Last week in a major environmentally-themed speech in Washington, Al Gore called for complete elimination of carbon-based energy generation in the US within ten years. It was a bold statement, equivalent to Kennedy’s Man on the Moon address, and then some: Achieving his goal will not only require the full participation of the US government, but also that of every consumer in the United States, a far more ambitious effort than the manned moon landing. It’s an inspiring speech that I highly recommend:

Predictably some feel this is a long-shot, if not an impossibility. Yet perhaps that is the point: By aiming for the stars, at least we may reach the moon.

And I’ll go one step further to say that, if the US is to have any chance of success, China’s participation will be needed as well, to provide many of the products needed - the solar water heaters, the wind turbines, the batteries to store power in electric cars, among other things.

A growing number of Chinese firms listed domestically and abroad are positioned to profit from China’s own environmental woes by taking them as the newest business opportunities. We make this point in Supertrends of Future China (scheduled for release in about three weeks, just before the Olympics), where we devoted a full chapter to what we call the Greening Supertrend.

In brief, Greening is the intersection of China’s national environmental policy with the domestic and global trends towards clean energy and pollution reduction. A new generation of entrepreneurs in China is embracing this modern Green Revolution. By taking advantage of the domestic market size and manufacturing power, they will put China at the forefront of environmental technologies, first domestically and then, if present trends continue and Gore’s vision becomes a reality, globally.

Red Star Greening Over China

The central government has put green development as a prime objective of the 11^th Five Year Plan for China’s economy. The target is further outlined in the Five Year Plan for Environmental Protection. Many critics rightly point out that national policy is often ignored at the local levels, but last year’s promotion of the State Environmental Protection Agency (SEPA) to full ministry status is a sign of how seriously the central government is taking the issue.

Recently, the government has made some regulatory steps which are actually putting China in the lead of global environmental policy: For example, the plastic bag ban I discussed last week was announced, implemented, and accepted by the national population in just six months.

Replacing those bags with environmentally-sound reusable bags is just one of the new opportunities that China’s entrepreneurs have already jumped into. On a much larger scale, China’s wind and solar energy industries are taking center-stage.

The World Wind Energy Association currently ranks China as number five in a list of global wind users. China has approximately six thousand megawatts of generating capacity, about a quarter of world-leader Germany’s capacity, and not even one percent of China’s massive energy needs. Shi Pengfei, the vice-president of the Chinese Wind Energy Association, said that the National Development and Reform Commission had increased China’s target of wind-energy generation to 100,000 megawatts by 2020, five times as much as Germany’s present capacity.

Xinjiang Goldwind Science and Technology Company (SZ 02202), China’s leading wind turbine producer, went public on the Shenzhen stock exchange in 2007. Although large scale wind farms face many obstacles in China, such as an electric grid that is oriented towards cheaper coal-powered energy generation, on the strength of its domestic market growth, some analysts (additional link) believe Goldwind and other Chinese companies can rise in the next three years to challenge the world’s biggest turbine manufacturers including GE.

By 2020 the central government has pledged meeting 15 percent of China’s energy needs through renewable energy sources, including wind, biofuels, water, and solar. By 2050, the ratio is to be 30 percent including nuclear power. This means huge investments are required, but China is already a world leader in the use of at least one clean energy technology: Solar.

Star light, star bright

In many of China’s second, third or fourth tier cities, rooftops are covered by solar water heaters. The cheap, ubiquitous devices use the sun’s rays to heat water so that even rural workers can afford to take a hot shower after a long day’s work. In China, 200 million people have their water heated in this way, according to the NDRC. China has more than 50 percent of both the world’s production and use of solar water heaters, and other forms of solar energy are starting to grow as well.

Suntech Power (NYSE:STP) is the world’s third largest solar cell producer after Q-Cells of Germany and Sharp of Japan. It had US$1.4 billion in revenues in 2007. Revenues are expected to increase quickly as solar cell-generated electricity starts to approach price parity with carbon-based energy sources such as coal and currently high-priced oil.

The government is also active in solar energy policy, mandating that China should increase its current 100 million square meters of solar water heaters to 150 million by 2010, and 300 million by 2020.

