It is not easy to understand. If one looks at media comments, China is the world´s largest renewable capacity installer. However, if we analyze the numbers of new capacity in the country and both the current and long term energy mix, the big winner is coal!

To celebrate that my book The Energy World Is Flat (Wiley, with Diego Parrilla) is to be published in China, I would like to analize the Chinese energy policy.

This year, China reduced by 30% its renewable capacity targets, but that is not a negative. China will install 110 gigawatts of solar and 210 gigawatts of wind by 2020 with the new plan. It is estimated that by 2020 15% of its energy mix will come from non-fossil fuel energy.

But 73% of electricity in China comes from thermal generation. And in 2015, 50% of the new capacity was also thermal. China´s energy mix in 2020 will come overwhelmingly from coal (65%) and nuclear. Solar, for example, will likely weigh less than 5%.

In China, the energy mix is decided from three perspectives: Benefit for the Chinese economy and jobs, competitiveness and local control of technology. Once we understand this, it is normal to understand why coal is still supported. It covers the three requirements, jobs, cost and control of the process.

Between 2013 and 2015, 50.8 gigawatts of capacity were added in coal generation. This means that in two years coal added almost half of what China plans to install to 2020.

According to official figures, there are a further 42 gigawatts of coal plants under construction, with 11 gigawatts approved only in 2015. Meanwhile, China has retired less than 10 gigawatts of obsolete capacity. If we add the figures on nuclear energy, China’s decision to double its nuclear capacity to 23 gigawatts more and go ahead with another 50 planned gigawatts places to China as the largest installer of new nuclear power in the world ( 136 reactors of approximately 340 planned in the world ).

The question, therefore, is why?

On the one hand, China’s consumption accounts for almost 50% of global coal demand, but it imports very little. First incentive in favour of coal: the balance of payments.

On the other hand, the vast majority of coal companies in the country are state owned. Second incentive: “Support” employment and “indigenous industry.” China knows that replacing coal with renewables has a negative net effect on employment, even if it is unquestionnably a creative destruction and positive from an environmental point of view. So transitions from fossil fuel to renewables have to be slow, because they affect jobs and can increase the cost of energy dramatically.

Finally, the cost and technology control. For China, which seeks to reduce its huge imbalances exporting, launching a race to renewables that ignores the cost of energy would be suicidal. But it is even more negative for its technology payment account, so it can be strategically potentially dangerous.

Despite the drop in costs, the average cost of electricity from coal in the country is much lower than solar photovoltaic, less than half. The CEO of Canadian Solar or Dinghuan Shi, chairman of the China Renewable Energy Society, estimate that solar PV will be competitive with coal in 2025, not earlier.

Of course there are environmental factors that should not be ignored, and China has reduced emissions significantly in the past years. So much in fact, that the CO2 emissions reduction of 2015 is equivalent to 200 million tons of CO2. That is roughly equal to the cumulative emissions from the 100 countries with the lowest emissions 5 . China is now on a path to achieving its Paris climate commitments well before its 2030 target date.

China´s energy revolution will happen as long as it does not damage competitiveness and jobs. China can benefit more than any other country in the world from what we call the energy broadband and the technological revolution … When costs are proven to be lower.

Daniel Lacalle is an economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

This article was originally published in Spanish by @elespanol

In the current market environment we must distinguish between unfounded fears and structural problems. The Italian banks´Non Performing Loan (NPL) dilemma is now structural and  has not been solved. In fact, the political crisis opened with the resignation of Renzi may have an important impact in an already fragile financial sector.

The Italian banking problem is much deeper than a matter of “perception of risk”. Non Performing Loans exceed 360 billion euro  (according to PWC) and have been growing since 2011, from 194 billion euro to the current figure. It is true that the percentage relative to total loans peaked at 18% and has fallen slightly to 17%, but it is also true that many of these loans are now simply impossible to recover.

The problem is that Italian banks are unable to do a Bail-In as the amount of shareholder equity and secured bonds outstanding is far too small to cover a gap that has taken too long to resolve. A Bail-In would consume almost all of the capitalization of some banks. Meanwhile, as stocks plummet even further, the possibility of a radical capitalization seems remote.

Italian NPLs are mostly to corporates -79% of the total- and unsecured -53% of the total-. Low interest rates and high liquidity have not reduced, but increased the risk. Half are covered by real estate collateral, so they don´t have zero value.

The NPL problem has become so large that, years after the 4 billion euro bail-out, market rumours point to a new capital injection from the Italian State that could reach 15 billion euro. A far too small amount for a very large problem. The possibility that the Italian government might take a majority stake in Monte dei Paschi di Siena is not small, in a bank where the ratio of NPL to equity is c102%.

But make no mistake, a 15 billion government capital injection is far from the solution.

Italy needs to undertake a Financial Sector Reform similar to the one that Spain carried out. Creating a “bad bank” and carrying out an in-depth public analysis of the sector´s assets and liabilities, followed by a radical recapitalization program.

What is the good news? The capital ratio of highest quality has improved over the years, albeit less than other banks in the Eurozone and Italian banks have been divesting and increasing capital whenever they could.

In 2015 more than 19 NPL transactions were made, and in 2016 that figure is expected to exceed 30 billion euro GBV (gross book value). Although it´s less than 10% of the total, it is good news of a long-overdue course of action that is expected to accelerate over the next three years.

But here comes the political uncertainty. Will an interim government accept a bail-out that goes against EU legislation, most of the political parties in Italy and the promises of the previous Renzi cabinet?.

Aditionally, macroeconomic data does not support the Italian economy. Italy has been showing a very poor growth rate since 1960, and remains in stagnation in the past two decades. Low oil prices have not helped despite being one of the most sensitive economies to fluctuations in crude prices in the OECD. Italy’s public debt exceeds 132% and debt to operating income of Italian corporations remains above the average of the euro zone and the OECD, according to Moody’s. But most of the problem relies in the semi-state owned entities and municipalities. If we remove the semi-state-owned conglomerates and municipalities, Italian companies show a similar balance sheet strength to German corporates, for example.

The Italian banking system challenges have not created a contagion effect on the rest of the eurozone, but this cannot be considered a relief. As soon as the ECB stops or moderates its quantitative easing program, we could see an escallation of risk premiums and Credit Default Swaps.

The solution is possible and urgent. It should include a comprehensive plan of recapitalization, restructuring of bonds and creating a bad bank.

My biggest concern is that, again, in Italy they might prefer to kick the can forward with the excuse that in 2017 inflation and the economy will sort out the problem, and that shares will rise before issuing new equity. After years making the same mistake, it is time to be realistic. The short squeeze generated by the rumours of an insufficient bail-out should not fool rational investors.

Daniel Lacalle is an economist and author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley)

This article was originally published by @Hedgeye in English and in Spanish by @elespanol