Chinese leaders meet to set 2035 vision

Clean energy spending is likely to rise to meet China's carbon neutrality goal, while a shift to electric cars threatens fuel demand, write Kevin Foster and Karen Teo

The world's attention may be focused on Washington ahead of next week's US presidential elections, but another high-level political event taking place in Beijing is likely to prove much more significant for global energy markets.

More than 300 members of the Chinese Communist party's central committee met at the fifth plenum session on 26-29 October to chart the country's policy direction. The discussions, led by President Xi Jinping, focused on two key documents — the 14th five-year plan, which covers 2021-25, and a mid-term economic strategy called Vision 2035. The significance of this year's plenum for global energy markets has taken on far greater prominence following Xi's unexpected announcement last month that China is aiming to become carbon neutral by 2060.

Full details of the five-year plan are unlikely to be released until the national people's congress in March 2021. But some major themes are clear. The need to incorporate climate targets into the plan in the wake of Xi's 2060 pledge is likely to lead to a substantial increase in clean energy investments, potentially at the expense of coal. "We must accelerate the promotion of green and low-carbon development," the plenum concluded.

China is transitioning from a phase of rapid growth to one of higher-quality development, Xi says. Economic growth will continue to slow, with analysts expecting GDP targets — if they are set at all — to be around 4.5-5.5pc for 2021-25, down from 6.5pc in the 2016-20 plan. That will weigh on oil demand growth. But the government will also maintain its focus on urbanisation, including the creation of new megacities such as the Xiongan New Area near Beijing and the Greater Bay Area linking Hong Kong with Guangdong — helping to sustain infrastructure spending. China's urban population share is expected to rise by 10 percentage points to 70pc by 2035, equivalent to another 140mn people moving to cities.

This will all unfold under Xi's "dual circulation" strategy, under which China becomes more self-reliant and increases domestic consumption — something that may encourage Beijing to place greater emphasis on expanding domestic reserves and reducing its dependency on imports. Beijing wants to develop its technology base and reduce its reliance on US technology products, such as computer chips.

Balancing growth ambitions, domestic consumption and the carbon neutrality target will be a tough task, and one that could rely heavily on the development of new technologies. Cars running wholly on internal combustion engines may be effectively shut out of the Chinese market by 2035, with electric vehicles and hybrids accounting for all new sales by then, influential industry association the China Society of Automotive Engineers says. This threatens to slash China's 6mn b/d of gasoline and diesel demand, but could boost alternatives such as hydrogen.

Trump this, Washington!

The longer-term focus of this week's plenum discussions will not mask the immediate challenges facing China's leaders. Its external relations are at their most uncertain for decades, beset by US tariffs and increasingly aggressive efforts by Washington to pressure Beijing in the twilight of the Trump administration's first term. But Xi appears to have emerged from the turmoil of 2020 with his authority enhanced, helped by China's success in containing Covid-19. The Vision 2035 plans may further solidify Xi's position and help him maintain power well beyond the formal end of his second term in 2022 — in another contrast to the political uncertainty gripping the US.