How will China stay an economic powerhouse while going green?

The common interpretation of “crisis” in Chinese politics is a juxtaposition of two opposing forces: threat and opportunity. For China, the pudding lies in the latter.

Last week, the country launched its whole-of-government plan for decarbonisation, centred on the economic potential of the renewable technology revolution, infrastructure expansion and energy input transformation. In contrast to the administration of US President Joe BIden, which frames the crisis as an existential threat to life as we know it, China’s top leader, Xi Jinping, sees climate change as an economic opportunity.

China wants to achieve carbon neutrality, but under one condition. When decarbonisation comes into conflict with its economic growth objectives, the former must be subordinate to the latter. As US political consultant James Carville famously said, "It's the economy, stupid!"

The Chinese Communist Party's renowned economist Liu Wei affirmed this approach, albeit with a more subtle tone, at the Green Economy Forum. “China’s development goal is to achieve basic modernisation by 2035,” he said. To reach a GDP per capita of $20,000 by 2035, a vision commanded by Mr Xi, China must grow at a minimum speed of 4.8 per cent per year over the next 15 years. This economic target remains paramount and unwavering.

Twenty months after the first Covid-19 lockdowns, China is still painstakingly seeking growth momentum from within. But domestic consumption is lacklustre at present, meaning state efforts to pump spending into infrastructure is delivering diminishing returns. At the same time, the coffers are absorbing shocks from spiking global commodities inflation.

China’s long-term prosperity may yet arise from consumption. But for its leadership, China’s power can only be secured by its industrial manufacturing.

“Manufacturing is the lifeline of China’s National economy,” according to Mr Xi, who believes that without manufacturing might, China cannot achieve its national rejuvenation. This is even more true in this era of supply chain deglobalisation.

When China’s manufacturing was crippled by a recent electricity shortage, the country moved swiftly to expand domestic coal production to support the sector, despite the consequences to its carbon footprint.

So here comes China’s economic paradox in the current decade: the country's manufacturing sector causes more pollution. How can China strengthen the heavily polluting manufacturing industries to consolidate its industrial power while ensuring its green energy transition?

The reality is that this unbridled decade for carbon emissions will enable China to lay out renewable energy infrastructure, innovate in renewable energy technologies and complete its renewable energy supply chains.

We will therefore see a decade of dual-track development in China: the expansion of high-tech manufacturing ensured by fossil fuel inputs alongside the green energy revolution.

Over $10 billion worth of tax breaks have been offered to coal-fired power and heating companies as of August. Inside China, more coal has been mined and coal financing has been further secured by the Chinese Securities Regulator.

China is unabashed with its recent upgrade of coal output in order to save manufacturing. According to its Glasgow pledge, China has nine more years to expand its carbon footprint through 2030, its declared date for carbon peak.

The manufacturing industry consumes 57 per cent of China’s power but only produces slightly over a quarter of China’s GDP. Across the broad economy, manufacturing industries emit the highest amount of carbon per unit of GDP. If decarbonisation were the dominant priority, it would be compelling for China to reduce its manufacturing capacity first to align power consumption with economic output.

The high-carbon industrial emitters include not only the dirty steel and mining industries but also the technology-defining semiconductor manufacturers. Decarbonisation will add further cost to China’s already laborious drive to chip independence.

Beijing residents pass by a government poster with the words 'Our Carbon Zero Agreement'. AP

Carbon emissions will enable China to lay out renewable energy infrastructure

The country saw an accelerating reduction of its manufacturing capacity even before the carbon pledge. Manufacturing contributed about a third of economic output in 2016 and only about a quarter in 2020.

China's net-zero carbon pledge is sure to further encroach on China’s global manufacturing prowess, and that could actually be dangerous.

The services economy has increasingly replaced the industrial economy, representing over half of China’s economic output in the current decade. Decarbonisation will further bias the growth of services over manufacturing, raising the risk that the latter will become hollowed out.

Of the many valuable lessons China has learned from US economic development, this one is particularly alarming. A strong global power can simply not thrive without robust and comprehensive manufacturing supply chains at home.

Outsourced manufacturing has produced disenfranchised workers in the American Rust Belt states. It has fragmented social cohesion and brought populism to the fore of economic thinking. Once the manufacturing capacity leaves for more competitive global markets, it is virtually impossible to restore it at home again.

China must avoid the US manufacturing conundrum.

Still, decarbonisation is undoubtedly a major economic opportunity for China. The hydrogen industry will balloon to $157 billion, from virtual non-existence, by 2025, according to the national development plan. As the Chinese economy desperately seeks the next growth engine, decarbonisation will unleash a sustainable wave of infrastructure and tech-induced industrial revolution.

“We have a narrative problem with climate change. We don’t have a human enemy to build a catchy story," historian and author Yuval Noah Harari entertainingly told the New York Times this week. Tech explosion, economic growth and employment opportunities from the green energy revolution must be the catchy stories of our times. They are not only personal but alluring.

For the moment, we need to rethink the global narrative on climate change. Rather than a doom’s day threat, let it be the opportunity to fire up the global economy.