With China set to take its place as the world’s largest economy by mid-century, its power needs will also dominate and, if it is not careful, the pollution problem will reach unprecedented levels. Green technologies promise to be among the best industries to be in during this challenging period of growth.  While China’s domestic market alone is a considerable prize for any green company, globally the potential is astronomical.  Gore’s call to action may help considerable to raise a green star over China.

Related Information:

A number of other commentators have written on China’s Green potential as a business opportunity. Here are a couple of articles that I recommend:

China: A Clean-tech gold rush

China’s Coming Environmental Renaissance

China’s Green Leap Forward

China’s Silver Lining

A possible Olympic legacy: A greener China

Categories: China Supertrends, Drivers of the Drivers, Greening, Pro-business Policy
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This week in Japan, the G8 leaders pledged to cut greenhouse gas emissions by 50 percent before 2050. In the same week, China announced it would immediately cut more free plastic bags. What is the main point of difference between these countries’ environmental policies? It could be summarized thus: More talk versus real action.

The G8’s move to cut greenhouse gases (primarily CO2) by 50% was immediately decried by some environmentalists and tagged as insufficient by the group of developing countries, including China, on the sidelines of the summit.

For example, the pledge didn’t even make clear whether the cut was to be from 1990 levels (as is the general practice of the UN and the Kyoto Protocol when measuring emissions reductions) or present levels, which would significantly decrease the impact of the pledge. The US in particular has increased carbon emissions in the subsequent 18 years by 20%. From a BBC report:

…the US has refused to set any interim targets for cutting emissions - and environmentalists have criticised the progress at talks as “pathetic”.

Five of the world’s biggest emerging economies said the G8 should increase its targets to more than 80% by 2050.

China, India, Mexico, Brazil and South Africa - who will join talks on Wednesday - also urged developed countries to commit to an interim target of a 25-40% cut below 1990 levels by 2020.

Meanwhile, in China, the Ministry of Commerce on July 11 announced changes to the plastic bag ban policy. Effective immediately, restaurants, bookstores, and clothing stores will also be required to eliminate free plastic bags, charging customers for each one issued. In fact, this was a clarification of the already-implemented plastic bag ban law, which came into effect on June 1 this year.

Is Red China Becoming Green?

One law eliminating free plastic bags does not a green country make, but I believe that China’s environmental policy is frequently unfairly derided by critics as unenforced. In fact, such a broad generalization is inaccurate: Here in Shanghai, it’s true that not every store has implemented the policy at present, and it seems many of the aforementioned clothing, restaurant and bookstores presumed the law was meant to apply to groceries only, but this loophole has now been closed. In hypermarts, supermarkets, and convenience stores, it is already impossible to get free plastic bags, so I expect the new revision will take effect quickly in restaurants and other venues.

In our new book Supertrends of Future China, we cover the plastic bag ban law as an example of China’s new environmental movement and the central government’s willingness to put its words into action. The G8 really should pay more attention instead of just making more hollow promises.

Related information:

For more details on the plastic-bag ban update, the resourceful China Environmetal Law blog has a post on the matter, describing the hitherto unknown-to-me existence of ‘produce department hooligans.’

Categories: China Supertrends, Drivers of the Drivers, Greening, Pro-business Policy
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For those wondering how China would plug the many holes in its supposedly-airtight capital account (allowing a record amount of hot money to flow into China in the past six months), part of the answer was revealed on July 2 via the website of China’s State Administration of Foreign Exchange: A new policy to verify that export invoices are valid and not over-billed for the purposes of transferring more foreign currency into China.

Here at China Supertrends, foreign reserves and hot money are an endless curiosity, having achieved in China never-before-seen volumes, anywhere, in the history of mankind (Perhaps the Romans had a proportionally large foreign reserve, but should that count?).

In a July 3 report from Xinhua, a SAFE official appears to have confirmed the much-speculated figure of US$1.797 trillion in foreign reserves as of the end of May, increasing about US$115 billion in just two months from the last officially-released figure of US$1.682 trillion. From the Xinhua article:

During the first five months of 2008, forex reserves increased by 18.7 percent year-on-year, or US$268.7 billion, SAFE figures showed.

