China's Shifting Coal Dynamics: Assessing the Long-Term Viability of Thermal Coal in a Renewable-Driven Energy Transition

The global energy transition is reshaping markets, and nowhere is this more evident than in China, the world's largest consumer of thermal coal. While domestic production of thermal coal hit a record 1.58 billion tons in the first four months of 2025—a 6.6% increase year-over-year—demand has softened, with seaborne coal imports declining by 13.6% in the same period. This divergence between supply and demand reflects a structural shift in China's energy landscape, driven by surging renewables, falling coal prices, and policy-driven capital reallocation. For investors, the implications are clear: the long-term viability of thermal coal is increasingly precarious, while renewable energy and green finance present compelling opportunities.

The Plateauing of Thermal Coal Demand

China's thermal coal market is trapped in a self-reinforcing cycle of oversupply and falling prices. By Q1 2025, benchmark coal prices at Qinhuangdao port had plummeted to 630 yuan per ton—a four-year low—despite record production. This collapse is fueled by two factors:
1. Renewable Energy's Cost Advantage: Solar power now costs 0.25 yuan/kWh in China's Northwest region, undercutting coal's 0.35 yuan/kWh. With grid parity achieved and power market liberalization accelerating, solar and wind are displacing coal in the generation mix.
2. Policy-Driven Overproduction: Local governments, incentivized by coal tax revenues, have pressured mines to maintain output, exacerbating oversupply. This has forced producers in Inner Mongolia—where production costs range from 640-660 yuan per ton—into losses.

The National Energy Administration reports that coal's share of power generation has fallen to 60% in 2025, down from over 70% in the mid-2000s. While coal will remain a backup source for 37–40% of power generation by 2030, its dominance is waning. For investors, this signals a need to reassess exposure to coal producers, many of which face declining margins and stranded assets.

The Renewable Surge: A New Era of Energy Investment

China's energy transition is not a zero-sum game. In 2024, clean energy investment reached $625 billion, with solar and wind capacity additions totaling 356 GW—nearly 4.5 times the EU's additions. This surge is underpinned by state-owned enterprises (SOEs) like Huaneng and Datang, which now allocate over 50% of their generation capacity to renewables. By 2025, SOEs account for 70% of national wind capacity and 40% of solar capacity, driven by SASAC mandates to pivot toward clean energy.

However, the transition is not without contradictions. While renewables expand, coal approvals remain stubbornly high. In 2024, China approved 66.7 GW of new coal capacity and began construction on 94.5 GW—the highest since 2015. This dual-track expansion reflects a tension between environmental goals and energy security concerns. Investors must weigh the risks of overcapacity in coal against the potential for renewables to dominate the grid.

Strategic Asset Reallocation: From Coal to Green Finance

China's financial system is evolving to support this transition. The People's Bank of China (PBoC) has introduced tools such as carbon reduction support loans, offering cheap financing for clean energy projects. By mid-2024, these loans had funded billions in renewable energy investments, with green bonds eligible as collateral for central bank lending. The PBoC's “five-pillar” green finance framework—encompassing taxonomy, incentives, and disclosures—has also harmonized standards with the EU and Singapore, facilitating cross-border capital flows.

Innovative instruments like transition loans and carbon efficiency loans are emerging in cities like Huzhou, where interest rates are tied to emissions reductions. Meanwhile, international partnerships such as the Just Energy Transition Partnership (JETP) are channeling $20 billion into Indonesia and $15.5 billion into Vietnam to support coal plant retirements and renewable investments. For investors, these mechanisms offer avenues to align portfolios with decarbonization goals while capturing growth in green infrastructure.

Investment Implications and Strategic Recommendations

The shift from coal to renewables presents both risks and opportunities:
1. Coal Producers: Marginal producers with high costs (e.g., Inner Mongolia mines) face declining valuations. Investors should avoid firms with weak balance sheets and overleveraged assets.
2. Renewables and Green Bonds: The solar and wind sectors are poised for sustained growth, supported by policy tailwinds and falling costs. Green bonds, now labeled under the EU-China M-CGT taxonomy, offer a way to access high-impact projects with transparent metrics.
3. Energy Storage and Grid Modernization: With 88 billion allocated to transmission and distribution in 2025, companies specializing in grid upgrades and battery storage will benefit from the need to integrate intermittent renewables.

Conclusion

China's energy transition is no longer a distant horizon—it is a present reality. While thermal coal remains a fixture in the short term, its long-term role is diminishing under the weight of renewables, falling costs, and policy realignment. For investors, the path forward lies in reallocating capital from stranded coal assets to the technologies and infrastructure enabling a low-carbon future. As the PBoC and global partners refine green finance tools, the window to position for this transition is narrowing. Those who act now will find themselves at the vanguard of a new energy era.