Focus topics


China’s Green Industries: What are the Opportunities for Foreign Investors? (Part 1)

By Qian Zhou, Asia Briefing

China’s plans to transform its economy to meet high environmental standards and serve climate-conscious goals may be considered ambitious, but it creates new opportunities. With advances in technology, financing, and regulatory policies, the growth potential of green industries is more attractive than ever – much of this momentum is concentrated in renewables, clean production, waste management, sustainable infrastructure, and services that support green development.

This is in line with the areas encouraged in the Catalog of Encouraged Industries for Foreign Investment (hereinafter, the encouraged catalog). In the presently effective 2020 version of the encouraged catalog, around 100 items fall into the scope of green industries, accounting for nearly one-fifth of the total sectors where foreign investment is encouraged. This trend persists in the exposure draft of the 2022 version of the encouraged catalog.

Renewable energy

Along China’s path to reach its ambitious carbon reduction targets, a rapid and effective shift of power generation from fossil fuels to renewable energy sources will be unavoidable, as this sector is responsible for 52 percent of carbon emissions in the country, higher than the global average of 41 percent.

Despite China’s dominance in renewables and the country’s proliferation of renewable energy sources, it is still far from replacing fossil fuel sources. In 2021, electricity generated from renewables reached 2.48 trillion kWh, equivalent to 29.9 percent of total electricity use that year.

To double electricity production from renewables, Zhang Xiliang, a climate modeler at Tsinghua University, projected that China will need to increase solar power generation 16-fold, wind power ninefold, nuclear power sixfold, and hydroelectricity twofold. Even though China is already a global leader in the area, it will need to spend trillions of dollars on renewable energy sources in the coming decades, presenting huge opportunities for foreign investment.

For foreign investors, China’s renewable energy market has felt intimidating to enter in the past, due to the market share of domestic companies, government procurement practices, and inconsistent levels of transparency. Yet, the below facts and trends offer fresh scope to enter this sizable market:

  • The energy sector prioritizes low costs, and innovation in technologies like solar panels has been relatively slow. While Chinese companies dominate the market share in many of these areas, they do not always possess the advanced technology required for cost
  • China is gradually removing subsidies for the renewables sector to even the playing field between domestic and foreign companies as markets and technology

Overall, there are no special limitations for foreign investors to invest in new energy projects. And many sectors are specially encouraged for foreign investment, according to the 2020 version of the encouraged catalog.

Renewable energy sectors promoted for foreign investment:

  • Construction and operation of new energy power stations (including solar energy, wind energy, geothermal energy, tidal energy, current energy, wave energy and biomass energy, )
  • Construction and operation of regional energy supply (cold and heat) projects driven by renewable energy resources
  • Construction and operation of biogas projects
  • Manufacturing of new energy power generation equipment in set or key equipment
  • Development and application of the complementary system for power generation with gas and renewable resources
  • R & D as well as application in the production of large energy-storage technologies (thermal battery, pumped storage technology, air energy storage technology, wind power and heating after midnight, )

Hydrogen

The Chinese government has identified the hydrogen industry as one of six industries of the future, and recently released plans that underscore its importance for both energy and industrial development.

In March 2022, the National Development and Reform Commission (NDRC) and National Energy Administration (NEA) issued the Medium and Long-term Development Plan for Hydrogen Energy Industry (2021-2035), making it clear that China wants to take a leading role in developing the nascent green hydrogen (hydrogen made using renewables) market:

  • By 2025: The plan calls for producing 100,000- 200,000 tons of green hydrogen annually, up from 6.6 tons currently, and getting 50,000 hydrogen fuel cell vehicles on the road – up from 7,700 as of
  • By 2035: China should form an industrial system for hydrogen energy and a system for applying hydrogen energy, including for transportation and energy

The New Energy Vehicle Industry Development Plan (2021-2035) projects hydrogen refueling station (HRS) capacity to grow from 72 units in  mid-2020 to  2,000 units by 2035, demonstrating the close relationship between hydrogen energy development and NEV development.

China is already the world’s largest hydrogen supplier, producing about a quarter of global output. The China Hydrogen Alliance projects the output value of China’s hydrogen industry to reach RMB 1 trillion (US$157.44 billion) in value as early as 2025.

The 2020 version of the encouraged catalog also includes hydrogen energy and its upstream and downstream industries as “encouraged sectors”, which further motivates foreign capital to participate in the development of China’s hydrogen energy sector.

Hydrogen sectors that are encouraged for foreign investment:

  • Production, storage, transportation, and liquefaction of hydrogen fuels
  • Manufacturing of equipment for preparation, storage and transportation, and inspection system for hydrogen energy
  • Construction and operation of hydrogenation stations
  • R&D and manufacturing of equipment for hydrogen plants
  • Manufacturing of fuel cells

New energy vehicles

Driven by government support and policy incentives, China has already been the world’s largest NEV producer and consumer, hosting over 90 percent of global investment for both original equipment and components.

In 2021, China sold 3.52 million units of NEVs, up 181 percent from 2020 and exceeding the total sale of the previous three years. This growth trend of NEVs is expected to continue, with China striving to reduce carbon emissions in all fields and green consumption getting more recognition in the consumer market.

For foreign investors, the cap on the share ratio of foreign investment in NEV manufacturing was lifted as early as 2018. And as of January 1, 2022, the restriction that one foreign investor cannot establish more than two JVs in China to manufacture the same type of vehicles has been removed. Thus, China’s NEV sector is now completely open to foreign investors.

According to the 2020 version of the encouraged catalog, foreign investment is especially welcome for research and development (R&D) and manufacturing of key parts and components of NEVs, and the manufacturing of charging piles and charging piles for energy storage. For the former, the 2020 encouraged catalog has provided a very detailed breakdown of the key parts and components of NEVs that are encouraged for foreign investment, with parameter requirements of each industry specified.

NEV sectors that are encouraged for foreign investment:

  • Design and manufacturing of special production equipment for power batteries for automobiles
  • Production of charging columns and charging stations for energy storage
  • Design and manufacturing of special production equipment for power batteries for automobiles

The second part of this paper will focus on carbon capture and storage (CCUS), green services, recycling and energy storage.

This article first appeared in Asia Briefing, published by Dezan Shira Associates. The firm advises international investors in Asia and has offices in China, Hong Kong, Indonesia, Singapore, Russia and Vietnam.

Related

    Green industries: What are the opportunities for foreign investors? (Part 2)
    PU letter exemption for z-work visa applicants
    China’s tax incentives for small businesses
    A close reading of China’s new cybersecurity review measures