As Brad Setser mentioned recently (and in this older post), there is likely an under-stating of the true amount of the increase in foreign reserves due to internal transfers to the state investment funds Hujin / China Investment Corporation; Chinese banks holding more foreign reserves as the reserve ratio continues to increase (up an additional one percent in June to reach 17.5 percent at present); and revaluations of China’s non-US currency holdings. As well, I’d point out the significant amounts of capital entering the market via the Hong Kong / Shenzhen corridor’s frequent travelers, black market currency traders throughout China, and people such as the Atlantic’s James Fallows withdrawing as much RMB from their foreign bank account as the limits will allow.

Back to the July 2 press release from SAFE, a Financial Times story on July 2 translates some important details:

Exporters will now be required to provide documentary evidence that their invoices are based on genuine transactions if they wish to change dollars into renminbi. The regulator said the new computer system for checking invoices would be introduced on August 4. A trial period begins on July 14.

This is serious news for exporters, and will create additional paperwork and possibly delays for many legitimate transactions. Still, this is what the hot money problem has come to: Reserve ratio increases can soak up liquidity but this is merely treating the symptoms rather than curing the disease.

If the trial proves feasible (and considering the volume of trade, it may not) this will be another problem, in addition to the rise in transportation costs, for China’s exporters (foreign and domestic companies alike) and possibly cause export growth to slow. Not good news for trade, perhaps, but a step in the right direction to reduce hot money.

UPDATE JULY 4: From the Wishful Thinking department, CBS MarketWatch reports SAFE has “limited” foreign tourists to exchanging a maximum of US$50,000 during their stay for the Olympics from July 8 to October 17:

The regulator said the quota would provide tourists with enough spending money while also helping to limit foreign exchange inflows during the games.

With an estimated 500,000 foreign visitors (that’s assuming they can get visas), what’s another US$25 billion of foreign exchange between friends?

Related information:

h/t to China Herald for the excellent Olympic-related news coverage.

An article from Reuters on the foreign exchange issue, relating to the previously-unofficial May 2008 increase.

Categories: Investment, Primary Growth Drivers, Trade
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Shanghai residents and visitors both may recall some of the lively pedestrian malls in the city, the most famous being Nanjing East Road going all the way to the scenic Bund. Shanghai’s Wujiang Road is also famous in the city for serving such delicacies as Shengjian (friend dumplings, most unhealthy but oh so delicious) and fermented tofu (usually served fried) known locally as ’stinky tofu.’ One half of Wujiang Road has undergone a facelift that is indicative of the changing consumer landscape in China.

Retail in China can be a mixed bag: French-retailer Carrefour may be having problems, but China’s Lianhua is doing well, and foreign firms such as Staples and UPS are expanding, even as Bertlesmann China closes its retail outlets.

There are clearly winners and losers, but retail consumption overall is the most important driver of growth in the Chinese economy. The picture is bright, according to a report by AT Kearney that ranks China as the fourth most attractive retail market (h/t to China Law Blog).

Here is my article from the June 30 edition of the Shanghai Star Business Journal, with some before and after pictures for your enjoyment.

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As world energy prices begin to affect transportation costs, the appreciating yuan results in a decreased demand for Chinese exports, and a tighter monetary policy starts to reign in inflation, the question now is how China will avoid a dramatic economic slowdown. If Shanghai’s Wujiang Road area is any indication, retail may be the answer to China’s excess supply, with China’s newly-affluent middle-class consumers increasingly demanding more.

People who have been living in Shanghai for longer than three years will have distinctive memories of the old Wujiang Road, the bustling restaurant street running parallel to Nanjing West Road near the subway station and intersection of Shimen No. 1 Road.

The area directly behind the station used to have Chinese eateries and snack stands, push-cart vendors and colorful events such as a weekly English corner. Now, in much the same way the Huangpu River separates Puxi from Pudong, old from new, Wujiang Road stands divided: East of Shimen No. 1 Road, the street remains much as it has always been, while the western half has recently taken on a new look: Redesigned by Singapore’s Frasers Property and rebranded as InPoint, part of the Jing’An Four Seasons mixed-use residential and retail development, western Wujiang Road is home to a newly-renovated shopping arcade.

The loss of yet another part of Shanghai’s historic past aside, it is hard to deny the new layout and selection is vastly improved.

