China’ s Investment in Green Companies

Introduction

Climate change is one of the major issues facing the world today – arguably the most important one of them all. At issue is the reality that, of the present path of development during the entire industrialized era, much of it has come as the result of using machines to perform tasks that otherwise were performed by humans, animals, or not at all. This is not a problem of itself, but combined with the fact that the negative externalities of development, from climate change to pollution to garbage, are often poorly priced into the cost of goods. This means that there is a trade-off between the desire to develop, and the negative impacts that development has on our world, and ultimately will have on human society as a whole. As many observer has pointed out – the planet will be just fine, in a million years or so, but humanity might potentially suffer terribly from climate change and pollution.

This leads to the paradox of development. Development lifts people out of poverty and a state where life is perpetually difficult, but to develop brings about negative costs of its own. The concept of sustainable development is rooted in the idea that development does not necessarily have to be destructive in the long run. Enter green investment – investing in technologies that deliver development without the negative environmental consequences. This means renewable energy sources, biodegradable and natural products, and anything else that takes nothing from the world, but can instead by reproduced infinitely, in theory.

China is the world’s leading producer of greenhouse gases, by far (Ge, Friedrich & Damassa, 2017). It is not the per capita emissions leader, but its per capita emissions are higher than the world average (Ibid.). Further, China ranks as one of the highest in the world for emissions intensity, which includes things like deforestation and land use change. Its high population and its rapid industrialization and urbanization put China at the fore of pollution and climate change. Its cities are among the most polluted in the world. This has led to intense crackdowns on factories, and substantial concern at the highest political levels that pollution and water shortage will undo much of China’s recent economic progress (Nace, 2017).

Area of Focus

This paper will investigate China’s investment in green companies. The objective here is to understand the state of such investment. It has been reported that China has invested heavily in green companies, in order to become the world leader in green technologies on one hand, but also as a means of addressing the crisis of its own pollution, which derives from industrialization, intensive coal use, and an increasing number of automobiles on the country’s roads. This area of focus has not been given much study in academic journals – they are not a good resource for current events research, so some other sources will also have to be adapted in order to actually gain a proper understanding of this issue.

The geographic area will be China, at the national level of the People’s Republic of China. This is because a lot of China’s investment policy is driven by the national-level government, through state-owned banks and other investment vehicles. The PRC, as a Communist country, has tremendous influence over investment both in the country and with outward foreign direct investment, and the latter does often tend to reflect the national interests of the PRC. Note that “China” and “PRC” will be used interchangeably here, but that does not mean anything with respect to recognition of the PRC’s claims to various foreign territories.

Gaps in the Research

There are massive, massive gaps in the research. This is not the sort of thing that is typically studied in academic journals. There are some threads of research that are related, and some that can provide some valuable background information. There have been studies about China’s energy policy, including with respect to renewable energy those studies are some of the most direct on this topic. There have also been studies on China’s investment in green supply chains, which given that country’s position in supply chains around the world is important in the study of China’s green investments. The studies that are utilized here will provide some key context, and if possible they will be augmented with other reliable sources, ideally including primary source information about China’s investments.

Link Between Economic Growth and Renewable Energy

One of the reasons that China has been so active in green investments is that it wishes to be able to continue growing its economy, but start to minimize the environmental toll that this growth has taken. The country’s leaders recognize that environmental damage is an externality, and one that is critical. When the Chinese people no longer accept the trade-off between economic growth and pollution – as occurred in the West starting in the 1960s, there is the risk that unrest will occur and disrupt the social order. One study showed that energy consumption lags economic growth, which gives the country the opportunity to force a transition to renewable energy without compromising growth, and indeed there is some reason to believe that this logic has been adopted by government, though not explicitly or publicly so (Zhang & Cheng, 2009).

