Take the pulse of China’s future economy – the green energy talk

China is facing a slew of near-term headwinds, such as sluggish economic growth, property credit crisis and geopolitical tensions with the US. BEA Union Investment believes instead of getting fixated on short-term noises, investors can focus on China's long-term growth drivers. Green technologies, such as solar energy and electric vehicles, with which investors are familiar, are secular trends that will not go in reverse gear. China has been a dominating player in these fields. So, how can China's enterprises benefit from the ever-increasing demand for green technologies? Here are some takeaways for investors.

How China charges ahead in the race of green energy

The much-needed energy transition into clean energy is critical for countries, including China, the US and the EU, to reach their targets of zero emission by 2050. Solar power is amongst one of the major renewables. Bear in mind that solar power is not a fuel. Panels are required to convert heat generated from the sun into electricity. The production of solar panels supply chains involves a number of stages and has been heavily concentrated in China. First, panels are made by melting and casting the raw material of polysilicon, before slicing them into wafer sheets. Layers of wafer sheets are then manufactured into a solar cell, and multiple cells are soldered together to form modules. As the final stage, modules will be connected to panels. According to the International Energy Agency (IEA), China accounted for more than 80% across these four major manufacturing stages of solar panels. And the country's share in critical elements such as polysilicon and wafers could rise even more to over 95% in the coming years.

Production aside, China has also been leading in investment, accounting for almost two-thirds of global large-scale solar investment. In the first half of 2022, the country invested US$41 billion, up 173% from a year earlier. This paves way to meet rising demand for solar panels down the road. The adoption of renewables is an irreversible trend. Even if global growth eases and outlook remains hazy, governments will remain resolute in decarbonization. According to the IEA's estimates, solar energy generation rose by a record 179TWh, or 22% in 2021, from the year earlier, fueled by China, the United States and the EU. Even in the face of a looming recession, supply chain disruptions and surging commodities prices, countries worldwide will continue to support the transition of clean energy and actively release favourable policies for emission reduction. This is also why at BEA Union Investment, we believe the demand for solar panel components will continue to increase and favour Chinese manufacturers, whose leading positions are unlikely to be shaken anytime soon.

Low Carbon Another green technologies that have been heavily concentrated in China is the manufacturing of lithium-ion batteries, which is the heart of all electric vehicles. Making batteries cheaper and more efficient hold the key to the future of EVs. China has been investing directly and indirectly in lithium, cobalt and graphite mines in markets such as Argentina, Chile and African countries. This brings China's processing and refining capacities of these metals, which are crucial minerals to produce EV batteries, to more than 50%. China's ability to secure raw metals to produce EV battery, coupled with government's favourable policies, allow Chinese corporates to take large orders, bring down unit costs and subsequently, boost market share. Today, China is home to the production of three-quarters of lithium-ion batteries worldwide. The majority of European and US electric vehicles are relying on the imports of Chinese lithium-ion batteries. According to Morgan Stanley, by 2025, about 88% of Europe's EV batteries will be imported, predominantly from China.

Same with renewables, the popularity of electric vehicle will only continue to grow. To achieve the target of net-zero emission, governments have been ramping up efforts to electrify private and public transportations. IEA data showed, EV sales doubled in 2021 from the year earlier to a new record of 6.6 million, regardless of the adverse impact brought on by supply chain bottlenecks and the pandemic. The first quarter of 2022 saw sales jumped 75% to 2 million. Considering only 120,000 electric cars were sold worldwide in 2012, growth rate had been astonishing, thanks to schemes such as subsidies and tax rebates on car purchases and/or in-home EV charging stations as well as the increase of charging stalls in public spaces. The IEA expected EV sales could register exponential growth and reach 300 million by 2030.

The development of renewable energies and green technologies will continue to grow irrespective of economic conditions. BEA Union Investment believes the aforementioned sectors deserve investors' attention. Should investors target long-term positioning through funds, it is worth understanding whether green technologies play a core theme of the fund's portfolio.