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Liu Shijin: Promote the balance between demand and production capacity through expanding domestic de

September 28th,2024 Tsinghua PBC School of Finance Chief Economist ForumThe forum was a success. It brought together 20 chief economists and industry leaders from renowned global institutions, focusing on…Global Industrial Structure Transformation and Economic OutlookThe forum, focusing on sub-themes such as industrial transformation, monetary policy, fiscal policy, artificial intelligence, climate change, and new energy industries, provides forward-looking analyses of the Chinese and global economies, offering new ideas for economic development policies. It was hosted by Tsinghua University's PBC School of Finance and organized by the Center for International Finance and Economics Research (CIFER), and was held both offline and streamed online.Vice Chairman of the Economic Committee of the 13th National Committee of the Chinese People's Political Consultative Conference (CPPCC) and former Deputy Director of the Development Research Center of the State CouncilLiu ShijinAttended the meeting and participated in the discussions.

Liu Shijin pointed out that,First, the government's clear objectives provided a credible long-term outlook, mobilizing investment across society and driving a sustained and significant increase in the proportion of renewable energy. Second, innovation-driven green technologies replaced traditional approaches, becoming a new engine for combining carbon reduction with economic growth. Large-scale investment in innovation has propelled the green economy and environmental goals forward in tandem. Furthermore, private enterprises have played a crucial role in equipment manufacturing and technological research and development, holding over 70% of the global market share and becoming the main force in the green industry.

However, challenges also exist. First, international uncertainties may affect the long-term expectations of the "dual carbon" target, and undermining this strategic goal would lead to huge investment losses. Second, the industry's development speed has exceeded expectations, with overcapacity and "involution" phenomena being prominent, necessitating adjustments to the target and accelerating the development process. Finally, the new energy sector faces oversupply, with photovoltaic and wind power accounting for a relatively low proportion of electricity generation, making it imperative to expand domestic demand. The government should quantify the "dual carbon" target and implement it at the local level to promote a balance between demand and production capacity.

The picture shows Liu Shijin speaking.

Speech Shorthand

Tsinghua PBC School of Finance Chief Economist Forum

Liu Shijin, Vice Chairman of the Economic Committee of the 13th National Committee of the Chinese People's Political Consultative Conference and former Deputy Director of the Development Research Center of the State Council：

Distinguished guests, good afternoon! I'd like to briefly discuss some important experiences China has gained in the four years since proposing its "dual carbon" goal. Additionally, I'd like to share some challenges we face. It's been almost four years since President Xi Jinping proposed the "dual carbon" goal at the UN General Assembly. Since then, China's green transformation has undergone significant changes in many aspects. For example, the term "carbon neutrality"—four years ago, even industry experts could hardly explain it clearly. Now, if you don't understand carbon neutrality, you're considered outdated; there are many carbon neutrality experts. But I think the most important thing is the rapid rise of a large number of low-carbon and green industries in China, which has exceeded expectations. In this process, I believe the following experiences are quite important.

First, the government's goals provide a clear and credible commitment, thus forming a long-term expectation. We emphasize the importance of stabilizing expectations, but addressing climate change is essentially a matter of externalities. The government must have strategic objectives. We now have a large number of industries emerging, and it should be said that the whole society has been mobilized. Many enterprises, including various markets, are involved. For example, look at the recent stock market activity; a significant portion of the stocks that have risen rapidly are related to "carbon and energy conservation." Why are people so enthusiastic about doing this? Because everyone believes that by 2060, the proportion of renewable energy will increase from the current 20% to 80% to 90%. This goal is definite, so there's no problem in doing it now. That's the first point.

Secondly, we focus on innovation. There are actually two paths to addressing climate change. One path is to maintain the existing production system. To reduce carbon emissions, we either need to reduce input or adopt new technologies, which may lead to a rapid increase in costs at a certain point. But what is the other path? It's about using low-carbon, zero-carbon, or even negative-carbon technologies—what I call endogenous green technologies. China has undergone a significant shift in recent years, moving from the first approach to the second, which is based on innovation. Regarding carbon reduction, and the relationship between environmental protection and economic growth in a broader sense, many people have worried about this relationship in the past. They wondered if carbon reduction would affect economic growth. If we followed the first approach, it certainly would in many cases. However, if we shift to innovation as the foundation, because innovation requires massive investment—currently trillions of yuan—this becomes a new driving force for economic growth, a driving force for innovation. This fundamentally changes the relationship between carbon reduction and economic growth.