China and Clean Energy

Given the reliance on coal in China, the moves that China has made towards investments in clean energy are of critical importance. In May 2017, Xi Jinping “promised to invest in clean energy, build scientific coalitions, and support other countries’ efforts to adapt to climate change” (Kaufman, 2017) This investment is set to include $900 billion in foreign direct investment in green companies and initiatives. In part the move is political, taking advantage of the opportunity the American people handed to China in the form of putting a moron in charge of the country, but in part this is simply an extension of prior Chinese policy on clean energy investments and green technology. China had previously set aside $360 billion for clean energy investments, and cancelled 103 coal plants that were on order (Ibid).

China has invested significant amounts of money both internally and externally in renewable energy. The country’s $32 billion in outward FDI in 2016 included a significant investment in renewable energy, including solar power (Jaeger, Joffe & Song, 2017). Internally, China has enacted policy reforms, including at the legal level, that have sought to encourage the use of renewable energy. Both the reliance on coal, and the persistent electricity shortages that the country faces have been targeted, for example in the 2005 Renewable Energy Promotion Law, and other instances where China has sought to use a variety of incentives to encourage the development clean energy investment, and seek legal means of curtailing investment in coal-fired power plants at the same time. By providing both disincentives for coal and incentives for renewables, China’s clean energy policy goes beyond focusing on investments and targets current consumption patterns as well (Chemi & Kentish, 2007).

China has examined a number of different alternatives to coal as a means of focusing on green investment in the energy sector. It has examined, for example, municipal solid waste as a renewable energy source. There are a variety of financial incentives and government policies that help encourage such development, which would be implemented at the municipal level, but using technology developed by Chinese companies through the provision of incentives by the national-level government (Cheng & Hu, 2010).

China has also become a world leader in the development of renewables, including solar and wind energy. Chinese companies have leveraged government policy and incentives to develop strong research and development branches, and the result is that China has been able to leapfrog Western nations to become a technology leader in the field of renewable energy. The implementation of financial incentives typically flows through the state-owned banking system, to private enterprise. There is not necessarily a transfer of equity in such arrangements, but rather the banks lend money to companies, the central government also funnels money into research at the university level, providing money for research institutions to work on projects in the green space. So not all of China’s investment in green technology specifically goes towards companies; just some (Chang et al, 2003).

It is worth mentioning that even though most of China’s energy consumption is urban in nature, the country has also made investments in renewable energy in rural areas as well. Small, off-grid wind energy projects were reported by the late 1990s in Inner Mongolia, and it was noted that these wind systems were cost competitive with gasoline power, and were “capable of providing year –round electricity and meeting rising energy demands” (Byrne, Shen & Wallace, 1998).

China has been particularly active in both solar and wind. By 2010, China had become the world’s largest producer of wind turbines, and the world’s largest manufacturer of solar panels. Chinese companies receive tax incentives as a means of encouraging them to start, grow and produce. These subsidies have also given China competitive advantage in export markets (Bradsher, 2010).

Foreign Direct Investment

China use outward foreign direct investment as part of its strategy to invest in green technologies. The PRC has increased its outward FDI dramatically since 2000, and uses this investment to further its various political and strategic interests. This investment has spread around the world at this point (Davies, 2010). China’s foreign investment in renewable energy alone came in at a reported $32 billion in 2016, an increase of 60% from the year before, indicating that renewable energy is a major strategic goal for China now (Jaeger, Joffe & Song, 2017).

The Economic Connection

Some of the details of this investment were detailed later. The funds would be divided among different agencies, including the National Development and Reform Commission, which is he major economic planning agency for China (Reuters, 2017). This highlights the link that the government sees between economics and renewable energy. Green investment in China is tied closely to the country’s economic plans. By focusing on this link, China puts itself in a better position to balance its economic interests with green investment. This manifests in becoming the world leader in the production and development of renewable energy technology, for example. It also calls into question how much green investment in in companies, and how much is in government, knowing how closely the two can be interrelated in a Communist country. There are private enterprises in China, but they often bear strong central government influence, and the implementation of renewable energy policy is definitely one of the areas that highlights that.

