With the country experiencing a sharper deceleration in the growth of energy demand compared to Gross Domestic Product (GDP), we assess whether this divergence is temporary or structural.
Last year, China began undergoing a key transition. Power demand, for example, grew at only 3.8% while diesel demand actually contracted – counter-intuitive for an economy expanding at over 7% per year.
However, this decoupling should be viewed not only within the context of shorter-term cyclical factors – including weather patterns, oil prices and industrial capacity – but also structural changes.
Fundamentally, the economy is rebalancing on two fronts. As the effects of the investment-driven 2009 economic stimulus begin to wane, it is now slowly moving towards consumption with the centre of economic gravity shifting away from the coast towards the inland region.
Both trends will have significant implications on commodity demand shifts. With economic emphasis now placed upon the service sector, the relationship between GDP growth and power demand growth will weaken permanently. Regional power patterns will also change, with significantly higher power demand growth in the inland regions compared to the coast.
Short-term, coal-fired generation will likely be subdued by lower power demand and a rise in non-coal generation, including hydro. In the long run, the pace of demand growth will be closely tied to power in inland provinces and the acceleration of UHV transmission lines to export to the coast.
Meanwhile, growth in the country's oil demand varies by product because of its distinct drivers. We are now witnessing a structural change in China's diesel requirement as the economy rebalances away from heavy industry.
In contrast, gasoline demand, which reflects personal car ownership, maintained a robust growth of 8% in 2014. Healthy growth momentum for gasoline will likely be sustained as the economy shifts further towards consumption.
Overall, our short-term view is that the recovery of commodity demand (for power, coal and diesel particularly) is closely tied to our industrial demand outlook. While they will experience a moderate cyclical recovery in the medium-term, the economic transition away from an industry-led model suggests their relationship with GDP growth will weaken in the long run.
China's GDP and energy demand decoupling: temporary or structural? [Subscription required]
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