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Anatomy of a Bubble – Case Study: China

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For years, China has been seen as a shining beacon amidst the global crisis, growing at a stunning pace while other countries reeled under the pressure of the global economic downturn of 2008-2009. However, Chinese stock market crashes, first in August 2015, and now at the start of 2016 have let people to question whether China is as immune to crisis as initially thought.

As per estimates by the Economist, Chinese equity market only impacts 15% of households. Therefore, the possibility of a widespread depression was quickly ruled out. However, there are other forces which are likely to be a greater cause of concern for the Chinese government, and possibly everyone around – the most prominent of them being the huge government and corporate debt bubble.

Looking at recent developments, there seems to be a striking resemblance between the increasingly swollen and inflated Chinese debt bubble and a simple spherical bubble, one that is impacted, shaped, and molded by a range of forces, as studied in school science books.

Slide1 - Forces Driving the Chinese Debt Bubble

Slide2 - Surface Tension

Slide3 - Government Measures

Slide4 - External Factors

EOS Perspective

China is under pressure in the face of rising labor costs, industrial overcapacity, falling prices, and weak global demand. Combination of economic slowdown, excess production in manufacturing, and rising debts at the macroeconomic level may cause a massive wave of firm closures and bad loans.

While China has expressed its intentions to reform its debt situation, internal and external market factors have forced the government to plunge more money into the market to finance economic growth and sustain the entire economy. These initiatives may diffuse the situation getting out of hand on a short-term basis. But the repercussion of a future debt crisis could be more severe. The scenario would not only be severe for China, but several other economies in the region, which are key sources of raw materials to China.

From a procurement point of view, while increasing price competition could make China still feature as an attractive proposition, buyers must consider the suppliers’ debt situation before making any decision. No one knows when, or if, the Chinese debt bubble will burst. With the situation still unclear, short-term contracts could be the way forward.

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Botswana Diamonds – A Mixed Blessing?

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While Botswana has been an important player in the global precious stones industry for years, it has once again received global attention in November 2015, when the second-largest diamond ever unearthed was found in Botswana’s Karowe mine. Diamonds-derived revenues have been the key pillar to the country’s development over years, on the back of Botswana’s considerable deposits and well-performing global precious stones market. However, the outlook for Botswana might not be so bright anymore, as industry experts expect the global diamond production to decline after 2025 when majority of the mines are likely to be exhausted. Botswana, still one of the largest producers and exporters of diamonds, is already facing challenges in this industry. Being a diamond-dependent economy, will Botswana be able to maintain a sustained growth in the future as its shining precious gems industry weakens?


Diamond-fueled economic growth

Botswana, a small African country with a population of around two million people, has witnessed huge success since its independence in 1966. From being one of the poorest countries in the continent, Botswana has grown to be now considered one of the fastest developing countries in the world (with average annual GDP growth rate of 4.45% from 1995 until 2015). The success of the nation is largely attributed to the diamond deposits and the associated extraction industry. The discovery of the gems in 1967 led the way to the country becoming the poster child of the continent’s success. As of 2015, the diamond industry contributed 80% to the country’s export revenues and 30% to public revenues. In 2013, it accounted for around 25% of the country’s GDP. The success of the industry paved the way for the development of several roads, schools, and clinics in the country. Gaborone, the capital of Botswana, has transformed from a village to a city of malls and office buildings, all largely thanks to the diamond industry. Further, the sector has created job opportunities in the country and greatly contributed to raising standard of living of the country’s citizens.

“For our people, every diamond purchase represents food on the table, better living conditions, better healthcare, potable and safe drinking water, more roads to connect our remote communities, and much.” – Festus Mogae, Botswana’s President, 2006

As of 2014, Botswana was the largest producer of diamonds in terms of value and the second largest, after Russia, in terms of volume. The country’s production increased from 17.73 million carats in 2009 to 24.67 million carats in 2014. This represented a hike of almost 40% in the span of only five years.

Diamond mining operations in Botswana are controlled by Debswana Diamond Company, a joint venture between De Beers, world’s leading diamond company engaged in exploration, mining, and marketing of rough diamonds, and the Botswana government.

In the past years, the government has undertaken various initiatives to make the country a global diamond hub. In 2013, Dee Beers and the Botswana government formed the Diamond Trading Company Botswana (DTCB) to encourage the practice of sorting and marketing rough diamonds in the country itself, rather than sending them to De Beer’s Diamond Company based in London. This move facilitated job creation and upliftment of the local businesses in Botswana. Further, a state-owned company called Okavango Diamond Company was set up in order to sell 15% of the diamond production of Debswana independent of De Beers.

Blog Article- Botswana Diamond- A Mixed Blessing

Grim future for Botswana

Despite being amongst the leaders in the global diamond industry, a grim future lies ahead for Botswana, driven by a range of reasons.

  • A weakened global demand: The global jewellery industry has been observing a sluggish demand, which has led to the global prices of diamonds witnessing a 12% decline from 2010 until 2015. To compensate for the stagnant sales, Botswana had been relying on opulent Chinese and Indian customers. However, the strengthening of the dollar and the decreasing price attractiveness of Chinese exports have weakened the Chinese economy. This was followed by a 2% devaluation of the Chinese currency, Yuan, which in turn has adversely affected the spending and demand for Botswana diamond by Chinese consumers.

  • Difficulty in diamond extraction: Botswana mines have reached a plateau as most of the diamond volume has already been extracted from the surface. Deeper extraction has now become a costly and time-consuming affair, showing an early sign that diamonds are likely to gradually become inaccessible in the country.

  • Competition from India: It is becoming increasingly difficult for Botswana to compete with a low-cost country such as India where majority of diamond cutting takes place. Although the wages in both countries are almost the same, India has levelled up its game by increasing its productivity by two to three times higher than that of Botswana’s. The cutting and polishing costs in 2013 ranged between US$ 60 and US$ 120 per carat in Botswana, whereas, in India it was between US$ 10 and US$ 50 per carat.

The above challenges have had an adverse impact on the country’s economy, particularly the employment sector. Teemane Manufacturing Company, a 20 year old diamond cutting and polishing firm in Botswana, shut down in January, 2015, leaving around 350 workers jobless. In the same period, MotiGanz and Leo Schachter, diamond cutting companies, also released almost 150 employees, and Debswana shut down two of its mines. These companies are offering retrenchment packages to their employees and ending their contracts with third parties which is likely to be affecting over 10 thousand jobs in the country. Shutting down of companies has also led to a decline in the various CSR programmes. The villages near the mines will no longer benefit from initiatives such as electrification of schools and development of roads.

