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
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