017, assuming continued growth in e-HDV sales, which reached 205,886 last year, and about 40% year-on-year growth in light-duty EVs.

At end-2016, China's EV fleet was displacing just over 180,000 b/d of oil products, more than 90% of which was accounted for by e-HDVs.

Chart - China's EV Fleet Powered by Solar

External Change

China is by no means alone in pursuing change, but it is better positioned and more motivated to achieve it than most other countries because of its reliance on fossil fuel imports, huge manufacturing capacities and air pollution problems.

There are concerns that the implied rise in electricity demand as a result of transport electrification will overwhelm the capacity to deploy and integrate thousands of gigawatts of additional renewable generation capacity into China's electricity grid.

China may be forced back into reliance on coal to power its growing fleet of EVs, thereby offsetting the impact of reduced vehicle emissions with higher power plant emissions.

This could prove a self-limiting factor that encourages more gradual change in what will, in any case, be a decadal process.

However, the lesson to be drawn from China's massive refining expansion is not that it represents an immovable barrier to the uptake of EVs, but that when Beijing puts its mind to a vast industrial endeavor, it generally delivers.

Nonetheless, the implications for oil exporting countries of a gradual decline in Chinese crude oil imports are major.

China has been by far the single largest factor in oil demand growth over the last 15 years.

It is far more important to international markets than the US, which has managed to increase its own oil production and reduce its import bill -- effectively keeping the hydrocarbon economy in-house, which itself may prove a barrier to change in the US.

A peak in oil demand, which has been predicted before 2040 by some oil companies and forecasters implies a concentration on only the cheapest oil production, which remains the Middle East. Higher cost producers will suffer.

There would be little incentive, for example, to develop the remaining reserves of the North Sea, or to head off further into the Barents and Arctic, a direction still thought inevitable only a few years ago.

Declining stakes in oil and gas production might reduce the barriers to change in other countries, which may, as in Europe, be more highly motivated to adopt EVs by the desire to combat global climate change.

Europe, like China, is dependent on fossil fuel imports and therefore has every reason to pursue economically viable alternatives.

Certainly other countries would seek to emulate China's lead. India notably is leaping into renewables generation, although primarily as a means of reducing its own reliance on coal-fired generation, but it is also pursuing industrial policies to redress its relative lack of manufacturing capacity.

Emulation of China would provide Chinese companies with new opportunities for the export of EVs and other renewable technologies, just as it has with e-buses and solar panels.

China's adoption of the New Energy Economy would be a win for both its domestic economys and its export industries.

Empowering Public-Private Collaboration in Infrastructure National Infrastructure Acceleration (NIA) approach

Executive summary

Infrastructure is a key economic and social driver of sustained growth and acts as a true enabler of a country’s competitiveness. Yet new infrastructure development remains insufficient and ineffective, and many investors continue to be discouraged by a general lack of information, the absence of bankable deals and risky policy environments. Enhanced public-private collaboration and understanding are therefore required more than ever, as stretched government budgets and increasing infrastructure needs conspire to widen the infrastructure financing gap.

There is no silver bullet for addressing the many facets of this global challenge; however, in a world where there is no shortage of capital, pursuing the right collaborations and frameworks may offer a potential solution. In this context, the National Infrastructure Acceleration (NIA) model proposes an innovative approach to a sustained country dialogue to address infrastructure development and investment.

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NIA facilitates interaction between the private sector and governments, thereby contributing to improving countries’ investment climates, deepening local capital markets and ultimately accelerating the development of infrastructure pipelines.

To achieve this, the NIA initiative convenes national multistakeholder working groups, recognized and endorsed by the national governments concerned. These working groups represent a standing, multistakeholder platform designed to facilitate interaction between its members, the goal of which is to identify actionable solutions to advance infrastructure development and financing. They also provide a space to address policy questions and initiate collaborative projects among members.

This report describes a standardized NIA Implementation Roadmap created by the World Economic Forum in close cooperation with S&P Global. By defining a series of activities that have proven to be effective in implementing NIA successfully at a country level, the Forum aspires to expand its reach and further the adoption of the model in additional countries, municipalities and regions around the world.

This publication is intended to serve as a blueprint for policy-makers, private entities and multilateral development banks (MDBs) that want to introduce a sustainable model for public-private collaboration in their respective countries or jurisdictions.