The weakening demand also meant that early this year, De Beers failed to dispose off 30% of its diamonds stock. The company had to reduce its 2015 production target from 23 million carats to 20 million carats. And the impact of the sluggish demand goes beyond the industry as well. In the first half of 2015, the country witnessed a year-on-year decline of 16.8% in the export of rough diamonds. Further, since the production of diamonds is a critical element in Botswana’s GDP composition, a fall in the diamond output has reduced the country’s GDP growth forecast for 2015 from 4.9% to a mere 2.6%. Botswana’s government has decided to use its foreign reserves amounting to around US$ 8.3 billion to fuel growth in the country.

EOS Perspective

The Botswana economy has relied heavily on its diamond industry for survival for a long time. Since the revenues from diamonds are now becoming uncertain, the country is in a dilemma of how to keep its economy moving. Encouraging economic diversification could be one of the ways to help the country reduce its dependency on diamonds. Apart from diamonds, Botswana also produces other minerals such as coal, copper, iron ore, and nickel. The country should focus on developing a suitable industrial policy to promote the production and export of these minerals. However, whatever the alternative growth-fuelling path is chosen by Botswana, the country has a long way to go in order to shift away from over-dependence on diamonds, its largest structural weakness, to make its economy sparkle even when diamonds run out.

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Emerging Markets Take Vehicle Safety Standards Seriously (At least on Paper)!

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The article was first published in Automotive World’s Q3 2015 Megatrends Magazine

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Across emerging and frontier markets, most car buyers have generally focused on pricing, maintenance cost, and fuel economy, thereby ignoring the very important aspect of safety. The governments in these countries have also not given due importance to this aspect, as basic safety features such as air bags and ABS are not compulsory as per regulations. Taking advantage of this nonchalance of both customers and governments, OEMs have for long compromised on safety features, which are a critical part of all cars sold in developed markets.

In recent years, however, with customers becoming more aware and global safety organizations cajoling for higher safety standards, some emerging countries have introduced increased safety measures, which in turn will require significant changes in the cars sold by leading OEMs. While this is expected to affect the bottom-line of OEMs in these price-sensitive markets, not abiding to the changing environment is likely to prove equally costly, if not in the immediate term, but surely over the medium-to-long term.

Existing Safety Standards

Among the key emerging and frontier markets, vehicle safety standards in South Korea match the levels in Europe, while China has also shown immense progress in adopting the standard safety requirements in automobiles. But other developing countries, such as Mexico, India, and Brazil, lie far behind. As per current car safety standards, Mr. David Ward, Secretary General, GNCAP (Global New Car Assessment Programme) rates China-7, Brazil-5, and India-3 on a scale of 10. “This rating is based on three key factors – the state of legislation, level of penetration of different technologies in the market place, and consumer awareness levels.” However, with India and Brazil initiating the implementation of several safety-standards in recent months, they are likely to match global standards at least for crash testing. Crash prevention, on the other hands, continues to be a long term goal.

It was a big blow to India, when GNCAP conducted tests on some of its most popular entry-level variants (Maruti Suzuki Alto 800, Hyundai i10, Ford Figo, Volkswagen Polo, Tata Nano, Maruti Swift, and Datsun Go) and awarded zero-star adult-protection rating to all of them. This, in addition to having the highest number of road fatalities globally, instigated the government to commit to introducing regulations for mandatory safety standards. As per new regulations, by October 2017, all new cars will be required to pass frontal and side crash tests, whereas the deadline for new versions of existing models would be extended to October 2019. To pass this test, cars will need to have reasonable body shell strength and be equipped with airbags and other standard safety features. For conducting the test, the government plans to develop two crash test facilities, which are expected to come online in 2015/2016. In addition, the authorities plan to launch its own NCAP. India is also creating a vehicle recall policy, which will encompass testing for manufacturing defects. However, this legislation is yet to be passed.

As safety standards gain priority in India, it is a cause of concern for car manufacturers in the country, which have for long focused on only pricing and fuel efficiency in the market. From the manufacturing infrastructure and technology front, OEMs may not require many changes to adapt to these proposed changes in safety standards. This is primarily because most car models do offer basic safety features (such as airbags and ABS) in their higher variants and they also use India as major export hub for their cars destined for Europe and the US. However, this will definitely erode a fraction of the bottom-line for car manufacturers as India is an extremely price sensitive market. Moreover, a large portion of the audience in the country is not very mature and still does not put a high value to the safety factor, thereby restricting the price tag carmakers can attach for these features.

“The first reaction of the OEMs is that they are not very happy, since it will make their cars more expensive. But in the longer term, they will adapt to it as they have done in other countries. People will become aware and ask for safety. OEMs focus will be to meet the safety standards at affordable prices. For example, child support restraints are not made in India and are imported. OEMs can ask the government for concessions on these imports.” says Rohit Baluja, Director, Institute of Road Traffic Education, India.

Several leading OEMs have criticized the government’s call to boost safety standards in India. An engineer working with a leading car manufacturer in India stated, “At this moment, there are no talks about any changes being introduced to the body. These matters are handled at a very strategic level. Nothing has been discussed on this aspect as of now. In India, safety can’t really become a USP right now. Price is and will continue to remain the main selling point. If we talk about metro cities, the demand for frontal airbags has increased. So yes safety has become more important. But this is the case in metro cities only.”

It also seems that the government has succumbed to pressure from the OEMs and has softened down several of the safety standards. As per the regulations, India will be following China’s footsteps and introducing crash testing at a speed of 56km/hour instead of 64km/hour, which is followed globally (while China started testing at 56km/hour in 2006, it also increased its speed from 56km/hour to 64km/hour in 2011). Moreover, the authorities plan to conduct only ‘head impact’ tests for Indian pedestrians against the ‘head and leg impact’ norms adopted by Euro NCAP. It has further slashed the requirement for the use of child dummies for some side impact tests, which is a global standard. Decisions regarding mandatory safety belt alarm, child alert alarm, pre-tensioners, and airbags are also pending.

While several leading OEMs, have not been very supportive of the Indian government’s decision of mandatory crash tests, the ones which have preemptively incorporated these features in their cars have been the winners. Toyota, which made airbags mandatory in all its models in October 2014 in India, has seen sales surge by 34% between October 2014 and April 2015. Volkswagen, which also made airbags a standard feature in all its Polo hatchbacks, has seen the sales of its entry-level variant rise, since the decision was made in February 2014. Post its poor performance in the crash test held by GNAP, Nissan Motors has also worked on strengthening the body shell of its Datsun Go by using higher-grade steel (having a tensile level of 520 mega pascal compared with the earlier 320 mega pascal) and adding side beams on both sides to enhance the strength and rigidity of the vehicles.

Thus the way forward definitely begins with OEMs embracing the introduced changes. It is not incorrect to say that the consumers continue to be price sensitive, but that is because they are not well informed about safety. Thus, to see an actual shift towards safety, both the government and car manufacturers have to work together in changing the mindset of the consumer and promoting vehicle safety as an equally important factor in purchase decisions.

