Gray Skies Are Going to Clear Up: Profiting From China's Green-Tech Movement

By Jason Simpkins
Associate Editor

Money isn't the only thing flowing through China right now. Pollution has filled the streets, contaminated the rivers and clouded the skies.

Half of China's population - 600 people to 700 million people - drinks water contaminated by human and animal waste. In fact, 1 billion tons of untreated sewage is dumped into the Yangtze River each year. And, according to a recent study conducted by the World Bank, air pollution causes more than 400,000 premature deaths every year.

With the health of its population fading and global opposition to carbon emissions rising, China has no choice but to address its pollution epidemic. And thanks to a blistering economy and a stockpile of cash reserves, throngs of investors are eager to help Beijing wash away its troubles.  

Cleantech Group LLC, which hosted an energy conference in Beijing just last week, estimates that China will attract $700 million in venture capital funding for clean technologies in 2008, Reuters News Agency recently reported. Total investments could reach $2 billion by 2010.

Qiming Venture Partners, based in Shanghai, is one of many firms scouring China for untapped investment opportunities, and is uncovering an increasing amount in the clean energy sector. The venture firm already has closed a $200 million fund, and expects to close a second $300 million fund next year. Approximately 10% of that fund will be earmarked for clean technologies.

London Asia Capital also has invested about $200 million in China, and is now weighing its options in the nation's clean-tech sector.

"In the last few years we have dramatically accelerated the deal sizes and went exclusively into the clean-tech sector," Christoph Loeslein of London Asia Capital told Reuters.

 Dried Up and Wasted

According to a Cleantech Network report and industry insiders attending the clean energy forum in Beijing, water treatment and energy efficiency projects boast the greatest investment potential.

Of the two, water may be the most pressing concern. China's water supply is both polluted and inefficiently managed. As a result there is no shortage of opportunity for anyone willing to wade waist-deep into the dirty business.

In addition to the problems posed by droughts and a lack of viable sources, a great deal of water in China is actually being wasted. In an article published by InterFax, Guo Youzhi, general secretary of the China Desalination Association, said that only 20% of industrial wastewater in China is efficiently re-utilized. That directly contradicts government statistics, which place the figure at a much-higher 75%.

Worse, the little water China does manage to circulate is of terribly poor quality. At the Cleantech conference, Liu Junjie, general manager of Duoyuan Global Water-Operation Co. Ltd., said 80% of China's surface water and 40% of the country's groundwater is polluted. 

Both Guo and Liu agree that the greatest obstacle to solving the nation's water crisis is economics.

"Artificially low water prices, as well as lack of preferential policies from the central government, mean that it doesn't make economic sense for companies to adopt costly technologies to improve water usage efficiency and re-utilize wasted water at the moment," Guo told InterFax.

Liu corroborated Guo's story, pointing out that China's water prices are only one third of average global prices, despite a government pledge to increase the cost of water by 10% annually.

However, Guo also said that while overall Chinese water prices are low, there is a substantial disparity in prices between regions. According to the InterFax article, the price of water in central China's Guiyang City has fallen as low as $0.005 per ton. But prices in the Tianjin Municipality have climbed as high as $0.88 a ton. 

High water prices in Tianjin has increased foreign investment in seawater desalinization technologies. Approximately 40,000 tons of the 600,000-ton daily desalinization capacity is the product of foreign investment from companies such as General Electric Co. (GE) and Veolia Environment (VE).  

It costs around $0.54 to desalinize a ton of seawater. According to Guo, it costs between $0.20 and $0.27 to treat and re-utilize a ton of industrial wastewater with current technologies. If Beijing keeps its word and the price of water rises, the tide of investment will rise as well.

Letting Mother Nature Do the Work

The second biggest environmental concern for China is the nation's suffocating air pollution. So far, China has relied heavily on coal-fired power plants to power its rapid industrial expansion.

Between 2003 and 2006, worldwide coal consumption increased as much as it did in the 23 years prior. China was responsible for 90% of that increase. China used 2.5 billion tons of coal in 2006, more than the next three highest-consuming nations combined. The country is home to more than 2,000 coal-fired power plants, and a new one goes into operation every week.

Those plants produce massive quantities of hazardous carbon emissions. Earlier this year, China surpassed the United States as the world's top emitter of greenhouse gases. The smog-filled skies have resulted in acid rain, desertification, dust storms and declining health. Healthcare costs alone account for an estimated 4% of China's GDP.

The nation's climate-change program has set a target of reducing greenhouse gas emissions by 950 million tons over the next two years. Last week, at the U.N. climate conference in Bali, Xie Zhenhua, vice chairman of the National Development and Reform Commission, said China's investment in renewable energy would reach $20 billion this year.

"China is already the world's factory," Yang Ailun, climate change program manager at Greenpeace China, told Bloomberg News. "It could be and should be the manufacturing hub of clean technology for the world as well."

China-based manufacturers of alternative energy technologies are already taking off in a big way. Companies specializing in alternative energy have seen their stock prices soar. Suntech Power Holdings Co. (STP) has seen its stock price skyrocket by 137% this year. Solarfun Power Holdings Co. (SOLF) has jumped 125%.

Three Chinese companies struck it big in their initial public offerings (IPOs) this year as well. JA Solar Co. (JASO) has seen a 248% vault in its stock price. Yingli Green Energy Holdings Co. (YGE) has climbed 201%. And LDK Solar Co. (LDK) is up 117%.

Solar power isn't the only clean energy industry showing promise either. China became the world's sixth-largest generator of wind power last year. Now, the country's largest manufacturer of wind turbines is planning to raise $244 million dollars from its IPO. In a statement to the Shenzhen Stock Exchange, Xinjiang Goldwind Science & Technology Co. Ltd. outlined plans to sell 50 million shares at about $4.88 a share.

According to KGI Securities Co. Ltd., Goldwind has 33% of China's wind power equipment market.

"As China's wind power sector takes off, we think Goldwind is well positioned to become a major beneficiary, thanks to its strong brand and first mover advantage," Steven Liao, a KGI Securities analyst, told Bloomberg.

Greenpeace's Yang estimates China may have installed wind-power-generation capacity of 120 gigawatts by 2020, given the level of state-sponsored initiatives.

"The power generated from the wind-generation units will be the equivalent of five Three Gorges projects," Yang told Bloomberg.

The Three Gorges Dam on China's Yangtze River is the largest hydropower venture in the world with a planned capacity of 18,200 megawatts.

Beijing is hoping that the nation's renewable energy consumption will rise from 8% now to 10% in 2010, and 15% in 2020. Right now 80% of China's energy comes from coal.

News and Related Story Links:

  • InterFax:
    Venture investment in China's cleantech industry promising but challenges remain - industry insiders
  • InterFax:
    China's water treatment industry to take off as venture capitalists keen to invest