As China continues to challenge the US for the top spot in the global economy, the economic policies of the two nations appear to be shifting. Many commentators have noted that under President Trump, the US is turning inward after decades of what Greg Ip of The Wall Street Journal called “the expansive American model of free trade — rather than China’s narrower variant.”
We noted in a blog post earlier this year that Ip wrote those words just two years ago, but they now read like ancient history. Trump ran in part on a protectionist, anti-globalization platform, and one of his first acts after taking office was to pull out of the Trans-Pacific Partnership in favor of negotiating bilateral agreements that will seek to ensure that the US’s interests are protected. As Trump stated in his inaugural address, his administration “will follow two simple rules: Buy American and hire American.”
Meanwhile, China is pursuing a far more aggressive and expansive economic strategy. Chinese banks and corporations, for example, are making massive railway investments in Africa to further Beijing’s One Belt One Road initiative, which according to CNBC “aims to revive the ancient Silk Road and strengthen Chinese ties with more than 60 countries across Asia, Europe and East Africa through infrastructure, trade and investment.” China is even expanding its influence into Central America — the US’s backyard — with plans to help build an Atlantic-Pacific canal in Nicaragua.
In another radical shift, Beijing has over the past few years made a number of pronouncements on its commitment to greenhouse gas emission reductions, and its intention to pursue an international leadership role on environmental issues, most recently in the wake of Trump’s announcement that the US would pull out of the 2015 Paris agreement on climate change.
This post addresses the reasons that China is staking out this position as a “green” leader, even as it copes with its own colossal air pollution crisis. It also explores the likely effects on international businesses seeking to compete in Chinese markets.
China’s Reasons for Trying to Claim the Role of Global Climate Leader
China does have severe urban pollution, which is becoming a serious internal priority. More than 40 percent of its deadliest particulate pollution
comes from coal plants, while vehicles contribute much of the rest, though there are disputes about their contribution.
These vehicles consume increasing amounts of petroleum products. While China was a net oil exporter a few decades ago, in 2013 it surpassed the US as the world’s largest net oil importer.
China sees a business opportunity in green technology exports, as a number of the exports that drove their industrial expansion, from toys to clothes, are now seeing competition from lower-cost nations in Southeast Asia and elsewhere.
Finally, China sees a significant opportunity in increasing its influence globally in the wake of the US withdrawal from the Paris accords. It does its best to deal with countries individually, rather than as trade blocs like the EU, and has even had separate climate change discussions with the governor of California.
Projects that reduce carbon emissions also help with one or more of these other goals.
Green Elements of the 13th Five Year Plan
Green initiatives are a big part of China’s 13th Five Year Plan, which started in 2016. Two big ones are green finance and the green technology industry.
China plans to develop green bond markets, industry funds and green guarantee mechanisms. It also plans to promote green asset securitization and establish mandatory green insurance for vulnerable areas. Foreign commercial and investment banks as well as insurance companies are permitted to participate in these areas.
Two high-growth technology markets will likely be new energy vehicles and green buildings. Production of fully electric and plug-in hybrid vehicles should reach 2 million a year by 2020. The plan anticipates that 30 percent of newly built structures will be green by 2020. Both vehicle components and energy-saving architecture materials will be in the “encouraged” category, according to the Catalogue for the Guidance of Foreign Investment Industries. The “encouraged categories” continue to increase as the Chinese government removes further restrictions for foreign investors. Shrewd operators in this sector should keep scanning the horizon for new opportunities.
Best Green Market Opportunities for Foreign Competitors
Some green areas will provide much better opportunities for foreign businesses than others.
The solar panel market, for example, is unlikely to be a useful target for international companies. China is the largest producer of both solar and wind energy in the world and plans to continue heavily subsidized growth. It manufactures about two thirds of the world’s solar panels and half of the world’s wind turbines. These domestic companies have immense market dominance — they control 98 percent of China’s wind-power market.
While manufacturing may present few opportunities for foreign investors, companies with peripheral IP in the solar and wind markets may find very willing partners to collaborate with in China.
Similarly, more opportunities may exist to companies working with smart grids. China’s power distribution system is overstressed, old and inflexible, and China lacks experienced engineering skills in these areas. Huge wind turbine projects have been built in the low-population-density northwest, where there are no big cities to use the generated power. Moreover, construction of high-capacity transmission lines has lagged significantly. In Gansu province, for example, 43 percent of wind-generated energy went unused in 2016. In the industry, this is known as “curtailment.”
International providers of high-voltage transmission, synchrophasor technology and other transmission modernization services can play a significant role.
China is also significantly building out its nuclear power capability. While they have developed an increasingly dominant indigenous capability, they are growing so quickly that there will be significant opportunities for foreign competitors.
While Opportunities Exist, Some Problems Remain
Despite progress in the green-energy sector, China built more coal-fired plants in 2016 and added to its thermal generation capacity. The nation accounts for half the world’s coal consumption, and while it is moving toward higher-efficiency plants burning higher quality coal, it lags in decommissioning older, less-efficient plants. Falling productivity will only increase pressures to keep generating power from coal.
So while China has been vocal in its desire to become a global climate leader, and has a rapidly expanding economy — with a World Bank-projected 2017 growth rate more three times that of the US — foreign investors in the green-energy sector will need to thoroughly perform their due diligence.
That said, due diligence is part of any international expansion plan, and while coal is still the dominant player in energy in China, given the size of the Chinese economy, the smaller green energy sector is still huge relative to other developed economies lagging behind on their own green investments.
An article in Quartz does not sugarcoat the difficulties of foreign businesses operating in China’s green market — including difficulties related to Beijing’s favoring of Chinese businesses — but it demonstrates that opportunities are there for the taking even in the locally-dominated solar panel market. The article quotes the CEO of a US manufacturer that has partnered with two Chinese companies and a government holding company. He observes: “The economics are very favorable in China. … You benefit from falling prices for solar equipment and then you install it with low-cost labor.”
Opportunities like these will only increase as the Chinese economy continues to grow and the green targets of the Chinese government are enforced. US and other foreign companies seeing doors closing in other markets should keep their eyes on China, the global economy’s new Green Giant.
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