“It’s a shared responsibility of government and manufacturers to inform the consumers and move the market forward. Our project of testing cars has also helped build awareness and get media attention. We will do more testing end this year and get results beginning next year. The combination of government action on regulation, the response of individual manufacturers and the work done by NCAP will improve the whole situation in India.” says Mr. Ward of GNCAP

Brazil has a similar story, where the cheapest models of few most selling cars, such as Volkswagen Gol Trend, Fiat Palio, Chevrolet Celta, Ford KA, Peugeot 207, and Fiat Novo Uno, received only 1 star when crash tested by Latin-NCAP. Moreover, Chinese car, Geely was awarded zero stars in a similar test. This was underpinned by the absence of basic safety features such as airbags, lack of body reinforcements, lower-quality steel, weaker weld spots to support the vehicles, and outdated designs of car platforms. As a result of this, the Brazilian government mandated air bags and anti brake locking systems on all cars in 2014. Like India, this regulation faced much criticism from automakers and was at the verge of being postponed as it leads to an increase in the prices of basic models and also results in a layover of several employees in the case of few models being discontinued. However, the government pushed ahead with the regulations as decided, but offered lower import tariffs for key safety equipment to subdue the expected price rise.

In addition, the government is considering making electronic stability control a standard in all cars; however, it is still in the future. Moreover, the government plans to launch a US$50 million independent crash test center by 2017. While the center is expected to run as a government body, OEMs may provide part of the funding for its operation and even use the center; this raises concerns regarding the autonomous working of the lab. Moreover, since the regulations lack a ‘conformity of production’ clause (which requires automobile safety performance to be spot checked for the entire time the model is produced), the car models are only required to meet the crash test requirements once. Companies can also send a car of their choosing. These factors further may compromise on the credibility of the testing.

The Case of China

Unlike India and Brazil, the upgradations in China’s vehicle safety standards are stemmed from the country’s CNAP (China’s New Car Assessment Programme) initiatives. While the Chinese government has only mandated the use of seat belts and frontal airbags, the number of airbags in vehicles in China is reaching the same level as in Europe and the US. This is primarily due to the aggressive promotion of CNCAP’s safety assessment by the Chinese government, which has encouraged the country’s population to value car safety as an important aspect. “We undertake a lot of promotional initiatives such as advertisement and highway hoardings to promote safety features among consumers. This has really helped in making consumers aware regarding the importance of safety.” says Mr. Guo from CNAP. Furthermore, CNCAP has upgraded its test protocols to match its European counterpart and is expected to be at par with their standards by 2018. CNCAP has also started focusing on accident research and plans to include a test for pedestrian protection in future vehicles. It has also been considering including test scenarios for automatic emergency braking systems that will further help mitigate pedestrian collisions.

Even in case of China, the pricing of the vehicles increased with the addition of safety features but the entire price is not passed down to the consumers, especially in the base-level cars.

However, one of the key reasons why China has upped its vehicle safety standards is to build a good reputation for exports. As Chinese cars gain traction due to competitive pricing and design, they suffer a poor reputation when it comes to quality. Thus, they have consciously increased focus on safety norms to meet global standards. While they are on the right lines, they still have a long way to go in achieving global standards with regards to safety.

Safety-Standard Levels across the Major Emerging Automotive Markets

Safety-Standard Levels across the Major Emerging Automotive Markets

Thus, as safety-standards improve across emerging markets, the onus now lies on OEMs to adapt to these changes. While this will definitely impact the bottom line of the companies, it also presents an opportunity for the carmakers to gain a strong market foothold by offering these safety-features at a minimal pricing. Moreover, although these changes are happening primarily in India and Brazil right now, companies must be prepared for similar regulations to come in Mexico and other Latin American countries in the coming years.

Apart from crash testing standards, there are a lot of talks going on regarding crash prevention technology, the most important being electronic stability control (ESC). While, this has already become a standard in several countries, such as Australia, Canada, EU, Israel, Japan, South Korea, the Russian Federation, Turkey, and the USA, the Global NCAP is working towards making ESC a mandate in all cars manufactured by 2020. “Our overall priority is to ensure that all passenger cars, irrespective of where they are produced, must have the appropriate minimum crash test standards and the most important crash prevention technology (i.e. ESC) by 2020. To achieve this, the most important countries to act are China, India, and Brazil.” states Mr. Ward. With crash test standards becoming a ‘standard’ also among key emerging markets, the introduction of ESC also does not seem far from reality. In fact, Brazil and China have already begun considering making it mandatory. The OEMs that anticipate this and work towards it will have an advantage.

While it has taken several key emerging and frontier automotive markets time to realise the importance of vehicle safety, both for drivers and passengers, and for other people on roads, it is a welcome change with governments introducing several policy measures in recent months to bring about this change. The implementation of regulations and the variation in standards that exists across these markets is a cause of concern, and aspects that OEMs might use to their advantage by bypassing certain global standards. It is important that consumers also make it a point to make safety a priority when purchasing a vehicle, which would force OEMs to ensure that global standards are also followed in emerging and frontier markets. Brazil, China, India must lead the way, and demonstrate that it is possible to make safety a standard, so that OEMs follow this as a standard operating procedure across other emerging and frontier markets.

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China’s Solar Power Boom

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Solar power, once perceived as a luxury that only developed nations could afford, is becoming a viable energy source for a broader set of emerging nations, which are leaning towards solar power generation to meet their obligations under the Kyoto Protocol, conserve scarce traditional resources, reduce dependence on imports of oil and fuel, or address escalating power demand.

In particular, several emerging countries in Asia are showing signs of intensified solar photovoltaic (PV) development in the coming years. For instance, China and India, the two Asian giants, are aiming for solar revolution with the target of installing 100 GW of solar PV capacity by 2020 and 2022, respectively. Solar energy is gaining popularity in many other emerging countries in Asia as well, such as in Thailand, Malaysia, Indonesia, and the Philippines. This intensive growth of the region’s solar markets is offering a gamut of opportunities to domestic and global developers, investors, and financial institutions operating in the solar power industry.

This article is part of a series focusing on solar PV market across selected Asian countries: China, India, Thailand, and Malaysia.
The series closing article Solar Rises in the East examines challenges and opportunities in all four markets, with additional look into Indonesia and
The Philippines.

 

Solar PV Installations

Currently, China represents the fastest growing solar market globally. While, in 2014, a total 38.7 gigawatt (GW) of new solar PV capacity was installed globally, China accounted for the largest share (roughly 27%) of this new capacity, adding some 10.6 GW, followed by Japan and the USA.

China’s strengthening position in the global solar power market is a matter of the past few years. At the end of 2010, China had an installed solar power capacity of less than 1 GW, and within three years it became a leading nation in terms of solar PV installations per year. Present outlook for China’s solar market is indicative of its bright future. Amidst burgeoning market growth, global solar companies are exploring diverse routes to benefit from China’s solar boom.

