Dragoman Digest

China’s hydro generation levels plunge amid low rainfall

Hydro is a major contributor to China’s power supply

China’s hydro projects are generating lower levels of electricity this year due to persistent droughts in China’s southwest that have reduced water levels in the Yangtze Basin. The Yangtze Basin’s reservoirs typically add around 20 million cubic metres of water between August and September. Across the same period this year, the reservoirs have instead been drained by 2.2 million cubic metres. The result was a hydro generation deficit of 44TWh in September. The slump comes despite a massive buildout of hydro projects in recent years. Between 2018 and 2024, China’s hydro capacity rose by around 20 percent. Yet, overall generation grew by only 12 percent from the first nine months of 2019 to the same period this year. Droughts, floods and extreme temperatures have been prominent climate effects in China in recent years.

A shortfall in hydro generation will complicate China’s decarbonisation plans. Beijing has been hoping that hydro will play a large part in its renewables buildout, particularly through providing dispatchable power to firm intermittent supply from solar and wind. While China’s overall capacity in renewables is substantial, poor transmission linkages mean that excess energy is curtailed despite shortfalls in other regions. The country’s gas and nuclear assets are running at near full capacity. A shortfall of hydro generation is likely to promote coal in China’s electricity mix until plans for improved transmission and more effective market-based trading eventually improves the national balance. Ironically, what has often been touted as China’s best tool to decarbonise now appears to be a victim of climate change.
 

Saudi Arabia leans towards US over China for AI ambitions

Saudi’s move emulates a broader trend that is taking place across the Middle East

Saudi Arabia is increasingly partnering with the US over China to support the advancement of its artificial intelligence (AI) capabilities. This month, the King Abdullah University of Science and Technology (KAUST) promised to end collaborations with Chinese partners that could adversely impact Saudi’s access to cutting edge US chips. This will likely include KAUST’s Arabic chatbot project with the Chinese University of Hong Kong and the Shenzhen Research Institute of Big Data. KAUST’s decisions comes as the Saudi Data and Artificial Intelligence Authority announced the acquisition of 5000 of Nvidia’s Graphics Processing Units (GPUs). Saudi’s Technology Minister, Abdullah Al-Swaha, has visited the US multiple times this year, meeting with Deputy Secretary of State Kurt Campbell to discuss cooperation in AI. Nvidia faces restrictions on the export of GPUs to China in addition to countries deemed to be at risk of transferring technology to China. US regulations in late 2023 included both Saudi and the UAE on this list of countries.

Saudi is not the first major Middle Eastern country to make a bet on the US’ continued AI and tech primacy. In December 2023, the top AI company in the UAE, G42, agreed to phase out hardware from Huawei. This was part of US-brokered government deal which saw Microsoft invest US$1.5 billion in G42. The US had feared that Huawei would use G42 as a backdoor to access Nvidia’s GPUs. Saudi is not completely ending its cooperation with China on AI. In June, Saudi Arabia’s Prosperity7 Ventures invested US$400 million in China’s start up Zhipu AI. Zhipu has been actively attempting to create a homegrown rival to ChatGPT. This reflects Saudi’s broader strategy of cultivating multiple economic and strategic partners, including countries at odds with the West like Russia and China.
 

Hanoi weighs laws governing cross-border data transfer

Foreign investors warn that the proposed laws could curtail foreign investment

Vietnam is considering new laws that would govern the transfer of data across its border. This month, Hanoi began debating the first draft of the Personal Data Protection Law (PDPL). While Vietnam has already introduced laws that regulate data transfer, the PDPL aims to establish a more comprehensive legal framework covering companies, government departments and individuals. Measures in the PDPL include a requirement for large companies to establish a data protection department, an obligation for businesses to gain consent from individuals when transferring their data, and the establishment of a rating system based on compliance with the laws. The introduction of the PDPL comes as Vietnam builds up industries that require large overseas data transfers including data centres, AI and semiconductor production.

Some companies are concerned that the PDPL will discourage cross-border data transfers. The proposed law allows Hanoi to access corporate data subject to “national security” clauses. The scope of data covered by these measures is ambiguous in the law’s current form, prompting fears that the PDPL could be used by Hanoi to monitor its citizens’ online activities. This is just one of several aspects of the bill that were reportedly modelled on Beijing’s data laws. The draft law requires companies to gain government approval before almost any instance of foreign data transfer. Both of these measures could present difficulties for multinationals transferring data from jurisdictions such as the EU. European law stipulates that personal data can only be transferred to countries with sufficient data protection laws.

The PDPL’s mixture of ambiguity and stringent requirements could dampen Vietnam’s investment environment. The Compute & Communications Industry Association, which includes large Western investors in Vietnam such as Apple, Facebook, and Google, have warned that the bill is at risk of being rushed. The PDPL could be approved by lawmakers within the next few weeks unless it is revised. Companies will also need to comply by 2026 and will not be given a transition period. The timing of these measures – which will evidently affect major US companies – is curious given that Vietnam will be firmly in the crosshairs of President-elect Trump’s fixation on trade deficits.
 

China lowers export tax rebates for select green tech products

Overcapacity has crippled profit margins in China’s solar industry

China is taking steps to ease overcapacity. On 14 November, the Chinese Finance Ministry announced that from 1 December, China’s export tax rebate for 209 products, including photovoltaics and batteries, will be reduced from 13 percent to 9 percent. For 59 other products, including aluminium and copper, the rebate will be cut entirely. An export tax rebate is a government refund on taxes paid on exported products. China’s rebate has served as something of a lifeline for solar producers. It has also prevented otherwise highly unprofitable companies from exiting the industry and has fuelled massive oversupply. Export figures are instructive. In the first three quarters of this year, the export volume of silicon wafers, solar cells and solar modules increased by 26.5 percent compared to a year earlier. Export prices in dollar terms dropped 34.8 percent across the same period.

Chinese authorities recognise that, as well as provoking tariffs on Chinese products, chronic overcapacity is deeply unhealthy for Chinese manufacturers. Although tax rebates are far from the only factor driving overcapacity, they have clearly exacerbated it. Beijing appears to be to encouraging consolidation of the worst affected industries including batteries, EVs, solar and steel. Whether this will reduce trade tensions is unclear. Formidable economies of scale enjoyed by sector leaders like BYD (EVs and batteries) and LONGi (solar) will presumably only increase with consolidation, potentially giving them even more opportunity to undercut international rivals.
 

South Korean companies face electricity price hike

State power company aims to reduce its deficit

South Korea’s state-owned energy company KEPCO last month increased electricity prices for large companies by 10.2 percent. The company last increased prices by 4.9 percent in November last year. KEPCO increased prices at a lower rate to SMEs (5.2 percent) and maintained existing prices for households and individuals. In the past, South Korea has tended to subsidise energy prices for large companies in its export-driven economy. Many of South Korea’s leading companies are in energy-intensive sectors such as semiconductor and vehicle manufacturing.

The price hike is a consequence of coal and gas price spikes over the last few years. South Korea is almost entirely dependent on fuel imports. Due to global coal and gas price fluctuations partly brought on by the war in Ukraine, KEPCO has racked up a deficit of 41 trillion won (US$29 billion) as of the first half of this year. Until recently, South Korea’s utility has resisted passing on these losses to consumers. However, its ability to do so has become increasingly limited amid a backdrop of sluggish economic growth. The national economy grew by just 0.1 percent in Q3 and 0.2 percent in Q2. Ultimately, the price increases may be a factor in decision-making as South Korean companies decide to invest at home or abroad.