China is banking on renewable energy in particular to be a driver of green business around the world. So by staking out a leadership position in these technologies, China has fostered an industry with tremendous potential. China has essentially changed the economics of renewable energy, making it a cost-effective alternative for more people in more markets. Companies like Jinko Solar are now major exporters to the US, Europe and beyond (Gardiner, 2017).

The country has targeted development of power infrastructure, and getting the generation closer to the places where it is needed. So investment in green companies is now targeted towards technologies that allow for smaller-scale power generation, as a means of achieving this goal. The degree of central planning that is required is heavy, but it results in a lot of money being made available to progressive businesses that are able to help the government meet its objectives.

Green Supply Chain

While much of the existing literature about China’s green investments is focused on energy, that is because that is the largest direction for such investment. But China has also begun to target some funding towards green supply chains. Part of this is driven by the desires of partners overseas, but a lot of the focus is internally-driven, as China seeks to not only become more efficient but reduce its pollution and carbon footprint while doing so. One study focused on the adoption of green supply chain management among Chinese enterprises.

The study looked at the means by which environmental awareness is disseminated among Chinese enterprises, and how this awareness translates into green practices. As yet, the Chinese government has undertaken regulatory changes, education campaigns, and there are marketing pressures from external sources as well, all of which have combined to increase environmental awareness among Chinese manufacturers. However, the authors of the study found that increased awareness did not translate that well into green supply chain management practices. As a consequence, this remains a rather nascent area for business application, but also for the study of China’s green investments in general (Zhu, Sarkis & Geng, 2004).

Limitations

One limitation, aside from the lack of research on the subject, is that the idea of “green investment” is rooted in ill-defined terminology. As to what specifically constitutes “green” is subject for debate – renewable energy sources are certainly, but there are other aspects of making the world’s development more sustainable that may or may not be considered to fall under the ‘green’ rubric. This makes the study of ‘green investments’ a little bit tricky, when that terminology is not part of the nomenclature used in the academic literature. Renewable energy ends up being the primary point of focus for a study such as this because the terminology has a set meaning, and there is a lot of interest in exploring the topic.

A further challenge lies in defining a company in China, as differentiated from government. There are definitely private enterprises, but it is clear that the central government plays a much larger role in the development of business than might be the case in the West. Ultimately, separating what is an investment in a company and what it is an investment in an institution or differentiating between public and private spending when the private companies are spending money borrowed from state-run banks is tough. It is often necessary to assume that there is a certain degree of conflation between business and government in China, simply because that is the nature of a Communist country.

Conclusions

China has become the world leader in renewable energy, and that is a subject about which there has been a significant amount written. The existing studies explore a number of themes, and these include the means by which government encourages the development of the renewable energy sector. This occurs with the carrot and the stick – regulatory burden and shutting down of coal plants, but also tax incentives for the development of renewables. Given the pollution issues that China faces, and how susceptible it is to climate change, the country has strong motivation to make renewables a central element of its policies with respect to green investment. Other areas have not received the same largesse.

It was difficult to acquire information the journals about China’s outward FDI. Clearly, the country has increased outwards FDI substantially since the year 2000, and last year more of this went toward investments in green business than was occurring previously. Most of China’s investment in green business has been internal in nature, putting China in the position of leading the world, but now the country has made a point to start exploring investment externally as well.

Opening of trade policy has allowed for China to make more such investments overseas – being affirmed as a member of the World Trade Organization aligns with the dramatic increase the country has made in outward FDI. So there is opportunity for China to increase green investment in business to a much higher degree. Indeed, while the country splits its internal investment in green technology between business and research, externally this investment will be all business. One aspect where China is not the world leader is in electric cars, so in all likelihood the country will target that as one of the key areas for investment in the future.

China’s investment in green companies continues to lead the world, and is focused mainly internally for the time being. The primary focus is renewable energy.