Market Overview

Total grid-connected solar power capacity in China reached 33.12 GW by the end of March 2015, with 27.79 GW from utility-scale solar PV projects and 5.33 GW from distributed solar PV projects. The country continues to add new capacity on an ongoing basis: it added 5.04 GW of new solar PV capacity in the first quarter of 2015 alone and aims to connect a total of 17.8 GW of new solar PV capacity to the grid in 2015.

Utility-scale solar refers to large-scale grid connected solar power generation, whereas distributed generation refers to electricity produced at or near the point where it is to be consumed. In China, solar power generated through rooftop solar PV systems on residential and commercial buildings as well as ground-mounted solar systems on abandoned lands, unused slopes, canopy for agricultural uses, and fish ponds are recognized as distributed solar PV projects.

All of this is just part of a larger plan to increase solar power output in this country, as according to the 13th Five-Year Plan (2016-2020), China aims to install a total 100 GW solar power capacity by 2020 (doubled from the target of 50GW set in 2013 under 12th Five-Year Plan, which we mentioned in our Perspectives in January 2015).

Growing solar market is expected to offer ample opportunities for new investments. A report released by Ernst & Young in 2014 indicated that China would require about RMB 737 billion (US$120 billion) of capital investment between 2014 and 2017 to meet its solar targets. About 71% of this capital investment value would be required for development of distributed solar PV projects.

“China’s continued demand for new energy capacity, its ongoing battle against air pollution and energy poverty, and its focus on economic development, meant the 100 GW solar target set in Beijing’s last Five-Year Plan could be treated as the bottom.” – Liansheng Miao, Chairman and CEO, Yingli (world’s second-largest solar panel producer), 2015

Such large-scale investments can be aptly utilized to capitalize on country’s abundant solar power generation potential. World Energy Council 2007 estimated China’s solar power potential at around 19,536,000 terawatt-hours (TWh) per year. 17% of mainland China receives annual solar radiation of more than 1,750 kilowatt-hours per square meter (KWh/m2) and more than 40% of China receives between 1,400-1,750 KWh/m2.

According to China National Renewable Energy Centre, several provinces in western and northern parts of the country (including Qinghai, Xinjiang, Tibet, Inner Mongolia, Sichuan and Gansu provinces) represent more than two thirds of the national solar energy resource potential. Most utility-scale solar PV power plants are concentrated in the northern and western parts of China, while distributed solar PV installation is gaining momentum in eastern parts of the country.

Solar Resource of China – Direct Normal Solar Radiation
Solar Resource of China

Source: National Renewable Energy Laboratory

Key Growth Drivers

Attempts to counteract deteriorating air quality

China became the largest consumer of energy in the world in 2010, with majority of its electricity generated from domestic coal reserves. In 2014, coal accounted for 64% of the total energy consumed in the country. Consequently, air pollution, which impacts public health, is a major problem for China to combat. Chinese Ministry of Environmental Protection indicated that nearly 90% Chinese cities did not meet government-recommended standards related to air quality in 2014.

China’s solar boom is driven largely by a progressive policy framework intended to improve country’s energy mix by generating greater portion of energy from clean and abundantly available renewable sources. This push towards solar power generation is also partly aimed at creating additional demand for domestic solar equipment manufacturers.

China, being the largest emitter of carbon dioxide in the world (accounting for about 23% of global carbon dioxide emissions in 2014), is committed to move towards cleaner energy sources including solar power, and to cut down consumption of coal for electricity generation. In November 2014, Chinese President Xi Jinping pledged in an agreement with the US President Barack Obama to increase the share of non-fossil fuels in primary energy consumption in China from 9.8% in 2013 to around 20% by 2030. Country’s abundant solar power potential along with a strong commitment to move towards cleaner energy sources for electricity generation has been a contributing factor that boosted development of solar market in China.

The need to support the struggling indigenous solar panel manufacturing industry

China has been the largest manufacturer and exporter of solar PV panels since 2007, producing the cheapest solar PV panels in the world owing to massive subsidies granted by the government. China has been known to export about 90% of its solar panels. In the face of such a heavy reliance on exports, the trade tariffs recently applied by EU and the USA have affected the growth of this industry.

In 2013, EU and China came up with a trade settlement, under which in a given year, Chinese companies are allowed to export to EU solar equipment able to generate up to 7 GW power without paying duties, provided that the price is not lower than US$0.56 per watt. Any solar products sold above the permissible volume quota or below that minimum price would be subject to anti-dumping duties of an average of 47%. Consequently, EU’s share in overall Chinese solar PV module exports reduced from 65% in 2012 to 30% in 2013, and further down to 16% in 2014. At the same time, in December 2014, the USA, which accounted for 3% of the Chinese solar PV module exports in 2014, imposed anti-dumping duty rates of 52% and anti-subsidy rates of 39% on imports of solar panels made in China.

Chinese government’s aggressive efforts to drive significant expansion of domestic solar energy generation capacity is concentrated to spur new demand for solar PV equipment, and thus provide new market opportunity for indigenous solar panel manufacturing industry, dampened by series of anti-dumping duties levied by top export countries.

Favorable policies and generous government incentives for Chinese solar market
Impressive growth rate of Chinese solar market in the recent years has been largely driven by conducive investment and policy environment. The government has introduced several incentive schemes to encourage solar developers to ramp up solar PV installation in China.

Key Policies to Promote Solar PV Installations in ChinaKey Policies to Promote Solar PV Installations in China

While the introduction of subsidies and other solutions to fuel investment and installations of solar power facilities led to considerable positive results and increase in solar power generation capacity in China, the government intends to stop providing subsidies for solar projects by 2020 in line with falling costs of developing and operating solar projects in the country. With advancements in technology, leading Chinese solar companies’ solar PV modules cost decreased from US$1.31 per watt in 2011 to US$0.50 per watt in 2014, representing about 62% decrease in three years. In 2014, Deutsche Bank noted that the solar PV module cost could further decrease by 30-40% in next several years. Moreover, solar power generation cost in China is expected to reach a level comparable with the cost of conventional power generation by 2017. With the decrease of solar panel production costs and the decrease in cost of electricity generation using solar energy, the government will no longer consider subsidies a necessary tool to drive the solar market growth. While generous government incentives are likely to dry out over time, many renewable energy-friendly policies introduced since 2006 remain in place, and continue to ensure a favorable environment for solar power market.

Key Challenges

Lower development of China’s distributed solar PV sector in comparison with utility-scale solar PV generation

Most large-scale utility projects are concentrated in the highly irradiated northwestern regions of China, where the economy is relatively underdeveloped and electricity consumption is limited. Inefficient grid infrastructure in the country poses substantial challenge of power loss in long-distance transmission from northwest China to other regions that are rapidly developing and experiencing shortage of energy.