Where once were about twenty small restaurants and shops now stands a mall with space for more than ninety. Hole-in-the-wall bubble-tea stands have been replaced by four coffee chains including the ubiquitous Starbucks. What once was a Chinese snack vendor selling meihuagao (a rare and delicious baked rice cake with red bean paste inside and topped with dried fruit) is now an Iceason. If you don’t like their ice cream, you can go to one of three other frozen dessert shops, such as a DQ and Cold Stone Creamery, or try Honeymoon Dessert, one of the many Hong Kong and Taiwanese-style snack shops.

Much like the Wujiang Road of old, there are sit-down restaurants galore, but now with a corporate-branded flavor. And that’s not even mentioning the shops: Retailers Levi’s, Tissot, and ONLY, and other sellers of everything from stuffed animals and puzzles to jewelry and baubles.

All this stands in stark contrast to the eastern side of Wujiang Road, with its low-priced stinky tofu vendors, fried dumpling shops, and outdoor crawfish restaurants.

In fact, the transformation of Wujiang Road is not unique, and is merely symbolic of how retail is quickly maturing in China. Shanghai has dozens of revitalized or new shopping areas taking shape, and it seems there is now an international-style mall on every major street to replace what once was a local- or state-owned retailer.

Nationwide, China is home to four of the world’s fifteen largest shopping malls, but many of them, including the world’s biggest in Dongguan, Guangdong Province, are having trouble filling up the space. This begs the retail supply question: If you build it, will they come?

Retail spending has been growing rapidly in China. In 2008, urban retail spending is up 22.3 percent in May year on year, with an average rate of 21.1 percent this year so far compared to the same period last year, according to China’s National Bureau of Statistics. This growth seems likely to exceed 2007’s 17 percent overall increase in retail spending, but this is partly expected due to the increased inflation rate compared to 2007. However, by taking inflation out of the calculation, real retail spending has still grown 13 percent in the first quarter of 2008, according to the World Bank’s most recent China Quarterly Update.

Another important indicator is that in 2007, China’s consumption growth - the portion of GDP growth that covers all the goods and services consumed by households - exceeded the growth due to trade or investment to become the top driver of China’s economy, albeit by a slim margin.

Of course, retail spending is only a part of total consumption, but it is a growing part in China as disposable incomes go up. In 2007, average urban salaries increased 18.7 percent, according to NBS figures, nearly four times the 4.8 percent pace of inflation in 2007, and minimum wage levels were increased in many of China’s largest cities. This excess income will drive new retail spending.

Short-term economic statistics aside, where will the long-term support for retail growth come from? There are three major population segments that will keep retail spending high in China’s cities: The white-collar youth, newly-urbanized migrant populations, and the nouveau riche who are spending on big ticket items in the automotive, housing, and luxury markets.

One study by MasterCard estimates that China will have more than 117 million young people with a yearly income greater than US$60,000 by 2016. A recent survey by website zhaopin.com of 6000 urban Shanghainese white-collar workers found that 80 percent had credit cards, and more than half of them already considered themselves in hock to their cards as monthly “card slaves.” The spending power of more than one hundred million high-income consumers who are comfortable with credit card debt, many of whom will live at home until marriage, will be of growing significance to retail sales.

Second, the urbanization trend in China shows no sign of slowing down. The McKinsey Global Institute estimates China will almost double its urban population to 926 million by 2025, with 219 cities of more than a million inhabitants. Each of these cities will have their own Wujiang Road-style pedestrian malls to stimulate consumers’ taste buds and empty their wallets.

Finally, China’s most affluent people, those who can afford their own cars and homes, are literally driving new trends to support their high-end consumption habits. Cars and homes create much related-goods spending, allowing auto-accessories stores such as Japan’s Autobacs, and home-furnishers such as Ikea, to prosper.

As well, the World Luxury Association reported that in 2007 China became the world’s second largest market for luxury goods such as watches, bags, and jewelry, and will top world leader Japan by 2015.

One only needs to look in a three block radius of the new Wujiang Road to see a healthy microcosm of China’s retail environment: Eastern Wujiang Road for the traditionally-minded, the new InPoint shopping street for young consumers, and Nanjing West Road’s high-end fashion and luxury retailers for the affluent. Some may miss the old meihuagao vendor, but China’s economy is not looking back.

Categories: China Supertrends, Consuming, Consumption, Primary Growth Drivers
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