The greening of China

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Risk: Investments in China are subject to certain additional risks due to issues relating to liquidity and the repatriation of capital.

To achieve its bold environmental targets, including carbon neutrality by 2060, China must focus on both the quality and durability of economic growth over a short- and longer-term horizon.

‘Greening’ the world’s most populous and growth-hungry country comes with a number of challenges. Among these is the requirement for China’s government and corporate stakeholders to play complementary roles in achieving the long-term net zero goal.

The solution lies in a multi-fold approach of steady, high quality economic growth, combined with ever-greater investment engagement and corporate disclosure, plus consistent support for transformation across new and old economy sectors.

Balancing act

A low-carbon future in China doesn’t have to be at the expense of economic growth. For instance, one of the government’s goals is to double GDP by 2035.

Yet this is compatible with environmental sustainability. “We’re going from quantity to quality in terms of growth,” says Henny Sender. “It’s slower growth, but on a firmer, more environmentally-friendly foundation.”

Indeed, the sacrifice in the name of being greener is essential, especially since China has historically been one of the world’s largest net importers of energy.

“If the government continues with the old style of growth, eventually the negative environmental impact will be so big that it will be even more difficult to achieve the economic growth goal,” says Yu Song.

Transition trends

China’s path to an environmentally sustainable economy is already relatively well trodden. The country represents over 70% of global production of solar panels and is equivalently dominant in wind turbines. Further, it has become the global leader in batteries for electric vehicles (EVs). Revenue from demand in Europe, for example, is growing 300% a year, now accounting for 16% overall1.

“We’re not only seeing exports from China, but also domestic companies going overseas and building production in local markets,” said Matt Colvin. “China is going to be competing more and more globally, including in the West.”

Notably, added Colvin, Chinese technology hardware companies are now spending about 9% of their revenues per year on R&D2, outshining their US peers in some cases. “Rather than competing on cost as they were five years ago, [Chinese companies] are increasingly driving innovation.”

Key to this continued success, however, is the ability of China’s manufacturing base to achieve scale over time. In turn, this creates a multi-year earnings opportunity.

Reinventing growth

Alongside the growth of these long-duration assets, the old economy also offers possibilities from transformations towards being less energy intensive.

The country’s steel industry, for example, accounts for 17% of total CO2 emissions in China, and 5% of global CO2 emissions3. Yet Yu said spending is targeting higher quality materials that are less energy intensive.

Increasing investor engagement is also yielding improved disclosure, often on a specific plant-level basis in sectors such as steel, cement and aluminium. “We’re certainly not dismissing investment opportunities within the old economy,” he added.

More broadly, Colvin said there is much greater awareness among Chinese-listed companies of the need for transparency. “Ten years ago only about 300 companies were issuing annual corporate sustainability reports; in 2020, this was over 1,000 companies,” he said.4

Although it continues to be one step at a time, the benefit of global collaboration, such as UN initiatives, is a trend that is seeing China head in the right direction.

Sources: 
1 Bloomberg, September 2020
2CLSA, December 2020
3Goldman Sachs, January 2021
4SynTao Green Finance, SynTao MQI database, June 2020

Yu Song
Chief China Economist and Chief Representative - Beijing, BlackRock
Matt Colvin
Portfolio Manager, Fundamental Active Equities, BlackRock