China is already the world’s leading renewable energy market and the sector is likely to experience robust growth. However, escalating trade tensions between the United States (US) and China pose downside risks to the economy and regulatory environment.
China’s claims to disputed territory in the South China Sea and East China Sea have raised tensions with a number of countries in the region, while relations with Taiwan remain poor due to Beijing’s claims to sovereignty over the island. China was also involved in a military stand-off with India on the Doklam plateau between July and August 2017, and relations with the US have deteriorated due to trade disputes. However, while tensions between China and its adversaries have gradually increased, military conflict remains unlikely over the short-to-medium term.
Internal tensions within China pose a more immediate security risk. The Xinjiang region, which possesses some of the country’s highest wind energy potential, has experienced ethnic violence and terrorist attacks in recent years. In December 2016, 4 anti-government assailants were shot dead by security forces while attempting to detonate a bomb at the Communist party headquarters in the south of the province. However, the risk of unrest in Xinjiang is mitigated by a heavy security presence, and assets in the energy sector have not traditionally been targeted.
Growing trade protectionism poses downside risks to the Chinese economy. In January 2018, the US implemented tariffs on solar panel imports, causing overcapacity issues for Chinese manufacturers. This measure was followed by steel and aluminium levies, and in June 2018 President Donald Trump approved plans to impose 25% tariffs on USD 50 billion worth of Chinese goods, including components for wind turbines and batteries. The risk of escalation in the US-China trade dispute is growing. China has pledged to approve counter-measures, but Trump has warned that any retaliation will be met with a 10% tariff on a further USD 200 billion of Chinese imports.
The economic impact of the tariffs approved so far will be modest. China’s real GDP growth remains robust and is forecasted to decelerate only slightly from 6.9% in 2017 to 6.5% in 2018, while Chinese exports grew 12.6% year-on-year in May 2018. However, if the US and China continue to pursue protectionist measures, the risk of supply chain disruption will rise and export volumes are likely to fall, dampening China’s economic growth prospects.
High levels of Chinese corporate debt continue to pose counterparty risks. State-owned firms in the steel, construction and real estate sectors are particularly indebted, elevating contingent liability risks. However, sovereign credit risks are mitigated by the fact that China’s debt is primarily domestic and denominated in local currency. In addition, gross general government debt is not especially high, at 47.5% of GDP at the end of 2017.
China is keen to develop its renewables sector in order to reduce its reliance on coal and meet emissions targets. As the world’s leading renewable energy market, China is forecasted to add 327 GW in renewables capacity between 2017 and 2027. However, the government is keen to make the sector competitive. Subsidies and feed-in-tariffs for solar energy projects were cut in May 2018, which will moderate the growth of the solar power sector in the short-term; subsidies for onshore wind power installations are due to expire by 2020.
International companies may struggle to have commercial contracts fairly enforced through the Chinese legal system, particularly at a local level. While the government has taken steps to strengthen its legal system, establishing a number of intellectual property courts, the system remains politicised. Due to the rising trade tensions between Beijing and Washington, US companies operating in China are likely to face additional challenges in securing regulatory approval.
† Underwriters noted that they rarely see contract frustration enquiries where government ministries are the counterparty. Instead, majority-state-owned corporates are more common.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Tanzania, Italy, Algeria and Chile all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email firstname.lastname@example.org
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