How to invest in the Chinese clean technology market.

Three years ago the Chinese Government launched a new document entitled “Central Document Number 12″ with the subtitle “Opinions of the Central Committee of the Communist Party of China and the State Council on Further Promoting the Development of Ecological Civilisation” at the time this achingly dull sounding policy paper would have only been of interest to dedicated party cadres and avid fans of Chinese politics.

But in retrospect the paper was a landmark and initiated serious efforts to wean China off carbon and reshape its economy into a sustainable model. For years China has trashed its environment in a dash for growth, the result is thousands of toxic or dried out rivers, rampant air and soil pollution and the destruction of large swathes of countryside, sacrificed for urban sprawl. But now change is in motion.

Although China remains the world’s biggest polluter its habits are changing, the country leads the world in renewable energy technology and the government has closed many old coal power stations building in their place an unprecedented number of solar farms.  The country is set to implement a nationwide emissions trading scheme in November which should place a price on carbon and encourage a reduction in greenhouse gas emissions. At the same time the government has beefed up the power of environmental inspectors, which has resulted in 15,000 officials and individuals being disciplined in the last year, a far cry from the days when environmental laws could be safely ignored. Now local officials and industrial leaders are said to live in fear of the inspection teams.

The overwhelming levels of pollution, increasing water scarcity, the need to reduce greenhouse gases but at the same time maintain economic growth present huge challenges to China, but it also presents an opportunity for its companies in the environmental sector who have the chance to solve these era defining problems and enjoy success while doing so.

Government policy now encourages the environmental sector with actions such as making solar technology a strategic industry which merits tax credits and cheap loans and ensuring a generous feed in tariff for renewable energy onto the national grid. In a similar manner ventures such as manufacturing electric car batteries have been prioritised by the government through subsidies and tax breaks.

Beijing’s heavy backing of the environmental technology sector was shrewdly noted by innovative emerging market fund East Capital who selected around 60 firms in this industry to make up their East Capital China Environmental Fund.

I was fortunate enough to speak with Hong Kong based Karine Hirn, Partner at East Capital Asia and passionate advocate of the clean technology sector, she explained the background to the fund and some of the companies included in it. The Fund is made up of ventures on the cutting edge of environmental technology, such as renewable energy  and clean transportation, but are all in one way or another concerned with providing solutions to China’s enormous environmental challenges.

 Some of the biggest firms included in the fund are:

Beijing Origin Water: a company devoted to cleaning and recycling water, as well as applying technology to use water more efficiently.

BYD: A major electric vehicle battery maker and Chinese rival to Telsa.

Longyuan Power: the world’s biggest wind turbine manufacturer.

Xingyi Solar: a major solar glass manufacturer.

Karine explained that firms like BYD which are involved the production of batteries for new energy vehicles are well worth tracking as the Chinese government looks set to ban the production of petrol cars in the near future, which in turn will transform the market for electric cars. The performance of electric vehicle batteries will be the battleground of the future for the car industry, and firms like BYD who are devoted to the production of these batteries and which have been backed by the government as a national champion to compete with the likes of Tesla should have a bright future.

Similarly those involved in the production and mining of lithium and cobalt – both components in the production of batteries are also well placed to take advantage of the coming shift to electric vehicles.

Of course there are some clouds on the horizon, fossil fuel interests are deeply entrenched into China’s political scene and will not be easily ushered away, similarly China’s industrial giants which produce so much of this pollution and waste are carbon intensive and changing this is like turning round a super tanker – slow and painful. Improving energy efficiency, moving away from the most polluting industries are all necessary, but have consequences for jobs and social stability which means the government will be tempted to move slowly.

Overall the economic and social benefits of this shift will be hugely positive as an improved environment will enrich the lives of Chinese citizens, it also creates opportunities for businesses, entrepreneurs and others that can solve these burning issues through applications of technology, innovation and by demonstrating that profit and improving the environment are not mutually exclusive.

Proof of that can be found with the East Capital Environmental Fund which enjoyed a 22.4 % absolute return in the last year.



Categories: climate finance, Company Case Studies, Country Investment Analysis

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  1. From Vietnam to Vanuatu: Financing the clean energy revolution in emerging economies – Rising Powers

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