Next Steps

The next steps in terms of research would be to dig deep into the primary source data, such as it is available. Normally this data is made available through media sources by China, and not always in English first. But more information is going to be in the primary source data than in anything written in academic journals. The focus may have to start by narrowing down “green investment” to something with a little bit more clarity, such as renewable energy. At that point, it will be easier to specify what China’s investments are, and how much they have changed. That information can then be juxtaposed with further research into China’ central planning structure, in order to determine how announcements like the ones made in the past year with respect to renewables investment will actually be implemented – in particular how much money ends up invested in green companies, and how that investment occurs. Knowing that the investment is funneled through China’s state-run banks provides some context for linking back government investment to private enterprise, in particular when those banks invest overseas, where there is more transparency into their activities.

The next steps for China are to examine what else the country can do in terms of green investment. What little evidence exists on things like the green supply chain actually tell little, and at the end of the day the underdevelopment of investment in areas outside of renewables provides fertile ground, because these investments must exist, and if they do, then there is room to describe them, and analyze how they, too, fit into the overall context of China’s policy with respect to investment in green companies.

References

Bradsher, Keith (2010). “China leading global race to make clean energy.” New York Times. January 31, 2010.

Byrne, John, Shen, Bo, and Wallace, William. (1998) “The economics of sustainable energy for rural development: A study of renewable energy in rural China” Energy Policy. Vol. 26, No. 1, pp 45-54.

Chang, J., Leung, Dennis, Wu, C. & Yuan, Z. (2003) “A review on the energy production, consumption, and prospect of renewable energy in China. Renewable and Sustainable Energy Reviews. Vol. 7, No. 5, pp. 453-468.

Chemi, Judith & Kentish, Joanna. (2007) Renewable energy policy and electricity market reforms in China. Energy Policy Vol. 35, No. 7, pp. 3616-3629.

Cheng, Hefa & Hu, Yuanan. (2010) “Municipal solid waste (MSW) as a renewable source of energy: Current and future practices in China.” Bioresource Technology. Vol. 10, No. 2010, pp.3816-3824.

Davis, Kenneth (2010) “Outward FDI from China and its policy context” Columbia Academic Commons https://doi.org/10.7916/D8VD76C0

Gardiner, B. (2017) “Three reasons to believe in China’s renewable energy boom” National Geographic. https://news.nationalgeographic.com/2017/05/china-renewables-energy-climate-change-pollution-environment/

Ge, Mengpin, Friedrich, Johannes & Damassa, Thomas (2017). “6 graphs explain the world’s top 10 emitters” World Resources Institute. https://wri.org/blog/2014/11/6-graphs-explain-world%E2%80%99s-top-10-emitters

Jaeger, Joel, Joffee, Paul & Song, Ramping. (2017). “China is leaving the US behind on clean energy.” World Resources Institute. http://www.wri.org/blog/2017/01/china-leaving-us-behind-clean-energy-investment

Kaufman, Alexander (2017) “China proposes major green investment amid US retreat from climate change.” Huffington Post. http://www.huffingtonpost.ca/entry/china-climate-change-xi-jinping_us_5919c109e4b0fe039b3646ca

Nace, Trevor (2017) “China shuts down tens of thousands of factories in widespread pollution crackdown.” Forbes. https://www.forbes.com/sites/trevornace/2017/10/24/china-shuts-down-tens-of-thousands-of-factories-in-widespread-pollution-crackdown/#63e12a546661

Reuters (2017). China to invest ?292bn in renewable power by 2020. The Guardian. Retrieved December 10, 2017 from https://www.theguardian.com/business/2017/jan/05/china-invest-renewable-fuel-2020-energy

Zhang, Xing, & Cheng, Xiao. (2009) Energy consumption, carbon emissions and economic growth in China. Ecological Economics. Vol. 68, No. 2009, pp.2706-2712.

Zhu, Qinghua, Sarkis, Joseph & Geng, Yong. (2004) “Green supply chain management in China: Pressures, practice and performance.” International Journal of Operation & Production Management. Vol. 25, No. 5, pp.449-468.

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