In 2015, state-owned power company China Three Gorges Corporation (CTG) announced a $3.7 billion deal to acquire the operational rights for the Jupia and Ilha Solteria dam in Brazil, becoming the second largest private power producer in Brazil. These two dams can produce an energy output of up to 3,444 MW and 1,551 MW of energy (the Hoover dam can produce up to 2,080 MW). This was hardly CTG’s first notable investment in Brazil; acquisition deals have occurred since 2011. The CTG case in Brazil demonstrates a larger trend in the investment preferences of Chinese companies: movement away from Chinese domestic fixed-asset investment and towards outward foreign direct investment (OFDI). This trend has been exacerbated by recent renewable energy supply chain shifts and changes in China’s domestic energy and monetary policy, just as consumption of green energy domestically is on the rise, with the twelfth Five-Year Plan outlining a renewable energy target of 11.4 percent of domestic primary energy. The CTG case illustrates this trend and demonstrates that China is poised to be a leader in not only the consumption of green energy, but in its development, production, and distribution as well.
Chinese private individuals and corporations are changing the ways they invest, transforming behavior in both the sectors of investment and the shape of deals that occur. For example, these actors have shifted from development-focused domestic investments to global investments in industries beyond heavy industrials. An August 2016 report from the Chinese National Development and Reform Commission noted a decline in domestic investments from private entities compared to government entities, including state-owned enterprises (SOEs). Over the last two years, there has been a 20 percent decline in year-on-year growth in fixed-asset investment from private investors domestically. [Specify domestic/international/both. I assume it’s in domestic?] Yet despite this decline, national GDP growth in China has remained strong, hovering above 6.5 percent. Where then, and how, are these Chinese entities investing?
Generally speaking, Chinese investors are willing to invest in geographic regions and countries that are too politically unstable for Western investors, which has created an array of international opportunities. These investments occur in countries such as Ecuador, Sierra Leone, and Zimbabwe, where Chinese investments comprise 57 percent, 70 percent, and 82 percent of the total FDI, respectively. As domestic growth has slowed and the economy has shifted from industrial to service-based firms, these international investments have grown relatively appealing. These international investments have drawn much criticism, both for exploiting countries with a weak rule of law, and for importing Chinese labor, providing little opportunity for domestic workers in the countries receiving investment. Strengthened rule of law and developing domestic environmental policy may deter investors from domestic opportunities, driving them towards foreign investment. Regardless, this willingness to take on greater financial risk is not limited to geographic choice.
As for how people are investing, Chinese OFDI now exceeds the foreign direct investment received by China. This is a significant shift in the Chinese economy, which was strongly supported by FDI during the initial years of reform and opening-up. In the early 2000s, the Chinese government started the “Go Global” initiative to encourage investors to search for opportunities abroad. These investments range from entertainment to agriculture, but among them, renewable energy investments have garnered particular attention. According to a report from the Institute for Energy Economics and Financial Analysis, Chinese foreign investment in renewable energy reached $32 billion in 2016. The investments and acquisitions are often in developed western countries, like Germany, the U.S., and Australia, but do include developing countries as well. These investments now frequently take the form of leasing and business services, such as the case with CTG in Brazil. The capital lease model, in which the Chinese firm leases the operational rights instead of purchasing the asset, is less binding and could potentially act as a long-term buffer should the economic situation decline in these countries. Amid China’s total OFDI stock, the single largest category was leasing and business services, further demonstrating a preference for this mode of investment. In many M&A cases, Chinese investors keep the existing workers at a particular site, and opt for a capital injection to revamp failing businesses, instead of taking a more direct interventionary role.
Chinese companies are not just taking over the investment side of renewable energy, but the development and manufacturing side as well. China now invests more money annually in the research and development of renewable energy than any other country. In manufacturing, Chinese companies are similarly dominant. Two of the top three solar panel manufacturers worldwide are Chinese and three of the top ten wind turbine manufacturers are Chinese. Chinese investors have been known to acquire Western companies to gain access to more advanced technical and management skills, but with renewable energy equipment manufacturing, they seem to be far surpassing their Western counterparts.
Despite this global dominance, government policy has had a mixed impact on the manufacturing and investment side. In China’s thirteenth Five-Year Plan, the government stated its intention to “build a modern energy system that is clean, low-carbon, safe, and efficient, and will safeguard the country’s energy security.” Later on, the government also announced plans to invest roughly $360 billion in green energy investments between 2016 and 2020. However, Chinese foreign exchange reserves fell 22 percent between 2014 and 2016, according to the State Administration of Foreign Exchange, creating a cash exodus, which has pushed the government to instill protective monetary policy, suggesting that the “Go Global” campaign may have been too successful. As a result, even regular cross-border business transactions between HK and mainland, nominally part of “One China,” have become more difficult.
The value of solar energy has also declined, leading some skeptics to wonder if the government will follow through on their declared initiative. While the Chinese government has previously advocated investment in sustainable energy sources and investment abroad, recent actions hint at a potential change in policy in the future. Monetary policy could drive current interest in green energy investment into the domestic market. This is still unlikely though as large industrial SOEs make the environment harmful to competition. According to the China Statistical Yearbook, SOEs comprise 66.4 percent of energy production firms as of 2011. However, despite these mild barriers to investment and development, there is another recent development contributing to China’s growing lead in green energy: the United States.
In stark contrast to China’s focus on renewable energy, the U.S. government is backing down on green energy, withdrawing from international agreements, and creating an unfavorable domestic business environment for renewable energy enterprises. Previously, renewable energy was 9.9 percent of the United States’s total energy supply, which is marginally below that of China. However, with the recent announcement of the Trump administration’s America First Energy Plan, it is unclear how this will change in the future. The plan places an emphasis on support of the coal and oil industries, which already present competition to renewable energy ventures. Additionally, the Trump administration has expressed a desire to withdraw from the Paris Climate Accord, marking the exit of a former key player in the green energy field. However, according to Joy Dantong Ma, a research associate at the Paulson Institute, it is difficult to say at this point how the recent changes in political landscape will impact future investments. Large investment projects take several years to put together, whereas trade would more likely see a direct and noticeable impact.
Despite the headwinds of respective monetary policy or more general challenges in renewable energy, China is currently poised to be a leader in the green energy industry. Chinese investors have established a strong hold on the market abroad. Chinese companies control a significant portion of the manufacturing of goods related to green energy, and the Chinese government, as well as the private sector, has dedicated significant resources to continuing research and development. In contrast to China’s enduring commitment, the United States, formerly one of the major players in green energy, has stepped down. Amid an international political climate that is increasingly nationalistic and conservative, China has emerged as a leader in an industry where it has often been subjected to criticism.
Michael Beit is a sophmore at the University of Chicago. Contact him at michaelbeit@uchicago.edu.