There has been a rise in coal shares in China, as investors have decided to snap them up on the belief that the urgency of the country to boost its economic growth would overcome environmental concerns.
Investors are betting that concerns about pollution will be overridden in order to boost demand for reliable energy and fossil fuels.
Coal index surges
There was a more than 10% rise in the coal index in China in August, which has brought its gains for the year so far to almost 50%.
Meanwhile, the blue-chip CSI300 has recorded a loss of almost 20% this year. Likewise, the flows in the biggest listed fund that tracks the sector are also quite impressive.
The Guotai CSI Coal & Consumable Fuels Index ETF reported that there was a fivefold increase in its assets under management from a year earlier.
By the end of June, the total assets under its management had reached a whopping 5 billion yuan ($720 million).
Beijing has to decide between economic stability in the short-term and reductions in carbon emissions in the long-term, with investors betting that focus on the former will eventually win over.
The gains in coal stocks are also tracking the outperformance recorded in mining, gas, and oil stocks globally.
Market analysts said that China would continue to see a high demand for coal because the renewable energy supply in the country lacks stability.
They added that a reckless campaign of cutting down carbon emissions at this point would result in more risks than pollution because it can choke the industrial output and the economy.
The production of renewable energy in China has been disrupted due to poor weather and there is also a rise in global energy security concerns.
This is after it became apparent just how dependent Europe is on energy imports when Russia decided to cut off its energy supply.
There have been power shortages in the Chinese province of Sichuan in the Southwest because the Yangtze basin has seen a long drought this year.
This is the biggest hydropower producer in China.
Room for growth
It should also be noted that there is room for the growth of coal production in China because the country has not pledged to actually reduce consumption until 2026.
There is a rise in production and analysts believe that by 2025, the country would have expanded its coal-fired power capacity to 200 gigawatts.
Some experts said that building more coal-fired power plants is not the solution for dealing with energy shortages. But, interested groups are returning politically and exploiting the need for energy security.
As far as money managers are concerned, the icing on the cake are dividends, valuations, and profits. Experts said that because of the modest valuation of the sector, coal stocks remain a safe investment option.
The coal prices are also rising and this can lead to higher dividends for investors. Currently, a 5.8% dividend ratio is offered by coal stocks in China.