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China’s recent heat wave — its longest and most severe in more than 50 years — has created challenges across the country. As of this writing, the string of extreme heat has surpassed 70 days. At least 240 cities reported temperatures of 40°C. Lack of rain (the government issued multiple nationwide drought alerts since the middle of August) caused hydropower plants to curtail output, leading to widespread electricity outages and shuttering factories in the semiconductor, electronics, and automotive sectors — exacerbating global supply-chain difficulties.
As awful as the heat wave has been, China’s ability to mitigate the economic repercussions underscores how climate resiliency initiatives can function as intended to lessen the physical effects of climate change and help keep the economy running despite increasing unpredictability.
For the past decade, China has pursued a comprehensive climate adaptation and mitigation approach, bolstering water management, investing in power and transportation networks, and subsidizing renewable energy and environmental conservation. China is also one of the only countries with carbon-pricing strategy; its carbon market is the largest in the world.
Acute awareness of climate-related economic risks has led the government to be proactive. A recent joint statement from multiple ministries stated, "Climate change has already brought serious adverse impacts to China's natural ecological system and has continued to spread and penetrate economy and society."1 China plans to do more, aiming to create a “climate-resilient society” by 2035 with plans to:
China’s resiliency initiatives can serve as a lesson for governments and companies around the world. Most regions on Earth will feel the effects of climate change in one way or another, whether from heat, drought, hurricanes, floods, wildfires, water scarcity, rising sea levels — or combination thereof.
Investors may want to consider the following implications of increased climate volatility in China — and elsewhere:
Materials: Energy-intensive processes to produce polysilicon and aluminum, key inputs for electronics and manufacturing, are at risk of disruption. Manufacturers with geographically diverse production lines, backup locations, and robust climate resilience strategies face less risk of interruption.
Electric utilities: The heat wave’s effect on China’s hydroelectric plants has been significant. The combination of lower electricity supply and higher demand from air conditioning put severe strain on the system and curtailed output. Given China’s reliance on hydro, which generates 20% of its overall power and up to 80% of power in some cities, demand for resilience, grid hardening, and energy storage, is likely to grow.
Power transmission: Existing market support for resilient power transmission infrastructure could increase. Ultra-high voltage (UHV) transmission should gain favor, and regulatory measures aimed at facilitating domestic cross-province transmission and reducing export-focused “energy mercantilism” should be positive for the domestic UHV industry.
Agriculture: So far, drought has affected several provincial regions encompassing more than 800,000 hectares of agricultural land. Corn, wheat, and barley growers are most vulnerable to climate volatility. Apart from grains, fruit, vegetable, and rice crops could also see lower yields. Prolonged drought could push prices up and trigger the need for food imports.
Coal: Over the next few years, China is projected to consume more coal than previously estimated. While most will be mined in China, coal imports (which had been falling) are likely to fall less than forecast.
Nuclear power: Discourse on reinvestment in the sector is ramping up. Nuclear may not be a viable investment theme in the near term, but from the macro perspective, investors should understand that China has strong — and growing — support for nuclear power.
After hundreds of years of stable climate conditions, projections from Woodwell Climate Research Center indicate that a new era of instability is here. China (like many other countries) will experience greater risk of both droughts (Figure 1) and floods (Figure 2). As global temperatures continue to rise, weather volatility will become more common and severe climate shocks — from hotter heat waves to longer droughts to bursts of extreme precipitation — will happen more frequently. And while Woodwell’s projections are for coming decades, climate volatility is already here. Last year, China was dealing not with severe heat and drought, but rather with floods from extreme rainfall events. And across many parts of the world, including, most recently Pakistan, where floods from a heavy monsoon season have claimed more than 1,100 lives, climate uncertainty is almost expected.
With the realization of the human and economic toll of increasing climate instability, China’s government has taken steps to become more resilient. Governments, companies, and consumers everywhere should pay attention.
1“China vows to adapt better to climate change as risks soar,” Reuters, 13 June 2022.; “China releases new national climate change strategy to build resilience against global warming by 2035,” South China Morning Post, 15 July 2022.
China equity: Is today's investor pessimism overdone?Continue reading
China equity: Is today's investor pessimism overdone?
The short answer is yes, say Equity Portfolio Manager Niraj Bhagwat and Investment Director Philip Brooks, who believe China may offer a short-term buying opportunity.