At last… good news about emissions

How often are we told what we will have to ‘give up’ if the planet is to live within its means? Clearly, things have to change: most of us will have to consume (much) less – and to change what we consume.

But some reductions to emissions may be easier to make than we think…

… particularly if the collapse of Evergrande and the waves of distress now rippling through China’s credit market confirm that the world’s second-largest economy really is moving away from relying on a speculative, debt-fuelled property boom to prop up its economy.

The Evergrande debt crisis drew fresh attention to an uncomfortable truth for China bulls: after years gorging on easy credit, China’s property market is painfully bloated.

Levels of leverage in the Chinese economy are eye-watering. According to the Bank for International Settlements, the debts of China’s companies are twice as large (relative to GDP) as those of the United States: debt-to-GDP has soared by 45 percentage points over the last five years.

China’s speculative housing bubble has sent corporate debt soaring. And for what?

But the problem isn’t just about debt

China’s ‘fictional’, debt-fuelled growth has had consequences that are far worse than stretched balance sheets.

Property isn’t built from leverage: it is formed of steel and cement

So one of the most painful results has been the incredible waste of resources: huge volumes of carbon dioxide have been emitted.

Perhaps even worse, much of that CO2 appears to have been pumped into the atmosphere for no good reason: a large portion of China’s housing stock, possibly as much as 20% or 25%, is standing vacant.

China produces more than 50% of global crude steel (opens in a new window) and consumes the majority of that production domestically (Bloomberg estimates that real estate is the final source of demand for 42% of Chinese steel production). So a significant portion of that production would appear to have been non-productive.

It is apparent that a lot of carbon dioxide emissions have been the result of mere speculation rather than real, value-creating activity.

So far, so bad.

The good news is that this might represent a watershed for the global economy

China’s urbanisation rate is quickly approaching 60%. And we know from other developed economies that the rate of urbanization tends to slow as it reaches 60%. Indeed, China’s growth has shown signs of slowing (recall the property crisis of 2015-16).

The rate at which countries urbanise tends to slow as the share of the population living in urban areas approaches 60%. China is approaching that point.

Urbanisation, 1790-2016

President Xi Jinping now appears to want to rein this in further (opens in a new window), putting a new focus on genuine growth rather than fictional growth. This is a useful step in the right direction. As my colleague Craig Bonthron recently pointed out, not all growth is good growth.

The fallout from Evergrande, soaring yields in China’s credit markets and the risk of contagion into the wider Chinese economy and beyond are of obvious concern to investors. But perhaps this also represents a sliver of good news for the climate…

China’s CO2 emissions grew in near lockstep with residential construction

A retreat from speculative property development could go a long way towards reducing emissions

We have repeatedly heard that China is still an emerging economy that should be allowed more flexibility in reducing its CO2 emissions than large, developed economies. But perhaps the reality is that China has more scope to cut emissions than we once assumed.

Debt-fuelled overinvestment not only artificially propped up economic growth but it was also, in effect, pouring petrol onto our communal planetary barbeque. So any change in focus from Beijing, from President Xi – and some honesty about the type of growth China needs –could be big (positive) news for our planet.