Clean energy in China is a compelling recession-proof investment theme

China’s decarbonization agenda will be a dependable long-term theme, and an important source of value for investors in a world beset by uncertainty and a rapidly changing geopolitical backdrop.

While investment in renewable energy and clean tech has slowed in other major markets, particularly the US, it continues to grow strongly in China. Analysts are more bullish on green stocks in China than in the US, with the former seen as benefiting from more favorable policy tailwinds and greater earnings growth potential.[1]

Heightened concerns about energy security as a result of the Russia-Ukraine war are also likely to spur long-term demand for products from China’s solar and wind energy manufacturers. And while policy risk has hurt sentiment in China’s technology and education sectors, renewable energy and clean tech has thus far seen significant upside from policy and may continue to do so.

China will widen its lead in renewables capacity

The country is already the world leader[2] in renewable energy capacity and is expected to widen its lead over the next few years. And the outlook for the sector keeps getting bigger with forecasts for installed capacity continuing to be revised upwards.[3]

Underlying that growth is a national commitment to achieve carbon neutrality by 2060, with emissions peaking by 2030.[4] The People’s Bank of China estimates that reaching those targets will require 2.2 trillion yuan ($327 billion) of annual investment through 2030, then 3.9 trillion ($579 billion) for the following three decades to 2060.[5]

One potential impediment is that China’s renewables capacity is running ahead of the grid’s capacity to handle it. So far this year, the government estimates that at least 10% of wind power generated in Inner Mongolia and solar power in Qinghai has been wasted for this reason.[6]

This issue will be gradually resolved through better energy storage systems and better planning. Greater flexibility will also help, with the government having decided to abandon setting capacity targets and instead focusing on consumption penetration for renewable energy development in its latest five-year plan, which runs from 2021 to 2025. All this should help considerably reduce oversupply risk.[7]

Risks rising for traditional power stocks

Other new risks have come to the fore, however, among the most frustrating of which is perhaps the worsening effects of climate change.

Severe droughts around the world have been drying up rivers and reservoirs, causing a big reduction in hydropower generation over the past year. In China’s Sichuan province, in addition to directly reducing a zero-emissions energy source, droughts are posing a new threat to clean energy supply chains which are already reeling from rising costs of raw materials and the thread of pandemic-induced lockdowns.[8]

Specifically, power outages are causing disruptions at manufacturing plants in Sichuan, which could have an adverse impact on output of lithium compounds used in electric car batteries and polysilicon needed to make solar panels.

It remains to be seen how long the droughts and power shortages endure, as well as how long it takes for these plants to secure alternative power sources – as some factories in the province already appear to have done.

Given the government’s eagerness to maintain the steady development of the country’s clean energy sector, there is cause for optimism. And of course, problems like the increasing incidence of droughts should provide a warning and impetus to decarbonize with greater haste.

New green opportunities will emerge

The path to net-zero will no doubt continue to veer off in new directions. One solution that appears to be gaining traction around the world is so-called green hydrogen, which unlike grey or blue hydrogen, is made using renewable energy. China recently announced a target to produce up to 200,000 tonnes of green hydrogen a year and have about 50,000 hydrogen-fuelled vehicles by 2025.

China’s clean energy sector will continue to evolve as the country progresses determinedly towards its 2060 target. Investors will need to be flexible in tapping into burgeoning opportunities and exiting those that begin to wane.

Securities-based financing provides a way for shareholders to manage and diversify their portfolios nimbly – for example, by providing capital to take positions in China’s renewable energy sector without having to reduce their long-term exposure to other geographies and sectors. It can also offer a more attractive way to raise capital at a time when market valuations are low and liquidity is scarce. Given how quickly opportunities can arise and shift, that flexibility can prove crucial in preserving and growing wealth.


[1] https://www.bloomberg.com/professional/blog/analysts-more-bullish-on-chinese-clean-energy-stocks-than-u-s/

[2] https://www.scmp.com/business/china-business/article/3161732/china-remain-renewable-energy-leader-strong-capacity-growth

[3] https://www.fitchratings.com/research/corporate-finance/chinas-new-plan-for-renewable-energy-development-focuses-on-consumption-19-06-2022

[4] http://english.www.gov.cn/policies/latestreleases/202110/24/content_WS61755fe9c6d0df57f98e3bed.html

[5] http://english.www.gov.cn/statecouncil/ministries/202107/02/content_WS60df0eaec6d0df57f98dc53f.html

[6] https://www.bloomberg.com/news/articles/2022-06-06/china-s-renewable-energy-fleet-is-growing-too-fast-for-its-grid-l425v47z

[7] https://www.fitchratings.com/research/corporate-finance/chinas-new-plan-for-renewable-energy-development-focuses-on-consumption-19-06-2022

[8] https://www.bloomberg.com/news/articles/2022-08-18/drought-fueled-power-crisis-in-china-poses-risk-to-clean-energy#xj4y7vzkg

Disclaimer

Past performance does not guarantee future returns, and individual returns are not guaranteed or warranted.

