China’s Emerging Cleantech Sector

October 6, 2010 Posted by China Briefing Reading Time: 5 minutes

By Andy Scott

Oct. 6 – China is becoming the place to be for emerging clean technologies. It is looking to invest 34 percent of its stimulus package on cleantech and has already directed US$100 billion to projects for cleaner railway systems and electrical grid networks. According to a recent report from The Pew Charitable Trusts, China dedicated US$34.6 billion to clean energy projects in 2009, claiming the top spot in clean energy spending. The United States was second with US$18.6 billion spent over the same period. China has seen investment in the cleantech industry skyrocket over the last five years, growing by 146.7 percent.

And this is only the beginning. China passed the United States in 2009 to become the leading recipient of private cleantech investment thanks to government incentives and programs aimed at fostering both a domestic cleantech market as well as attracting overseas investors.

The growth reflects the success of the government’s often complex program aimed to foster a domestic cleantech market and manufacturing base. A 2009 survey of China cleantech by the China Greentech Initiative identified 19 central government entities with duties related to cleantech and at least 18 national programs relevant to the sector.

Planning at the national level is guided by the 11th Five-Year Plan (2006-2010), which placed an unprecedented emphasis on sustainable development by setting ambitious targets to reduce energy intensity per unit of GDP by 20 percent by 2010.

Under this plan is a network of laws, incentives, and industrial promotion policies that attach the more nebulous national plans to paper through concrete policy. Examples of laws include the Renewable Energy Law of 2005, which required many power grid operators to purchase resources from renewable energy producers.

Other incentives include tax benefits pertaining to China’s corporate income tax, including up to three-years tax exemption or 50 percent reduction in corporate income tax if the revenue is derived from certain cleantech projects. Promotional policies include the Green Credit policy, which requires commercial banks to incorporate environmental protection criteria into lending decisions.

These favorable policies attracted US$331 million venture capital investments in 2009, roughly equal to 2008 due to the economic recession at a time when other cleantech VC investment fell around the world.

Energy needs
The swing from agricultural to industrial society has thrown China into the midst of the largest and fastest human migration in history. Opportunities in bustling cities seem much more promising than in the impoverished countryside.

In addition to the environmental degradation resulting from this urbanization – over two-thirds of China’s rivers and lakes are now too polluted even for industrial use – the country faces a dual problem of energy self-sufficiency and cost-containment.

Energy demand in China has risen 5 percent per year since the market reforms, a rate that has rapidly increased following the shift to energy dependent, heavy industry manufacturing in 2001. To meet this growing demand, China increased oil imports by 5 percent in 2009, along with huge swells in imported coal and natural gas. Imported crude oil represented 52 percent of China’s overall consumption in the same period of time.

China’s voracious energy demand consequently exposes domestic markets to inflating commodity prices that threaten the profits of commercial enterprise, not to mention increasing the cost of living. The cleantech industry is coming to be seen as a viable alternative to solving China’s energy issues.

The country’s shift to cleantech has been helped by the same factors that led it to success as a low-cost manufacturing center of the world: large and sustained public investments combined with low production costs and low-cost labor.

Market outlook
In terms of venture capital investment in 2009, the eight largest cleantech sectors in China included:

Agriculture
Energy efficiency
Energy storage
Water and wastewater management
Recycling and waste
Materials
Transportation
Energy generation

From these, the wind and solar photovoltaic markets are particularly strong and already the largest in the world, dominated by domestic giants like Suntech Power Holdings and Goldwind Science and Technology. As these markets become more developed, foreign investors are wise to focus on filling innovation gaps by developing the efficiency of existing energy technologies or providing energy management like energy auditing and advisory services or monitoring and control systems.

Growing urbanization and construction needs offer an excellent opportunity to utilize green building materials, services, and solutions. Certified “green” floor space constitutes less than 1 percent of new built environment. This deficit exists despite the government’s goal for building efficiency to constitute 40 percent of China’s total energy efficiency improvements by 2010.

For all the opportunities in China’s cleantech sector, there are also many obstacles for foreign companies. These include the sheer number of government agencies are involved in the cleantech sector and preferential laws and regulations meant to encourage innovation that often suffer from a lack of transparency and consistency. A recent meeting of cleantech investors in Beijing that included Camco China, DP Cleantech Group, GSR Ventures, Tsing Capital and China Cleantech Focus highlighted the importance of understanding the size of the market and having the ability to be flexible and able to adapt to meet the constantly evolving market conditions.

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