Thirdly, we rely on market forces, especially private enterprises. As mentioned earlier, the low-carbon and green industries have developed rapidly in recent years. We are now leading globally in equipment manufacturing and R&D, holding a market share of 70% or higher worldwide. If you look at the leading companies in various sectors, they are almost all private enterprises. Recently, there's been a lot of talk about "competition," especially in the new energy sector. The reasons for this competition are complex and deserve further analysis. However, I believe the mainstream is still important. First, you must explain why this sector has only seen such success in China. Can other countries achieve the same success? It's very difficult. This is because China has a series of favorable conditions: a massive market, excellent supporting infrastructure, and our technology is not lagging behind. In some areas, we are on par with, or even leading, the pioneers in this field. More importantly, the entrepreneurs in this sector, especially private entrepreneurs, haven't given up. They've worked diligently and wholeheartedly, which has led to the current situation.

I just mentioned three important pieces of experience.

Related to this, I think there are several important challenges now. The first is the issue of expectations, which is related to the first point. The expectations for "dual carbon" are also facing some uncertainties. For example, the US is currently holding an election, and there's a possibility that after the election, the previous administration might withdraw from the Paris Agreement. This uncertainty exists. As I mentioned earlier, it's about establishing long-term expectations. Can this goal still be shaken? Or can it be relaxed a bit, taken a step back? We need to emphasize a distinction now: compared to four or ten years ago, if this goal is taken back, it's not simply a matter of ideology or values; it's a matter of interests. Trillions of dollars have already been invested—in China, and perhaps even more globally—including R&D and market promotion. If this goal is shaken, some of these investments could very well go down the drain. If this happens, the economic situation we discussed this morning might worsen, and could even trigger a crisis in some areas. That's the issue. I often say that dealing with climate change is like riding a tiger or a horse—once you're on it, you can't get off. Getting off would be extremely costly. We need strategic resolve and a strong sense of values. Right now, it's more about interests.

The second challenge is the future development of this industry. We are currently facing overcapacity, a problem of companies "crowding out." We may not have anticipated the rapid pace of industrial development; so many companies have emerged in just four years. Our original roadmap focused on carbon reduction, outlining a target after a certain number of years. Now, we need to shift our perspective. We must consider the perspective of individual companies and the industry as a whole. With so many companies and investments already made, the industry and companies' development follows certain patterns. Currently, they need to rapidly expand their scale and stabilize the market to reduce costs and fund future R&D. If this process is delayed, say to five or ten years, companies may not be able to wait that long and will close down before then. Companies and industries have their own development patterns. Since these companies and industries have already emerged—exceeding expectations—I believe their development goals need adjustment. We must accelerate. Is this possible? COP28 proposed doubling renewable energy capacity and doubling energy efficiency by 2030. Recently, the market penetration rate of new energy sources has exceeded 50%, but when will this government-set target be achieved? It was 2035, and we've already achieved it 11 years ahead of schedule. Furthermore, regarding the proportion of renewable energy in total electricity generation, I saw some data today that shows it will reach 30% by 2035, but we've already achieved that six years ahead of schedule. From a business development perspective, accelerating the growth rate of new energy sources is certainly necessary, and also a possibility.

The third challenge is that while our current production capacity is strong, we also face a supply-demand imbalance in the new energy sector. Currently, our installed capacity of new energy sources exceeds half, over 50%. However, photovoltaic and wind power, which should be the main drivers of new energy, only account for slightly over 15% of total electricity generation, while Europe has exceeded 27%. China still lags behind in this area. Yet, our production capacity accounts for over 70% of global capacity, making the supply-demand imbalance quite pronounced. We need to expand domestic demand, specifically in this area. How can we expand domestic demand? I believe the government still needs to play a crucial role. Specifically, it needs to quantify the current "dual-carbon" targets for carbon reduction and implement them at the local, provincial, municipal, county, and even enterprise levels. In recent years, we have set overall goals, but the specific quantified targets have not been implemented. These goals must be implemented, and a clear accountability system must be established. Only then can real demand be generated, because carbon reduction has targets and timelines. This needs to be addressed urgently.

On the other hand, some of China's production capacity may still need to be exported; otherwise, international trade tensions and conflicts would be difficult to avoid. We need to coordinate domestic and international efforts to balance supply and demand. Thank you!

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