In spite of often being labelled the world's top polluter, the mainland is becoming an attractive target for investors looking to capitalise on green initiatives, the development of new energy sources, and far-reaching environmental protection policies.
With 15 per cent of China's US$586 billion stimulus package allocated to eco-projects and clean technology programmes, analysts say mainland enterprises are luring investors looking to diversify into a new asset class.
But making sense of a fast-growing, complex and multifaceted sector requires careful analysis of investment opportunities and the factors that affect trends.
Shanghai-based Steve Lee, CEO of HSBC Jintrust, says that as the mainland government policy is clearly supportive of green initiatives, the sector promises strong growth potential. "The mainland's demand for cleaner, more diversified energy sources has created many new investment opportunities, but inevitably, there will be winners and losers. The challenge is identifying the winners from the losers," Lee says.
He says that with China's commitment at the United Nations Climate Change Conference in Copenhagen in 2009 to a 40-45 per cent carbon emission cut by 2020, some mainland companies may undergo structural changes to meet these requirements. According to official figures, by 2020, the mainland's total investment in new energy could reach 4.5 trillion yuan (HK$5.3 trillion).
Lee says experienced analysts, who have built up specialised market segment knowledge, have enabled HSBC to successfully launch its Jintrust Carbon Awareness Fund, the first equity fund on the mainland to focus on low carbon businesses.
The fund is now only available to mainland investors but, according to Lee, there is a strong possibility a similar product could be developed for the Hong Kong market. "All our analysts have been in the business for quite some time," Lee says, adding that his team includes telecoms, equipment manufacturing and renewable energy specialists. Lee expects career prospects for green analysts to expand as the sector develops.
He says the Jintrust Carbon Awareness Fund not only focuses on new carbon-efficient industries, but also on traditional ones that improve carbon emission performance with new technologies and by upgrading systems.
"In addition to the more obvious newer industries, including wind power, solar and hydro, there is a requirement for analysts to look at the way traditional companies can adopt technology and upgrade systems so they can become attractive investments," Lee says.
Recruitment firms say experienced analysts, required to work in the mainland's sector, are in tight supply.
Eunice Ng, director at Avanza Consulting, Pacific, points out several reasons for this. "In most cases, analyst must also be bilingual, they must also be prepared to spend a lot of time on the mainland visiting companies and talking to regulators and policy makers. As a relatively new sector, there are not that many who have the combination of knowledge and experience, and, at the same time, get prepared to enter this new market," Ng says.
To make life easier for analysts and investors, a recent suggestion from the People's Bank of China proposes the need for the country to compile an investment guide to help potential investors better understand the scope of green projects. Last year, the mainland set up a green finance framework for green financing, but it is still at the initial stage.
Compared with institutions that have set up investment structures specifically to invest in the country's green and new energy sector, mainland banks are mainly supporting China's green initiatives through lending polices.
In the quest for new energy, the mainland is also investing in the exploration of shale gas and coal-bed methane, also known as unconventional gas.
Private banker expects mainland to become even more attractive in developing green technologies
As the mainland gets to grips with resolving environmental issues, private banks and their high-net-worth clients are beginning to ramp up investment in renewable and efficient energy technologies.
According to the latest quarterly index ranking compiled by accounting firm Ernst & Young, the mainland for the first time has overtaken the United States as the most attractive country for renewable energy investment.
Eckhard Plinke, executive director and head of sustainability research with Bank Sarasin & Cie, the Swiss private bank, says
the mainland is among the countries that are most attractive in developing green technologies, especially in terms of the absolute market size. For example, China recently became the world's largest market for wind energy.
"We expect this dynamic development to continue, particularly in environmental technologies such as water treatment," he says. "From a sustainable development point of view, wind and solar are the preferred areas of green development. We are also positive about hydro as long as minimum environmental and social standards are applied in the case of large dam projects."
Plinke is less keen on nuclear power given risks and unresolved waste disposal problems.
While private banks and their clients are taking a keen interest in the mainland's green initiatives, Plinke suggests a need for caution. He says local companies, that are either not listed or less transparent, often dominate the mainland domestic market. And, as a major part of the green sector, renewable energy is faced with large short-term uncertainties with regard to oversupply and the regulatory environment, especially amid cuts in public subsidies.
According to Dr Khoo Guan Seng, head of the innovative unit of the Singapore Stock Exchange and an Islamic finance expert, the mainland's green sector could be an ideal vehicle for wealthy investors and sovereign funds from the Middle East because they meet Islamic financial concepts known as Sharia investing.
Speaking at an "Islamic Finance: Opportunity and Risk" seminar, jointly organised by Classified Post and Kornerstone, Khoo said investments that contributed to social benefits, such as a cleaner environment and which were not involved in the production of alcohol, tobacco and pork products, are attractive to wealthy Middle Eastern investors looking to diversify their assets.