Considering transmission challenges and costs involved in utility-scale solar PV projects, most observers of China’s solar energy sector suggest that the country should ideally shift its solar PV market, which concentrates primarily on utility-scale solar PV in remote locations, to distributed solar PV in densely populated areas in the north, south, and east. However, as the current subsidy structure favors utility-scale solar PV projects over distributed solar PV projects, the development of distributed solar PV sector is relatively low. As of 2014, distributed solar PV installations connected to the grid accounted for only 16.65% of the total grid-connected solar installed capacity in China.

Current FiT Policy (Introduced in 2013)

Current FiT Policy (Introduced in 2013)

Source: National Development Reform Commission

Furthermore, the market for distributed solar PV in China faces other challenges, such as the possible dearth of rooftops suitable for installations of solar systems. Therefore, solar energy developers continue to be more interested in utility-scale solar PV projects in northwestern regions over distributed solar PV projects in other parts of the country, which leads to great loss of power during long-distance transmission, a challenge that could be overcome only if the grid infrastructure is significantly improved.

 

Rising concerns about the quality of domestically produced solar PV modules

Solar developers, investors, and financial institutions are increasingly concerned about the quality, performance, and reliability of solar PV modules produced in China. General Administration of Quality Supervision, Inspection and Quarantine, a Chinese regulatory agency, indicated in 2014 that about 23% of solar PV modules produced by Chinese companies for the domestic solar market did not meet recommended quality requirements related to panel’s antireflective coating. Findings were based on inspection conducted in the third quarter of 2014 with samples from 30 companies, which represented about half of China’s suppliers of antireflective glass. Flawed antireflective coating may result in gradual deterioration of power output, thus increasing operational inefficiencies in the long-term. Experts suggest that such quality defects may not have immediate effect and can go undetected for two or more years of operation of the solar plant, raising uncertainty among investors and developers.

“A reduction in power generation caused by quality imperfections means declining investment returns or even losses from solar farms.” – Meng Xiangan, Vice Chairman, China Renewable Energy Society, 2015

Quality inspection of 3.3 GW of installed solar PV projects (about 10% of China’s installed solar capacity at the end of 2014) by China General Certification Center in 2014, indicated that a third of 425 utility-scale solar parks surveyed had several defects including faulty solar modules, poor construction, design flaws, and project mismanagement. These solar parks, built in China between 2012 and 2014, are likely to yield lower power output than originally estimated.

In light of recently identified quality issues in the domestically manufactured solar PV modules, investors and developers have increased caution in selection and implementation of solar projects in China. For instance, in a recent interview with Bloomberg, CEO of Sky Solar, a Hong Kong-based solar developer, said that the company plans to invest in China only at a “careful” pace because of quality concerns. This might be indicative of broader industry’s concerns that might hamper the rapid development of solar plants in the country.

 

Opportunities for Global Solar Companies

Global solar developers seek manifold opportunities in China’s expanding solar market

Global solar companies are keen to grasp the opportunities offered by rapidly growing China’s solar market. With the market’s expansion, a surge is expected in demand for imports of certain materials and instruments utilized in solar equipment manufacturing in the country.

Participation from foreign solar firms in development of utility-scale solar PV projects in China is increasing in the form of joint development ventures. For instance, in 2014, SunPower, a California-based solar developer, announced plans to develop 3 GW of solar PV in Sichuan province in collaboration with four Chinese partners. SunEdison, another US-based solar energy company, is planning to partner with Chinese companies for development of 1 GW of utility-scale solar project in the country.

Foreign solar developers also see opportunity in China’s distributed solar PV sector. For instance, UGE International, a US-based firm offering renewable energy solutions, has partnered with Blue Sky Energy Efficiency, a Hong Kong-based energy investor, to offer the power purchase agreements (PPA) to customers in China.

“Blue Sky and UGE are bringing an innovative solar energy financing structure to China that will make it possible to rapidly expand use of on-site renewable energy with no money down.” – Rosie Pidcock, Senior Manager of Commercial Solar, UGE International, 2015

According to Solar Energy Industries Association, solar PPA is a financial agreement where a developer arranges for the design, permits, financing, and installation of a solar energy system on a customer’s property (rooftop) at little to no cost. The developer sells the power generated to the host customer at a fixed rate that is typically lower than the local utility’s retail rate. This lower electricity price allows the customer to purchase electricity at a rate lower than when purchased from the grid while the developer receives revenue from selling electricity as well as tax credits and other incentives generated from the system. PPAs are common in the USA, but they will be introduced in China for the first time in 2015. PPA financing structure will provide solar electricity to local and multinational corporations operating in China at a cost lower than conventional electricity without any capital investment. Hence, success of PPA is expected to boost the growth of distributed solar PV in China.

 

Inadequate domestic supply of some materials and instruments used in solar equipment manufacturing will encourage global exporters to strengthen their focus on Chinese market

Foreign companies may explore opportunities to export critical materials and components used in manufacturing of solar equipment to China. According to a report released by CCM in 2015, a Guangzhou-based research firm, China relies on imports for about 40-50% of its polysilicon (a key commodity for solar PV panel production) needs. In 2014, China imported around 93,000 tons of polysilicon worth US$2 billion. Other materials used in production of solar PV modules, including silver paste, TPT back sheets, EVA encapsulant film, and slurry material, are also short in supply in China. Furthermore, huge demand is anticipated for advanced equipment required to separate high-purity polysilicon, including hydrogenation furnaces, large-scale casting furnaces, plasma enhanced chemical vapor deposition (PECVD) coating equipment, and automatic screen printing presses. China is dependent on imports of these materials and technologies used in solar PV module production, and thus, the ongoing expansion of Chinese solar market will provide great opportunities to global suppliers of these commodities.

 

 

Despite a few challenges, China’s solar market is believed to be set for rapid expansion, at least for the foreseeable future

China is installing solar PV capacity at a breakneck pace. The country is already the largest producer of solar PV modules in the world and if it is able to achieve its solar targets, it might become the largest solar power consumer as well. Chinese government’s support for the development of solar market to achieve its ambitious solar targets by 2020 will serve as a key growth driver. However, China’s ability to establish strong and lasting position as the world’s largest solar power market will be dependent on its ability to efficiently deal with challenges it is facing, challenges significant enough to cause caution amongst private investments. The industry would need to focus on potential quality issues identified in domestically produced solar equipment in order to uphold investors’ confidence. The government’s role must also extend beyond the support for solar generation targets, to include development of distributed solar PV sector, that would need additional stimulus from government to pick up pace.

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Russia’s Energy Economy Sanctioned

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A host of countries are of the view that Russia is intentionally trying to destabilize Ukraine by allowing infiltration of arms and ammunitions to support Ukraine’s separatist groups. These countries also believe that Russia desires Ukraine to be a part of the newly formed Eurasian Union and be in its circle of influence. This is pinching more to the western group of countries because they, on the other hand, want to integrate Ukraine with the West and make it a member of NATO. Conflicting interests have resulted in the infliction of sanctions from both sides, Russia being the bigger victim.