This Document is intended solely for accredited investors, sophisticated investors, professional investors, or otherwise qualified investors, as may be required by law or otherwise, and it is not intended for, and should not be used by, persons who do not meet the relevant requirements. The content provided herein is for informational purposes only and is general in nature and not targeted to any specific objective or financial need. The views and opinions expressed in this Document have been prepared by third parties and do not necessarily reflect the views and opinions of EquitiesFirst.  EquitiesFirst has not independently examined or verified the information provided herein, and no representation is made that it is accurate or complete.  Opinions and information herein are subject to change without notice.  The content provided does not constitute an offer to sell (or solicitation of an offer to purchase) any securities, investments, or any financial products (“Offer”). Any such Offer shall only be made through a relevant offering or other documentation which sets forth its material terms and conditions. Nothing contained in this Document shall constitute a recommendation, solicitation, invitation, inducement, promotion, or offer for the purchase or sale of any investment product by First Holdings, LLC or its subsidiaries (collectively, “EquitiesFirst”), nor shall this Document be construed in any way as investment, legal, or tax advice, or as a recommendation, reference, or endorsement by EquitiesFirst. You should seek independent financial advice prior to making an investment decision about a financial product.

This Document contains the intellectual property of EquitiesFirst in the United States and other countries, including, without limitation, their respective logos and other registered and unregistered trademarks and service marks. EquitiesFirst reserves all rights in and to their intellectual property contained in this Document.  The Document should not be distributed, published, reproduced or otherwise made available in whole or in part by recipients to any other person and, in particular, should not be distributed to persons in any country where such distribution may lead to a breach of any legal or regulatory requirement.

EquitiesFirst make no representation or warranty with respect to this Document and expressly disclaim any implied warranty under law. You acknowledge that EquitiesFirst is not liable under any circumstances for any direct, indirect, special, consequential, incidental, or punitive damages whatsoever, including, without limitation, any lost profits or lost opportunity, even if EquitiesFirst has been advised of the possibility of such damages.

EquitiesFirst makes the following further statements that may be applicable in the stated jurisdiction:

Australia: Equities First Holdings (Australia) Pty Ltd (ACN: 142 644 399) holds an Australian Financial Services Licence (AFSL Number: 387079). All rights reserved.

The information contained on this Document is intended for persons located in Australia only and classified as a Wholesale Client only as defined in Section 761G of the Corporations Act 2001. The distribution of information to persons outside this criteria may be restricted by law and persons who come into possession of it should seek advice and observe any such restriction.

The material contained in this Document is for information purposes only and should not be construed as an offer or solicitation or recommendation to buy or sell financial products.

The information contained in this Document is intended to be general in nature and is not personal financial product advice. Any advice contained in the Document is general advice only and has been prepared without considering your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant disclosure statements or other offer documents prior to making an investment decision about a financial product.

Hong Kong: Equities First Holdings Hong Kong Limited is licensed under the Money Lenders Ordinance (Money Lender’s Licence No. 1681/2023) and to carry on the business of dealing in securities (Type 1 licence) under the Securities and Futures Ordinance (“SFO”) (CE No. BFJ407).  This Document has not been reviewed by the Hong Kong Securities and Futures Commission. It is not intended as an offer to sell securities or a solicitation to buy any product managed or provided by Equities First Holdings Hong Kong Limited and is only intended for persons who qualify as Professional Investors under the SFO. This document is not directed to individuals or organizations for whom such offers or invitations would be unlawful or prohibited.

Korea: The foregoing is intended solely for sophisticated investors, professional investors or otherwise qualified investors who have sufficient knowledge and experience in entering into securities financing transactions.  It is not intended for, and should not be used by, persons who do not meet those criteria.  

United Kingdom: Equities First (London) Limited is authorised and regulated in the UK by the Financial Conduct Authority (“FCA”).  In the UK, this Document is only being distributed and made available to persons of the kind described in Article 19(5) (investment professionals) and Article 49(2) (high net worth companies, unincorporated associations etc.) of Part IV of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (‘’FPO’’) and any investment activity to which this presentation relates is only available to, and will only be engaged in with, such persons. Persons who do not have professional experience in matters relating to investment or who are not persons to whom Article 49 of the FPO applies should not rely on this document. This Document is only prepared for and available to persons who qualify as Professional Investors under the Markets in Financial Instruments Directive.