Walking down a street right now in Shanghai, one would be forgiven for thinking the pandemic never happened. At times it’s hard even to spot someone wearing a mask.
Dig a little deeper, though, and it’s clear that recent events have had a profound impact on the Chinese economy. Foreign investment and exports turbocharged the Chinese economy for nearly two decades after China entered the WTO. But now things have changed.
The pandemic has underlined how important exports are to the Chinese economy. It has also exacerbated existing frictions between China and other countries, highlighting how dependent China has become on imports of key components and materials. On the other side, the pandemic has exposed how reliant global supply chains have become on Chinese-made inputs.
To some extent, events this year have merely accelerated trends in deglobalization that were already underway. But with economic decoupling set to continue, China’s old economic model looks increasingly unsuited to the post-pandemic world.
Step forward the government’s latest economic buzzword, “dual circulation”. This somewhat gnomic concept boils down to making the economy more resilient by making it less dependent on imports and exports, and more reliant on domestic demand.
But in the short term the government has needed to fall back on investment to shore up the economy, which S&P Global economists forecast will grow by only 1.2% this year.
Yet again, the government has resorted to infrastructure to provide jobs and support the economy. Sales of excavators and front loaders in the first seven months of this year are up 15% on last year and steel production is at all-time highs. But this stimulus package is a little bit different.
Last hurrah for the old economy?
Alongside urban renewal and major transport and water conservation projects, the government is also prioritizing investment in what it is calling “new infrastructure”.
The focus this year will be on seven key areas: 5G, data centers, AI, the industrial internet, inter-city and urban rail, new energy vehicle charging infrastructure and further investment in the ultra-high-voltage grid to reduce transmission losses and more efficiently deliver the electricity required to power this new infrastructure.
Total investment is estimated at Yuan 1-1.2 trillion ($158 billion–$187 billion), which is relatively modest compared to the estimated Yuan 17 trillion spend on all infrastructure in 2019.
But the government hopes that this initiative will accelerate the construction of the data and communications networks needed to support the development of e-commerce, smart manufacturing and smart cities with internet-enabled transport and energy networks, all powered by AI and data collected from the millions of digital measurement devices and sensors that form the backbone of the industrial internet. Well, that’s the vision, anyway.
In with the new
This opens up opportunities but also presents challenges to the energy sector. It doesn’t mean China is turning its back on heavy industry – China is going to need coal and steel for decades to come. But investment will increasingly be focused on areas that support domestic consumption and help the country become more self-reliant.
This means investment in emerging industries like new materials, robotics and biotechnology, as well the transformation and upgrading of basic manufacturing, improving it so that it can meet the needs of domestic consumers.
It also means big investment in areas that will make China less dependent on imports. Developing domestic competence in areas like semiconductors will be a priority, but so is strengthening energy security to reduce China’s ever-growing thirst for imported oil and gas.
This will require further investment in domestic production, notably unconventional natural gas, a segment that China’s oil and gas majors will continue to develop. In the first seven months of the year natural gas production was up 9.5%, growing significantly faster than oil or coal output over the same period.
While petrochemicals and aviation fuel will see continued growth, increasing use of electric vehicles and the electrification of public transport presents an existential threat to China’s oil and gas companies.
S&P Global Platts Analytics forecasts Chinese gasoline demand will plateau around 2025, with gasoil peaking a decade later. With the market for two of their key products set to decline, China’s energy companies will need to look not to exports but to China itself for new markets and business models, to continue to be relevant.
Sinopec has already started on this journey, installing electrical and hydrogen charging facilities at some of its filling stations. CNOOC has established a company to develop an offshore wind power business. Its project off the coast of Jiangsu is set to connect to the grid by the end of this year.
A digital revolution
The industrial internet, big data and AI will likely be able to help drive efficiencies and reduce costs. Alibaba, one of China’s leading technology companies, claims that by applying machine learning to real-time data from wind turbines they have been able to predict in advance when they will fail, reducing the operation and maintenance costs at one wind farm by nearly a third.
Sinopec has introduced an industrial cloud platform across some of its refineries to optimize production and reduce costs. Downstream, it has been developing digital transaction platforms and e-commerce channels to better secure the market for its chemicals and refined products.
But to be truly transformative, these technologies need to capture and analyze real-time data not only along individual energy value chains – from production through to distribution and consumption – but also across them, where the oil, gas, coal and electricity energy systems interface and interconnect. Better coordination and optimization across the whole energy system could help increase the role of renewables and distributed generation in China’s energy mix.
China isn’t the only country hoping to harness big data and digitization to transform its economy. But its state-directed model of development, with its ability to allocate and co-ordinate investment in the new digital economy, might mean that it gets there more quickly than others.
The 14th Five Year Plan, to be released next year, will contain more detail on the government’s ambitions and targets for China’s new economic model. The transition may be gradual and incremental, but the direction of travel is clear. China’s centrally planned, digitally coordinated, consumption-driven economy is beginning to take shape.