In order to dilute Russia’s efforts towards annexing Ukraine, western countries imposed sanctions on Russia which initially followed a route of barring entry of people close to the Russian leadership and blocking their assets in those countries, but this strategy proved futile. The result was a series of new sanctions aimed at Russia’s various sectors in an attempt to further pressurize the country by slowing down its economic growth and deteriorating its investment atmosphere.

Russia's Exports

The latest series of sanctions (those released in July and September 2014) were articulated to weaken Russia’s economy by mainly influencing oil production and its exports (in 2013, exports constituted 28.4% of Russia’s nominal GDP, of which oil and natural gas exports had a share of 68%).

Major Russian energy giants such as Rosneft (integrated oil company majorly owned by the Government of Russia), Transneft (world’s largest oil pipeline company), Lukoil (Russia’s second largest oil company), and Gazprom Neft (fourth largest oil producer in Russia) were directly brought under the purview of sanctions.

The ‘energy sanctions’ prohibit western companies to share energy technologies and invest capital in any Russian offshore oil-drilling projects based out of the Arctic regions, Russian Black Sea, and western Siberia’s onshore. In addition to technology constraint, western companies are debarred from financing Russia’s key state-owned banks for more than 90 days in order to build up financial pressure on Russian energy companies indirectly.


Rosneft and ExxonMobil’s Discovery of Oil at the Universitetskaya-1 Well

One of the major projects under the Rosneft and ExxonMobil partnership was to discover oil and gas reserves in Kara and Black Seas through a joint venture established in 2012. The two companies had also agreed on other projects such as an attempt to conquer the Arctic region’s oil and gas reserves through establishment of the Arctic Research and Design Center for Continental Shelf Development (2013), understand feasibility of developing a LNG facility in Russia (2013), and a pilot project for tight oil reserves development in the shale basin of Western Siberia (end of 2013). Talking about some hard cash involved in research and development activities, Rosneft invested US$250 million while ExxonMobil gambled US$200 million.

In September 2014, the two companies announced their success at discovering oil at the Universitetskaya-1 well in the Kara Sea which became Russia’s second offshore Arctic project. This discovery was a big finding and they initiated drilling activities quickly through the West Alpha rig (originally owned by Seadrill subsidiary of North Atlantic Drilling but under a contract with ExxonMobil till July 2016). Till this time, the partners were under the assumption that they won’t be affected by western sanctions imposed on Russia but to their disappointment, the new sanctions restrained ExxonMobil to cooperate (restricted energy technology transfer) with Rosneft on this project any further. To their dismay, drilling came to a halt in October 2014 as Rosneft could not utilize ExxonMobil’s West Alpha rig.

Rosneft is presently on a lookout for a new rig managed by companies located in the East, China, or South Korea. An attempt to find a new rig and then adjust it at the Kara Sea’s well site is going to be a enormous task and expected to delay things at least till mid-2016. Meanwhile, China (through Honghua Group, for instance) is strengthening its chances of getting positioned as a substitute provider of energy sector technology to Russia, but it is doubtful if it will be able to match the capabilities of western companies. It will be a humongous challenge for Rosneft to find a rig provider which has the expertise to ensure safety operations in such a tough part of the world.

The objective of recent western sanctions appears to not only limit present oil production but harm the future of Russia’s energy sector. 90% of current oil production in Russia comes from conventional oil fields such as West Siberian brownfields which do not require highly advanced western energy technologies, but the problem is that these fields are depleting rapidly. Russia, therefore, faces an urgent need of finding new oil sources to retain its position of being one of the main players in the world’s energy sector (3rd largest crude oil producer – 10.44 million bbl/day, 2013; 2nd largest crude oil exporter – 4.72 million bbl/day, 2013; 2nd largest natural gas producer – 669.7 billion cu m, 2013; largest natural gas exporter – 196 billion cu m, 2013).

Delay of the Rosneft project is slowly fading Russia’s aspirations of increasing oil output as tapping of Universitetskaya well’s oil reserves (estimated to be up to 9 billion barrels) could have added approximately US$900 billion to the government coffer over the next 10-12 years. Similar projects might have led to discovery of new oil reservoirs in the Kara Sea where oil reserves are estimated to be around 13 billion tons (way more than Gulf of Mexico’s and Saudi Arabia’s independent reserves). As per Merrill Lynch, Russia might lose US$500 billion of direct investment and US$26-65 billion of budget revenue during the next 10 years, as energy investors from other parts of the world also become uncertain of Russia’s economic stability.

If western sanctions remain at this level, it would make it difficult for Russia to discover and exploit oil resources in areas like Arctic, as it is primarily western companies (BP, ExxonMobil, Shell, etc.) which have the required expertise and technology to do so. Since the Russian energy sector almost single-handedly drives the country’s economy through exports, impact of the western sanctions, which is already impacting various facets of Russian economy, will be felt heavily in the long-term.

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China’s Green Energy Revolution

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China is widely criticized as the world’s largest emitter of carbon dioxide and other greenhouse gases. Less noticed, however, has been the fact that the country is also building the world’s largest renewable energy system. China plays a significant role in the development of green energy technologies and has over the years become the world’s biggest generator and investor of renewable energy. As China heads towards becoming the global leader in renewable energy systems, we pause to take a look at the major drivers behind this development and its implications on China as well as on the rest of the world.

Reducing CO2 emissions has become one of the top priorities and the Chinese government has set its eyes on developing sustainable energy solutions for its growing energy needs. To support this objective, China has set forth aggressive policies and targets by rolling out pilot projects to support the country’s pollution reduction initiatives and those which reflect the strategic importance of renewable energy in country’s future growth.

Why has China suddenly become so environmental conscious and investing billions on renewable energy?

  1. Air and water pollution levels have become critical, causing tangible human and environmental damage, which lead Chinese authorities to rethink on the excessive use of fossil fuels. Considering current and potential future environmental hazards of burning fossil fuels, China decided to decrease the use of coal and is actively seeking for greener energy solutions. While serious concerns about climate change and global warming are key drivers towards expanding the use of renewable energy for any country, for China, the motives are well beyond abating climate change; they are creating energy self-sufficiency and fostering industrial development.

  2. China is witnessing a dramatic depletion of its natural gas and coal resources and has become a net importer of these resources. China’s increased dependency on imported natural gas, coal and oil to meet its growing energy demands bring along some major energy security concerns. The current political volatility in Russia, the Middle-East and Africa pose serious challenges not only for China, but, for other countries as well to secure their energy supplies for the future. Not to mention the risks associated with energy transport routes.

Taking into account these geo-political risks and in order to achieve a secure, efficient and greener energy system, China started its journey towards developing an alternative energy system. A new system that reduces pollution, limits its dependency on foreign coal, natural gas and oil was envisioned.

