A new catalyst for the Chinese economy: the green dragon

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Last year, 40% of China’s GDP growth, reaching 5.2%, stemmed from green economic activities, surpassing real estate, which contributes 30% to Chinese GDP. The Chinese green economy continues to grow - the $1.6 trillion in economic activity related to clean energy last year marked a 30% increase from 2022. According to CREA's report, solar power, solar PV panel manufacturing, EVs, and batteries drove most of the investments. Without the green sector, Chinese GDP growth would have been a modest 3% last year. China's deep-rooted green industrial policy saw significant success in developing various technologies in 2023, spanning from EVs to batteries, pump hydro, electric trains, and high-voltage transmission. This indicates a long-term trend of accelerating green technologies in China, contrasting with potential setbacks in the US and the EU due to political divisions over the energy transition. The green dragon promises prosperity and growth not only for China but also for the global economy. Further evidence of the remarkable green transformation includes increased commitment to ESG and the rapid pace of the Chinese energy transition.

Tripling renewable investments in China fuels GDP growth this decade

The US has been the engine of growth for the world economy and that was clearly the case in 2023, while Europe and China underdelivered on growth. Will the innovation and earth focus that the year of the dragon is expected to bring materialize and make China lead global growth again? Looking back at China’s unyielding and long commitment to green solutions indicates that what is ahead will be even more transformational than the past achievements. According to the IEA, in 2023 the world added 510 GW of new renewable energy capacity, an almost 50% growth over previous year. From all the new renewable energy capacity to be added between now and 2028, China is expected to account for 60% of the total. Over the 2023-2028 window, the IEA forecasts that China will build 2,000 GW renewable capacity in the five-year period, which will be almost four times more renewable capacity than the EU and five times more than the US (respectively the second and third largest markets for new renewable energy). Solar is to represent 3/4ths of all new capacity. Furthermore, the agency expects that by the end of 2024, China will reach 1,200GW total renewable energy capacity -  the goal for installation by 2030 delivered six years in advance.  

China dragon is already predominantly green

Carbon Brief emphasizes that the green economy is now the largest engine of GDP growth for the country, with solar being the largest contributor. While the country has been leading both the manufacturing of PV panels and their installation, in 2023 the industry grew at an unprecedented pace. Around 200 GW of new solar was installed in China last year, above the 87 GW added in 2022. In the much talked about EV side, China’s production was up 36% YoY, reaching 9.6 million units last year (representing 32% of all the vehicles built in China in 2023). Of those, 8.3 million were sold domestically and 1.2 million were exported (the exports were up 78% YoY). There are 94 brands offering 300 different models in a highly competitive market, where all the additional manufacturing capacity of cars added last year was devoted to electric powertrains. As EV penetration grew, so did the EV charging network, with 3 million new charging points added across the country bringing the cumulative number of EV charging points to 8.6 million. A segment benefiting from material growth is the clean energy storage, beyond just batteries. New pumped hydro projects under construction in 2023 reached 167 GW, with another 250 GW of pumped hydro in pre-construction phase. While current growth comes from mature key technologies (solar and battery) there could be more growth coming from solutions like green hydrogen. To bring electrolysers and fuel cell manufacturing to a price point that makes green H2 economical, China would need to invest massively in both production and deployment – both developments are underway. 

One example of China’s ambitious initiatives already underway 

The Chinese government is developing massive solar and wind projects in its desert areas of Gobi and Kubuqi in Northern and Western China (an interesting video that showcases the scale of the plan for China’s northern deserts can be seen here). The projects, already under development, will bring 200 GW of new capacity by 2025 and an additional 255 GW between 2026 and 2030. The part to be completed by 2030 will have 90 GW to serve local markets, and 165 GW to be sent to the rest of the country. Moreover, the plan includes seeding and planting grass and herbs underneath the solar panels, as the panels in the desert collect enough dew to provide water for ecological restoration and develop agriculture under the panels. The massive size of such projects could bring the Chinese installed capacity of solar and wind to 1,700 GW by 2030, way above the national target of 1,200 GW by the end of this decade. The multiplier factor of large utility scale solar + wind is material, with required investments in long distance transmission lines, energy storage and potentially green hydrogen production. Projects like the Gobi and Kubuqi desert renewables could allow China to reduce its reliance on coal fired generation and therefore enable a material reduction in CO2e emissions. 

Supply glut in context and the deep discount of Chinese green names

The flip side of the massive increase in solar PV manufacturing capacity and battery making in China is a severe drop in prices. Last year, Carbon Brief points to solar panel prices dropping 42% YoY, a much more dramatic reduction vis-a-vis the historical average deflation of ca. 17% p.a., with battery prices falling even faster, down ca. 50% YoY.  Similar to the point made by energy economists that “the best thing to solve high oil prices are high oil prices”, the short-term glut that reduced prices of the commoditized technologies is encouraging faster up take of the solutions. An acceleration in demand of these key decarbonizing products will bring the industry to a more balanced level.  

Green investment not decoupling from the overall view of China as a geopolitical risk

Green represents 40% of the Chinese economy, it is growing and has the potential to triple by 2030, implying that companies are quite oversold on the sharp drop in prices of solar panels and batteries. But it’s not just the supply glut; shares of these companies also are being penalized as investors price in the geopolitical risk of China invading Taiwan and consequently suffering severe sanctions from all Western leaders. For example, in the solar PV manufacturing segment, JinkoSolar Holdings currently trades at a market cap of $1.4 billion, P/Sales of 0.09x (this is not a typo) and forward P/E of 2.4x, despite a 63% quarterly revenue growth and a 24% ROE, while Arizona based First Solar has a market cap of $15.5 billion, trades at ca. 5x P/S and forward P/E of 11x. EV manufacturers face a similar coexistence; BYD trades at $79 billion market cap, TTM P/S of 0.9x and Forward P/E of 14x, while Tesla at a $636 billion valuation trades at TTM P/S of 7x and Forward P/E of 64x. Battery manufacturers have a comparable dynamic, with CATL at a 25.5% ROE trading at 1.7x TTM P/S, and Korean LG Energy Solutions with a 7.5% ROE trades at TTM P/S at 2.8x. 

ESG is not dead, and China is embracing it

The three main exchanges in China released draft guidelines on sustainability reporting requirements this month. The largest 400 companies in China will have to report sustainability reports by 2026, which is likely to create some standardization of data disclosure. These companies across the three exchanges will be required to disclose their ESG governance and strategy, key figures on their energy transition plans and environmental and the social impact of their operations. Analysts believe that the China effort is an attempt to level its regulations to Europe, where this year companies will have to report under the Corporate Sustainability Reporting Directive. 

In conclusion, while the geopolitical risk is not to be ignored, the green economy in China will continue to receive full support from the government that needs a new engine of GDP growth to replace the ailing property sector. The cohort of green companies leading this long-term structural shift from the high emissions economy should decouple from a negative outlook for the Chinese consumer and real estate investments. The current valuations of several leading names, like BYD, JinkoSolar and CATL, means they are trading at very deep discounts. These companies will continue to grow top line and are likely to improve profitability as utilization rates increase because demand for their solutions will further accelerate. It is unfortunate that many global leaders are antagonized with China. When it comes to decarbonization, the majestic roar of the Chinese green dragon is a sign of positive change.