Bob Homan: China is benefiting from the new energy order
This column was originally written in Dutch. This is an English translation.
By Bob Homan, Head of ING Investment Office
Every energy crisis creates winners and losers. In the 1970s, it was Japan that adapted rapidly to a world of expensive energy. In the current energy crisis, China appears to hold the right cards.
The current geopolitical tensions and the renewed focus on energy security starkly highlight just how vulnerable some regions are. Europe is a clear example of this. This is reflected in the stock market, where European shares have clearly underperformed the rest of the world since the outbreak of the war involving Iran.
At the same time, the relative strength of other economies is striking. In this context, China is often cited as a country well-positioned to deal with the current energy challenges, just as Japan was in the 1970s.
The lessons of previous oil crises
The oil crisis of the 1970s marked a clear turning point. Economies with high energy intensity and limited flexibility lost ground, whilst countries that managed to use energy efficiently and translate that efficiency into attractive export products actually gained market share.
Japan became the textbook example of that inventiveness. The rise of smaller, more fuel-efficient cars came at exactly the right time. Whilst American — and to a lesser extent European — manufacturers clung to heavy models, Japan managed to gain ground worldwide with more efficient alternatives.
That lead was not confined to the automotive industry. Japanese companies also rapidly gained ground in sectors such as consumer electronics. The Japanese stock market became the ‘place to be’. By the end of the 1980s, Japanese shares even accounted for around 45% of the global index.
China and the new energy transition
The parallels with today’s China are striking at first glance. Despite still having a relatively high energy intensity, the country has invested heavily in energy efficiency and renewable energy in recent years. At the same time, China has built up a dominant position in the market for products that are essential for electrification and the broader energy transition.
Whereas the shift in the 1970s centred on more fuel-efficient combustion engines, the focus is now on the transition to electric driving. China combines scale, cost-efficiency and technological integration, and is increasingly successful in rolling out this combination internationally. This applies not only to electric vehicles, but also to solar panels and home batteries.
Not a repeat, but an echo
The question is to what extent this will result in a comparable period of economic prosperity for China. In some sectors, this dynamic already seems visible, but the picture is less clear-cut than the comparison suggests.
After all, the world is fundamentally different from that of fifty years ago. Global trade is less free, geopolitical tensions play a greater role, and China is at a different stage of economic development. An ageing population, high debt levels and lagging domestic demand are relevant issues in this context.
What investors are looking at
A precise repeat of the Japan scenario is therefore not immediately obvious for China. At the same time, the difference in weighting is striking: Chinese listed companies currently account for only around 3% of the global index, compared with Japan’s clear dominance at the time.
It is precisely this asymmetry that makes China interesting. Without wishing to stretch the parallel, an overweighting of Chinese equities within a well-diversified investment portfolio does seem an obvious choice.