How China's long-term roadmap could impact energy security, commodities

Energy security was not the overarching concern at China's biggest political meeting of the year, the "Two Sessions" or "lianghui". The main outcomes of these were a revamp of financial regulators, data security and responding to the US' "containment" of the Chinese economy.

But this does not mean that energy security has become less important.

In fact, soon after these parliamentary meetings, Beijing brokered talks between Tehran and Riyadh to resume diplomatic relations, bringing the oil and gas producers closer to its sphere of influence. Similarly, President Xi Jinping's visit to Moscow has an oil and gas element to it.

With energy security taking a backseat at China's most important political meetings of the year, this means that recent efforts to bolster energy security through domestic mechanisms have been successful and China feels it is able to weather any immediate disruptions to supply or markets.

What is more meaningful for the energy sector are the broader messages from China's new leaders like the freshly appointed Prime Minister Li Qiang on China's economic and policy roadmap.

Stability a prerequisite for prosperity

Stability was the dominant theme at the meetings, and was mentioned by both Xi and Li.

"We need to better coordinate development and security. Security is the foundation of development and stability is the prerequisite for prosperity," Xi said during the first session of the 14th National People's Congress March 13.

For the energy sector, this translated to maximizing domestic sources like coal and ramping up investment in domestic production across hydrocarbons, including oil and gas. Excessive dependence on oil and gas imports, an LNG sector increasingly dominated by the US and Australia, and a global payments system dominated by the petrodollar pose challenges to energy security.

"To avert power shortages and outages, China continues to prioritize its energy security. A large part of this effort lies in stabilizing the coal market. The government is telling miners to commit a high portion of their output to long-term contracts with the power sector," S&P Global Ratings said in a March 7 report that called thermal coal the bedrock of China's energy security.

According to the report, coal will likely continue as the country's dominant power source for at least another three to five years.

"This fuel presents the easiest path to energy security. This is based on China's vast coal reserves and coal remains the most affordable option for base-load power," Ratings said.

China's Government Work Report 2023 published on March 5 stressed on strengthening domestic exploration and development of important energy sources and increasing reserves and production.

Commodity markets regulation

Beijing made data control its top priority by setting up a national data bureau to deal with data privacy and storage issues, which complement recent efforts to gain control over its vast trove of electronic information.

This will have a ripple effect on commodities and financial markets in the coming years. Together with concerns over "stability," the data controls mean that China will not shy away from using regulatory mechanisms to manage fuel price volatility.

In mid-March, Chinese bond markets took a hit after authorities suspended data feeds to price aggregators. In 2022, vessel tracking services were affected after data providers were unable to send data out of China, following the introduction of China's Personal Information Protection Law that took effect Nov. 1.

China sought to influence commodity prices even before market interventions by governments became commonplace due to the global energy crisis and the Russia-Ukraine war.

In May 2021, the National Development and Reform Commission, China's top economic planning body, said it will strengthen monitoring and price controls on metals, agricultural and energy commodities in its 14th five-year plan (2021-25).

High-quality development

Both Xi and Li stressed on the need for high-quality development, which basically refers to upgrading China's manufacturing capabilities to high-end products. This is closely related to China's energy transition as one facet of high-quality development is using green energy.

"We must also promote transformation and upgrading of industries, promote coordinated urban-rural and regional development, make further efforts to build a green and low-carbon economy and society, and effectively upgrade the quality and appropriately expand the output of our economy, so as to constantly increase our economic strength, scientific and technological capabilities and composite national strength," Xi said during a speech addressed to lawmakers.

China is expected to continue strengthening its position as a clean energy superpower and maintain control over supply chains. Energy transition is the cornerstone of its manufacturing game plan, the driver of its future economy and its primary means to achieving energy security. Even in the years of China's opening up under Deng Xiaoping, hydropower was already central to China's energy self-reliance goals.

Policy outlook

There were at least two other broader policy messages that have implications for energy -- the role of the private sector at a time when state-owned enterprises have gained more influence under Xi and the scope for more market reforms amid perceptions of Beijing's withdrawal.

Li addressed concerns around the recent crackdown on private firms in the technology sector saying "private enterprises will enjoy a better environment and broader space for development."

"Standing at a new starting point, this government will continue to foster a market-oriented and law-based business environment in keeping with international standards, treat companies under all types of ownership as equals, protect the property rights of enterprises and the rights and interests of entrepreneurs in accordance with law," Li said during a press conference March 13. "We will create a level playing field for all kinds of market entities and make further efforts to support private enterprises to grow and thrive. As for development space, China has a super-sized market with huge demand. There are a lot of new sectors and new racing tracks that can be tapped. All this promises great opportunities for private entrepreneurs."

Beijing's approach to private enterprise is important because technological development for energy transition sectors like green hydrogen, carbon capture and deeper renewables penetration could rely heavily on non-public entities.

The Biden administration's Inflation Reduction Act raised the stakes for global competition on clean energy technologies and while Beijing has not issued an official response, ramping up private sector innovation will be key to competing with the US.

Energy reforms are also crucial to improving downstream pricing in the gas sector as an increasing number of second- and third-tier companies become new LNG importers. Power market reforms are vital to build an interconnected national grid that can support deeper penetration of renewables.

Meanwhile, China's 5% economic growth target is only barely supportive for commodities demand. Energy consumption is a barometer of economic growth and the bigger problem may not be the lack of fuel supply but rather of demand.

"This [5% target] summarizes its policy priorities in 2023, in our view. The economic target likely also reflects the weaker global economic conditions this year and the continued headwinds arising from geopolitical factors," Ratings said in its March 19 report on the Two Sessions. "We believe the 5% target also reflects China's continued focus on longer-term economic and financial stability. Policy support for economic growth this year is unlikely to be so strong that it risks fiscal and financial sustainability."

It remains to be seen how the consolidation of power under Xi and the changing US-China relationship percolates down to the oil, gas and coal sectors. Li heads a new federal leadership, largely picked from provincial cadre but without a technocratic background or their predecessors' reformist mindset, and this is likely to reflect in future energy policy.