China’s Reopening is No Blossoming of Energy Markets

After months of zero-covid policy-inspired lockdowns, China declared it was open for business. Only days after this declaration, Shanghai and Beijing tightened pandemic measures and re-entered partial lockdown. China experts may argue whether this is a setback for President Xi Jinping or not. In the face of faltering growth and energy crises, this haphazard reopening will bring turmoil to global energy markets, but not for the reasons you may think. Optimists hoping that China even partially reopening will ease logistical woes and increase production are in for a rude awakening since it doesn’t appear the usual market mechanisms of Chinese consumption or production are applying. However, pessimists who fear the country’s reopening will strain the market through increased energy demand don’t have it quite right either.

The unclear relationship between Chinese lockdowns and global energy turmoil stems from confusing and contradictory signals from Beijing. While the government is loath to admit it, there is some scientific rationale for the lockdowns. The comparative ineffectiveness of the Sinovac vaccine, particularly against Omicron, and lagging vaccination rates among the elderly are the most obvious culprits. Despite this, one should never forget that zero-covid is fundamentally one of Xi’s key political projects. As such, Chinese domestic politics dictated its implementation and will dictate its end.

China’s vital 20^th party congress approaches, and Xi is not in an unassailable position. Critical members of the CCP are breaking party discipline, most notably Premier Li Keqiang engaging in a very public charm offensive and former ambassador to Ukraine Gao YuSheng speaking critically of Chinese foreign policy. With general dissatisfaction bubbling, President Xi Jinping has every incentive to tighten his grip and embark on a political project to consolidate his position. That political project is zero-covid.

Zero-covid will persist so long as Xi believes it to be politically useful, though this policy is now both a blessing and curse for him. Aiding Xi, zero-covid has allowed the central government to discipline disobedient local governments, which coincidentally happen to be the most anti-Xi. Zero-covid has also allowed Xi to use party discipline to consolidate his standing, reorder the economy, and advance his “energy revolution” as he sees fit. However, the curses are numerous. Youth unemployment for recent graduates is at record highs. Logistical bottlenecks continue with the Port of Shanghai having a backlog of 260,000 cargo containers from April 2022. Overall energy demand has declined by 1.3% from April 2021 until April 2022, energy per capita usage increased, reaching 2.6 toe/cap, and workforce participation has precipitously declined.

With zero-covid causing problems, Xi also continues his “energy revolution.” Despite the pressures of covid and overall energy trends, Chinese energy use has diversified significantly as the demand for renewable energy is expected to reach 1 billion tons of coal per annum. While coal and gas generation has declined by 11% and 29%, respectively, in April 2022, wind and solar energy use increased by 25% and 15%. China has invested 137 billion in renewable energy and 110 billion in electrified transport in 2021 alone. Despite this long-term series of green investments, China is still heavily reliant on coal, recently greenlighting a coal capacity expansion of an additional 300 million metric tons per year. Xi’s energy revolution, another cornerstone of his tenure, is something he is less willing to compromise than lockdown easing.

With increasing energy shortfalls, declining growth, and political dangers, Xi appears to want to have his cake and eat it too through the newest wave of short-term rolling lockdowns. While the central government recently acquiesced to Shanghai introducing 33 new stimulus policies to scale back zero covid and help with economic growth, this is no guarantee of economic revival. Half of the labor force is still unable to return to work, and foreign investors already in China are expressing serious doubts about the plan and the impact of rolling lockdowns.

Xi’s zero-covid and energy revolution march on, even if the march has stumbled due to economics and party politics. In the face of market pressures, Xi has decided that politics, not economics, should dictate energy markets in China. Interested parties should take the president’s calculations seriously and remember that China’s reopening and its impacts on global energy markets will be less determined by its market dynamics and more by Xi.

With assistance from Wesley A. Hill