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China's New Green Leanings Big Plus For BYD, Solar

This article is more than 8 years old.

China is going green, and its recent laws to punish polluting industries shows just how important the alternative energy sector is in China. If Beijing is going to play sector favorites, it's not going to be coal and diesel transportation equipment. It's going to be electric vehicles, lithium battery technologies and solar. One swipe of the pen can change the lives of companies like JA Solar and EV maker BYD .

Earlier this year, a documentary titled "Under the Dome" caught the attention of Chinese, especially those in the crowded east coast cities that have more days of poor air quality than good days. The "Under the Dome" documentary was quickly called China's "Inconvenient Truth", the Al Gore documentary that put climate change on the map. "Under the Dome" put pollution high on Beijing's agenda, even as the government tried to censor the film. Shortly after its release, the government said during an official plenary session that it would make fighting pollution a top priority.

In a sense, the government delivered this month. The Shanghai Composite Index might not like it, though.

Since June 12, the Shanghai Composite has lost more than 13%. The sharp sell-off maybe due to the decision by Beijing to implement a new environment-related tax to address its environmental problems. Up until now, China's environmental regulations have been non-existent and favorable to massive, earth shattering development projects -- whether it was a hydroelectric power station over the Yangtze, or muni funding local coal miners.

China published its new Environmental Protection Tax Law on June 10. The law bolsters regulators to enforce policies designed to improve quality. Call it a de facto Clean Air Act, but China is increasing taxes on polluters.

Since then more details have come to light. This draft law, which is up for public commentary until July 9, would double statutory taxes on water and air polluters and shift enforcement to a Federal tax authority versus local environmental protection bureaus that have been accused of turning a blind eye and taking bribes.

The taxes are expected to hit a broad swath of ‘dirty’ industries including construction, mining and of course coal.

One Stroke of a Pen

Roughly 1% of China's energy matrix comes from solar power. Oddly enough, China is the world's leading producer of photovoltaic solar panels. What is stopping the government from putting solar panels on every public housing project in the country? Or ordering developers receiving public financing to build towers that can capture energy from the sun, using a solar array made in China? A single policy change here would send China solar stocks through the roof.

This is already happening to some extent.

China installed a record 12 gigawatts of solar power in 2013, according to government figures. This is more than has ever been installed by any country in a single year. No country has ever added more than 8GW of solar power in one year, according to Li Shuo, a policy and energy analyst at Greenpeace East Asia.

Solar is not the only beneficiary, and may not be the clear winner either.

The new environmental rules means Chinese coal companies will fold. Some will find a market along the new Silk Road in countries like Pakistan. But coal is expected to go from 64.4% of China's energy matrix today to 58% in 2020, according to the China Electricity Council. The biggest gainers, they say, will be wind power and natural gas. China spent much of this year signing record natural gas deals with Russia's Gazprom .

EV maker BYD, which stands for Build Your Dreams, is one of the real winners here. In the future, BYD will likely get contracts to build public busses. This will also present opportunities for investors and companies building EV charging stations.

The Shanghai police plans to gradually replace all of the city’s patrol cars with low-carbon alternatives. BYD will be one of them, providing the infrastructure is there. It's been a problem in the recent past, but this new green initiative might light a much needed fire cracker under the two main state players in this market: State Grid and Southern Grid.

Most of the companies on the Shanghai Composite are state-owned, so Beijing policymakers likely believe they can weather a near-term adjustment as they seek to transform China`s economy to a greener, cleaner and meaner tech economy. This month’s tax draft is just the first step in a centrally-led environmental policy transformation.

"If the government in Beijing is now going to be picking winners and losers with its environmental mandate, it could mean more volatility ahead for Chinese equities," said Vladimir Signorelli, founder of Bretton Woods Research, a boutique research firm based in Long Valley, NJ. "A new tax burden on Chinese industrials is worrying Chinese equities about the future growth and profit outlook," he said about the companies in the index that are now officially part of "old China."

China's green tilt is good news for a number of companies, including JA Solar and BYD.

For the first time in at least a decade, the sense of urgency to deal with a highly unbalanced and distorted

energy structure is palpable in China. The middle class in cities across the country are not going to wait for the day when they have to wear gas masks on the streets in order to breath. The rabble will get rowdy. Beijing knows it. More importantly than that, however, is the fact that lithium battery technology, wind and solar power, and natural gas are of economic interest to the country's planners.

They know that stresses in the Chinese economic system are building and deteriorating air quality could end up stalling growth, and creating both environmental and public health crises.

Beijing will be fully responsible for shepherding its own economy and energy system onto a more sustainable footing, said Damien Ma, an energy Fellow at the Paulson Institute.

"The clouds of pollution dust that are now periodically found on the U.S. West Coast, having blown over from Chinese factories manufacturing products for the global market, is just one of many illustrations of how China’s energy and environmental challenge is no longer just China’s problem," Ma said. Investors with a long term view should be mindful of these policy changes in China and look for companies that will be benefactors of China's new found love for the environment.