Read the Full Report

COP24 Special Edition Shining A Light On Climate Finance


− Green loans are evolving, with the Climate Bond Initiative forecasting nearly $1 trillion in green bond issuance by 2020.

− Despite the uptick in green bond and loan issuance, the market still remains relatively small, especially compared to the universe of assets comprising CLO 2.0 transactions.

− In our view, a green CLO market has large growth potential, boosted by regulatory initiatives and emerging interest from both issuers and investors in 2018.

− We built a hypothetical rating scenario for a green CLO to compare and contrast the underlying portfolio and structure with a typical European CLO 2.0 transaction.

− Our hypothetical green CLO analysis showed that green loans may have different fundamental characteristics to corporate loans, such as lower asset yields, higher credit quality, and higher recovery rates assumptions.

The global collateralized loan obligation (CLO) market has experienced a rebirth (2010 in the U.S. and 2013 in Europe). New issuance continues to increase due to investor familiarity with the product, as well as low historical default rates. While a market for green assets, such as green loans and bonds has been established for a while, although still of a relative size, a sustainable securitization market is still in its infancy. Considering the challenge in financing the amounts, S&P Global Ratings expects green CLOs to play a role in increasing the private sector presence in the sustainable finance market.

Following the Paris Agreement that came into force in November 2016, 184 parties have ratified the action plan to limit global warming. For this purpose, developed nations have pledged to provide $100 billion (about €87 billion) annually until 2025. As part of this deal the EU has committed to decrease carbon emissions by 40% by 2030. In March 2018 the European Commission (EC) proposed the creation of environmental, social, and corporate governance 'taxonomy', regulating sustainable finance product disclosures, as well as introducing the 'green supporting factor' in the EU prudential rules for banks and insurance companies.

Read the Full Report

Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

Read the Full Report

Global Economic Outlook 2019 Autumn Is Coming


- The direction for the global economy in 2019 is clear: GDP growth will slow, led by the U.S., which will likely see the rate of expansion fall to around 2% by the end of next year. Chinese growth will moderate. Europe's growth will remain relatively low and stable.

- We see the risks around our baseline on the downside. These include worries about the entrenchment and expansion of the U.S.- China dispute, as well as market turbulence related to the path of interest rate normalization by the U.S. Federal Reserve. Brexit and Italy's fiscal woes may have an impact, but remain regional risks for the most part.

- All is not lost! Policy makers across the major economies can seize the opportunity to shed shibboleths and undertake bold (non-monetary) policy actions to mitigate the slowdown.

- We expect the path of growth and policy normalization next year and beyond to be orderly for the most part; more an arrival of autumn than a coming of winter. This global slowdown is both necessary and healthy. It's not the beginning of another global financial crisis.

Dec. 11 2018 — The outlook for the global economy in 2019 is straight forward: GDP growth will slow in aggregate and in most major countries. The U.S. will lead the trend, as fiscal stimulus will wane and monetary policy normalization will continue, with both weighing on growth. China's expansion will continue to moderate despite a pause in corporate deleveraging, and we expect further policy easing as ongoing trade tensions and the effects on both business and investor confidence continue to bite. European growth will trundle along, weighed down by concerns about Brexit, Italy's budget, and Germany's new leadership ahead of a reshuffling of the European governance. Across emerging markets, tech and oil exporting economies may struggle in relative terms.

Moreover, the risks to this outlook are on the downside, driven in large part by two scenarios. First, the U.S.-China entanglement (it's not just about trade and never was) may worsen and broaden before it gets better. The pause in tariff escalation by Presidents Trump and Xi following the recent G-20 meeting in Buenos Aires was welcome, but much work lies ahead. Second, as our just-completed Credit Conditions Committee agreed, with the cycle turning, the possibility of surprises on the credit front is rising as well. These include debt affordability as well as access to financing.

Despite this gloom, we are not jumping on the crisis band wagon. In broad terms, we see the slowing of global growth as both necessary and healthy. We expect the process to be reasonably orderly, with recent bouts of market turbulence a reminder that slowdowns are not always smooth. It need not be the case that winter is coming, but the global synchronized upturn of 2017 has clearly passed, and we are entering the autumn of the long expansion that followed the global financial crisis.

Read the Full Report