China – Breakingviews – Xi’s green campaign will restructure state sector
HONG KONG (Reuters Breakingviews) – Xi Jinping’s push to make the world’s second-largest economy carbon-neutral by 2060 will reshape the state sector. Equity investors have applauded moves by energy giants like Sinopec and PetroChina to jump on the green bandwagon. But creditors and smaller players in coal and heavy industries might shiver.
Chinese state-owned enterprises generate around 4.5% of global GDP, estimates Gavekal Dragonomics’ Andrew Batson, and they dominate energy-intensive industries. Cleaning them up will be difficult and painful, but would also go a long way toward meeting the emissions pledge Xi made to the world last September. For the biggest firms, it also offers an opportunity to rebrand themselves. Sinopec, formally known as China Petroleum & Chemical Corporation, promised to increase its hydrogen filling stations from 27 to 1,000 by 2025; Morgan Stanley estimates that would contribute to keeping up to 300,000 hydrogen-powered commercial vehicles on the road. Long a market laggard, Sinopec shares shot up 14% in February. PetroChina set more modest goals, and was rewarded with a more modest gain. Peers will get the message.
With China’s most powerful leader since Mao Zedong behind the push, and an environmental regulator empowered from a series of ministry consolidations in 2018, environmentalists have cause for optimism that the People’s Republic will deliver. But investors should remember that sweeping capacity cuts to polluting industries implemented in 2016 caused thousands of small producers to collapse. This next push will be risky, forcing SOEs into immature and expensive technologies while private demand is not yet established. Shareholders may end up regretting their confidence in Sinopec’s hydrogen plans. And many smaller players may go bankrupt.
Ma Jun, a prominent central bank advisor, warned about this risk in January, citing a Tsinghua University study that predicted default rates for coal producers alone could jump from just 3% in 2020 to 22% in 2030. In November, one of the biggest regional state coal producers Yongcheng defaulted on a 1 billion yuan ($155 million) bond; peer Jizhong Energy Resources is now struggling to pay off 10.5 billion yuan. In 2019 China’s coal sector alone owed over 3.5 trillion yuan, the U.S.-based Natural Resources Defense Council estimated. Xi’s green campaign may deliver more short-term pain than gain for investors.
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