China’s Ambitious Renewable Energy Plans

According to RENI21’s 2014 Global report, in 2013, China had 378 gigawatts (GW) of electric power generation capacity based on renewable sources, far ahead of USA (172 GW). The nation generated over 1,000 terawatt hours of electricity from water, wind and solar sources in 2013, which is nearly the combined power generation of France and Germany.

The country has now set its eyes on leading the global renewable energy revolution with very ambitious 2020 renewable energy development targets.

China’s Renewable Energy Development Targets













In May 2015, we published an article on the solar power boom in China, in which we presented the revised, higher solar power generation targets.

To achieve the 2020 renewable energy targets, China has adopted a two-fold strategy.

  1. Rapidly expand renewable energy capabilities to generate greener and sustainable energy.

    It has significantly expanded its manufacturing capabilities in wind turbines and solar panels to produce renewable electricity. As per data from The Asia-Pacific Journal, China spent a total of US$56.3 billion on water, wind, solar and other renewable projects in 2013. Further, China added 94 GW of new capacity, of which 55.3 GW came from renewable sources (59%), and just 36.5 GW (or 39%) from thermal sources. This highlights a major shift in energy generation mix as well as China’s commitment towards cleaner energy technologies.

  2. Reduce carbon footprint.

    The government has banned sale and import of coal with more than 40% ash and 3% sulphur. Government’s Five year plans have stringent targets on reducing coal consumption as well as CO2 emissions. It is expected that environmental and import reforms will become more stringent along with greater restrictions, which would help accelerate China’s migration to a green economy.

The government has also announced a range of financial support services, subsidies, incentives and procurement programs for green energy production and consumption. Solar PV and automotive industries are good examples.

  1. By supporting domestic production and providing export incentives, China has become the global leader in solar panels. Over the last few years, the government has also financed small-scale decentralized energy projects, deployed and used by households and small businesses, in order to make them self-sufficient in their energy needs

  2. China has also positioned itself as the leading manufacturer of electric vehicles globally. According to Bloomberg, China is mandating that electric cars make up at least 30% of government vehicle purchases by 2016. To achieve this target, the government has started investing on essential infrastructure and providing tax incentives for purchasing of electric vehicles.


China has laid the foundations for a future where renewable energy will play a vital role. The advancements in technology and changes in policies will further enhance the country’s renewable energy landscape and will drive affordable, secure and greener energy. How the Asian giant achieves to balance between its economic, industrial, regulatory and environmental goals with sustainable renewable energy investments will, however, only become clear in the next few years.

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Luxury Brands Losing Ground in China, Looking Elsewhere

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It was not very long ago, when the European luxury products market sprung back to life on the back of the booming Asian markets. Right after the global recession, most luxury brands, however, re-strategized their efforts towards the high-end luxury-hungry markets of China and other Asia-Pacific regions. For the last several years, China has been the industry’s main growth engine, helping make up for lackluster demand in Europe and Japan. But this period seems to be ending much sooner than the industry would have wished for.

Leading luxury brands, Louis Vuitton, Gucci, and Burberry, are losing their shine in the Chinese market, which along with Hong Kong and Macau, represent more than a third of global sales for most of these brands. This premature slump is attributed not only to the stagnation in the Chinese economy, but also to a maturity in consumer tastes in the region.

Over the past few years, there was an explosion of demand for luxury items that communicated wealth and status to the society. However, on the flip side, this led to over-exposure of luxury brands, which in time has resulted in them losing their premium status. This has translated into a shift in priorities among such consumers, who now feel a ubiquitous ‘logo-fatigue’ with such products and are looking for goods that provide a more unique and authentic image.

Unlike the more established European and American markets, where trends and consumer preferences take a long time to form and assimilate, Asian (especially Chinese) markets have witnessed consumer trends emerge, become a fad, and then be rejected, very quickly. The shorter life span of a trend makes it a challenge for these companies to move out of the ‘masstige’ market (a combination of mass and prestige market) and present a fresh take on luxury items with discrete or even absent logos. Several brands, such as Saint Laurent and Balenciaga, have realized this shift in consumer perception of luxury and have been successful in implementing it.

Although most leading fashion and luxury brands have now embraced this trend in their Asian strategy, the demand from China is not expected to recover enough to regain its peak. A large proportion of luxury products’ demand came from China’s deep-embedded culture of lavish gifting for favors (to government officials); however, President Xi’s latest campaign against corruption and lavish gifting have further dampened sales of luxury products, especially watches.

This puts the industry in a challenging spot to re-innovate themselves for the Asian consumers as well as to find new growth frontiers. While other Asian counterparts, such as India, continue to look promising, luxury brands are now establishing presence in African markets. Sub-Saharan Africa is being viewed as a promising market for luxury goods on the back of increasing urbanization, economic development and most importantly a burgeoning aspirational middle-upper class that view luxury goods as a sign of status and success. Although, growth is from a low base, the appetite for luxury goods in this market is expected to soar. Leading brands – Cartier, Louis Vuitton, Burberry, Gucci, Fendi, and Salvatore Ferragamo, have already set foot in Africa. While these brands are largely concentrated in South Africa and Morocco, luxury sales are also picking up in new markets like Angola and Nigeria.

Although most companies have started focusing on developing themselves in the African markets, it is far-fetched to say that these markets will be able to substitute the demand from China and other maturing Asia-Pacific regions, especially any time in the near future. This puts the industry in a precarious position in the coming years, settling down for moderate growth. Companies that push themselves at this time, to redefine luxury and bring about radical changes to advertising campaigns and store designs to recapture the audience have a strong chance of emerging as market leaders.

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A Dragon Unfurls its Wings – How China’s Economic Slowdown Is Rippling Through Emerging Markets

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Almost 10 years ago, Goldman Sachs published a report, in which it predicted Chinese GDP to overtake the USA’s GDP by 2020. Today, this prognosis looks like a far-fetched dream as China has recently been riding a wild economic horse. When Chinese economy was growing, its demand for various products and services contributed to the economic growth of emerging markets across the world. The deteriorating performance of Chinese economy over the past few years appears to have started adversely affecting these markets. Will the emerging markets be able to successfully sustain in future?

China witnessed a spectacular and continued rise of its GDP during major part of last three decades. However, end of 2007 saw a turning point, and the country’s economic growth rate cooled off from 14.2% still in 2007 down to 9.6% in 2008, reaching mere 7.4% in the first quarter of 2014. This single digit growth would be more than satisfactory for a lot of economies. However, for China, which regularly recorded double digit rates, this extended period of slower growth is disappointing, with some calling it as ‘an end of an era’.

For years, China was enjoying relentless economic growth through massive investments, exemplary rise in exports, as well as abundance of labor force which was available at low wages. Due to these factors, economists started referring to China’s economic growth model as an investment-and-export driven model. This model has played a key role in driving exports also from emerging markets such as Latin America, Asia, and Middle East, as there was substantial demand for commodities from China’s end to support its domestic consumption as well as export requirements. With the weakening of foreign demand and internal consumption, China’s export demands have considerably weakened, leading to declining prices of export-related commodities and resulting in an adverse impact on emerging markets’ GDPs.

