Profiting from the 'greening' of China

 07 March 2018


by Jamie Horvat and Henrietta Walker

Featured article - Profiting from the ‘greening’ of China

Think of Beijing and images of the Chinese capital shrouded in smog might come to mind.

China’s breakneck industrialisation has come at an environmental cost. It accounts for almost a quarter of the world’s energy consumption and is the largest emitter of greenhouse gases.

However, since the poisonous ‘airpocalypse’ that afflicted Beijing earlier this decade, there has been a radical shift in policy. Today, China is the largest consumer of renewable power and its economy is rapidly rebalancing towards services and less energy- intensive industry.

As long-term investors, we are convinced that the ‘greening’ of the world’s most populous country will provide some exciting opportunities.

‘Making China’s skies blue again’

The Chinese economy’s remarkable ascent since the 1980s has generated enormous wealth. But, as elsewhere, growing incomes cannot mitigate concerns over public health – especially when air pollution is so acute.

The World Health Organisation estimated that more than one million Chinese citizens died from dirty air in 2012. It is hardly surprising that a 2015 survey by the Pew Research Center found air and water pollution to be the second and third highest public concerns.

The Chinese government has taken its cue. Premier Li Keqiang has vowed to “make our skies blue again” and, in his speech to the 2017 Communist party congress, President Xi Jinping referenced the environment more than the economy.

Words have been translated into action. The government has exercised its control and influence to reduce coal usage and close heavily polluting steel and aluminium plants. The clampdown is succeeding, with pollution levels in Beijing and elsewhere falling sharply this winter.

Emergence of the green dragon

The war on pollution has been accompanied by an unprecedented push towards renewable energy.

China invested a record US$133 billion in clean energy in 2017, according to the Bloomberg New Energy Forum. That represents 40% of the global total and more than twice as much as the United States. China accounted for more than half of the US$161 billion invested in solar generation in 2017.

Significantly, Chinese companies are at the vanguard of the global renewables industry, and not just in making solar panels. From producing just one in four wind turbines erected in China in 2002, Chinese manufacturers now account for more than 90% of the domestic market.

Overall, China has now overtaken the US and Germany to become the largest exporter of environmental goods and services.

Long-term opportunities

As well as being a dominant producer of green technologies, China has become an increasingly important market for them.

It has, for instance, swiftly emerged as the world’s largest market for electric vehicles. Over 300,000 electric cars were sold in China in 2016, with buyers spurred on by expanding public charging infrastructure and generous subsidies.

The Chinese government’s commitment to improving the country’s environment record and tackling climate change is reflected in the 2016 Paris agreement, when it pledged that emissions would peak by 2030 at the latest. The contrast with the US, which pulled out of the Paris agreement on climate change last year, is stark.

China has a long way to go in its ambitions to rebalance its economy away from heavily polluting industries. Yet so long as it remains committed to its ambitions, the business environment for companies with energy-efficient processes and products should be supportive.

The ‘greening’ of China and of Chinese consumer demand is a significant structural change in the global economy that will benefit certain sectors and companies over the longer term.

As long-term investors in company shares around the world, it is a theme that we are paying close attention to.

Important information

Please remember that the value of investments goes up and down and will fluctuate over time, and you may not get back the original amount you invested.

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are not able to give any financial advice. If you’re at all unsure about the suitability of your investment, please speak to a financial adviser.