Is the Slowdown for Real?

China’s economic slowdown has not only been reflected in its modest GDP growth figures, but also in several other negative trends that have been observed. These include a continuous decline in the percentage of fixed-asset investments as a part of China’s GDP. Investments contracted from 24.8% in 2007 to 19.6% in 2013. Reduction of fixed-asset investments is likely to negatively contribute towards a country’s economic slowdown by adversely affecting sectors such as real estate, infrastructure, machinery, metals, and construction.GDP

Moreover, yuan has depreciated against US dollar (with average exchange rate of 7.9 in 2006 down to 6.26 in April 2014). In addition to this, Purchasing Managers’ Index (PMI), which is a composite index of sub-indicators (production level, new orders, supplier deliveries, inventories, and employment level), has plunged from 52.9 in 2006 to 48.3 in April 2014, below the middle value (50), thus indicating some contraction of China’s manufacturing industry. This industry contributes significantly to China’s GDP, therefore, the industry’s deterioration has a direct adverse effect on China’s economy.

This negative twist in China’s economic growth story is believed to be a result of a synergetic effect of various internal and external factors, some of which include:

  • Over-reliance on abundant supply of low-cost labor. For decades, China has based its growth on production of goods requiring high amount of cheap manual labor. However, as the economy continued growing, the demand for higher wages has increased, pumping up the labor cost. This cost is contributing to the inflation of products’ export prices, which is ultimately translating to a lower demand of Chinese goods.

  • The focus of Chinese workforce has been shifting from rural agriculture to urban manufacturing. The government has been taking steps to propel this transition in order to boost economic growth, prosperity, and industrialization. As more and more Chinese moved to urban areas, gradually, the transition has started yielding diminishing returns mainly due to saturation in the manufacturing industry.

  • Europe has also played a villainous role in China’s story. It has been one of China’s largest export markets but has recently been extending a significantly low demand for commodities and products from China. In 2007, the European Union accounted for 20.1% of all the exports from China. This percentage has fallen to 16.3% in 2012.

Chinese Leaders React

The Chinese government is in a reactive mode and has been unveiling a plethora of actions to bolster growth. The overall approach looks conservative in nature with a targeted GDP growth of 7.5% for this year, after recording a growth of 7.7% in 2013.

In an attempt to improve the situation, some of the expected financial and fiscal reforms are in the pipeline. Liberalizing bank deposit rates and relaxing entry barriers for private investment are some of the moves to be implemented by 2020. Various property measures (such as relaxing home purchase rules, providing tax subsidies, or cutting down payments) are planned to be introduced (based on local demands and conditions prevailing in a particular city) in order to balance the property market as a whole. A target of creating 10 million new jobs in Beijing has also been set for 2014. The underlying motive of all the rescue measures is strengthening the Chinese economy’s reliance on domestic consumption and services.

Influence on Emerging Markets

Undoubtedly, swing of the Chinese economy towards consumption and services is expected to considerably affect all the connected economies, several of them being emerging markets economies (EMEs). Commodity producing emerging markets such as Latin America, Middle East, parts of Africa and Asia are likely to be affected. Within this group, metal producers will probably suffer the most, as China had a significant demand for iron ore, steel, and copper during its investment boom phase. Within this subgroup, economies which are running current account deficits are forecast to be more susceptible to the ill-effects of China’s economic slowdown.

As China tilts towards domestic consumption, Latin America has started to witness a dawdling growth as the region’s growth rate dropped from an average of 4.3% in the period of 2004-2011 to 2.6% currently. For instance, as Chile depends heavily on copper exports to sustain its economic expansion, the country has been regularly reporting sluggish growth rates (5.8%, 5.9%, and 5.6% in 2010, 2011, and 2012, respectively) due to the decline in the price of copper, largely fueled by a lower demand from China. In addition to this, Brazil and Mexico are struggling to survive through falling benchmark stock indexes. The fall is mainly due to declining prices of commodities, as exports to China from Brazil and Mexico have weakened.

Middle East will probably register both positive and negative effects of China’s economic slowdown. One of the ill-effects could be reduction in oil prices, from US$140 per barrel in 2008 to approximately US$80 per barrel by the end of 2014, due to China’s lower demand of oil. On the positive side, Middle East is strengthening its position as an attractive region with long-term growth since China is being considered as a slightly less attractive option for investment by a majority of investors. This is mainly due to Middle East’s good infrastructure and accelerated development of industries such as defense, chemical, and automotive, and not only traditionally developed energy and petrochemicals.

The impact on African countries is expected to be negative primarily due to declining commodity prices. As Africa’s growth substantially depends on its exports to China, some African commodity exporters, such as Zambia, Sudan, and Angola, have started to feel the strain as China’s demand for commodities is weakening. This weakened demand has led to lower prices of commodities such as aluminum, copper, and oil, which registered a y-o-y decline by 4%, 9.5%, and 5.4%, respectively in January 2013. Zambia is likely to receive the strongest hit as copper constitutes almost 80% of the country’s total exports and reduction in copper prices could make its current account deficit to account for almost 4% of GDP in 2014.

Effect of China’s economic slowdown will vary from country to country in case of Asia. Countries such as Indonesia and Philippines, which have significant domestic demand, would be less adversely affected as they are less dependent on commodities exports to China. China’s unstable economy has spurred new investments in other growing Asian economies such as Cambodia. India is also likely to benefit from the ability to import oil at lower prices, which are pushed down by China’s weakened demand for oil. At the same time, however, export of cotton and metals such as copper and iron ore from India to China is dampened, adversely affecting India’s economy.

While EMEs have already been witnessing a lower demand from their traditional trading partners such as European Union and the USA, China’s slowdown will be an added burden to their economies.
China's Impact


It’s Touch and Go

It is rather evident that Chinese economic slowdown is having an adverse impact on emerging countries across Africa, Asia, and Latin America. One can hope that the measures taken by the Chinese leadership to curtail the slowdown will soon start taking effect and gradually lift up the economy, and in doing so, control the extent of damage spilling over many emerging countries and their economies.

In the event that the Chinese economy is unable to recover from this period of slowdown soon, it will continue to be a terrible blow to the economic ambitions of several emerging markets, especially those in Africa and parts of Asia-Pacific, which are heavily reliant on Chinese investment and trade relations.

Simultaneously to absorbing fewer production inputs imported from emerging countries, it is worth noting that China’s role in world economics might start to alter as it transforms to a consumption-led economy. This transformation is likely to slowly increase China’s appetite for imports of products and services, apart from traditional commodities-focused imports. It will be interesting to observe whether and how some of the emerging economies will attempt to satisfy this new Chinese hunger for goods extending beyond simple commodities.

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