Around the world, stock markets have been very rocky as of late with investors fearing a return to a recession in many developed countries. This fear has compounded with weak earnings out of many large banks and tempered growth predictions for mainland China to reduce expectations for one of the main drivers of growth in the emerging world. The government has stepped in to cool down the red-hot Chinese economy in order to avoid inflationary pressures but still keep the economy growing at an acceptable rate. This has forced China to end a variety of stimulus programs and forcing banks to cut down on their lending. Chinese banks issued 36 billion yuan less in loans for the month of June and the government has set a target of 7.5 trillion yuan in loans for the year, a 22% decrease from 2009 levels. Due to this sharp cut in available loans, it looks likely that many Chinese sectors will not be able to grow as quickly as they have been in previous quarters as growth looks likely to fall back below the 10% mark for the next quarter.
Despite the slightly lowered prospects for growth in the overall market, the energy sector looks to attract an out-sized percentage of investment going forward. China has now become the world’s largest energy consumer, surpassing the U.S. for the first time since the statistics first began. While ten to twenty years ago this event would have been met with fanfare in China as another symbol of their growing industrial might, Chinese leaders have downplayed the news saying that the report was flawed and inaccurate with one Chinese official saying that “the IEA’s data on China’s energy use is unreliable” . This shows just how far the world has come in terms of attitudes on energy usage in just a few short years, leaving the Chinese scrambling to come up with a variety of new technologies and ideas in order to help reduce the country’s dependence on oil and coal while still allowing the economy to grow unimpeded by energy issues [also see the Definitive Guide To China ETFs].
In light of this, there are now rumors that the Chinese government is planning to spend roughly 5 trillion yuan ($738 billion) over the next ten years on clean energy programs in order to reduce the country’s dependence on oil and coal for power. By doing this the government hopes to nearly double the amount of energy that comes from non-fossil fuel sources in ten years time, increasing the overall percentage of non-fossil fuel energy from 8% to 15%.“This does seem a very high figure on spending, although it’s not clear how this has been worked out,” said Barbara Hon, an analyst at China Everbright Securities in Hong Kong. “The government is taking the issue of cleaner energy seriously for the reasons of climate change, energy security. It’s already meeting some of its targets for sectors like wind power well ahead of schedule.” The country is already a big player in the alternative energy market, attracting over $11 billion in capital for the sector in the second quarter alone; more than the U.S. and the EU combined. Additionally, the country has invested its own funds in alternative fuels, plowing close to $35 billion into the sector; a 50% increase over the previous year [also read What's Fueling The China Energy ETF? for more on the Chinese energy industry].
Clearly the country needs a lot more energy to sustain its economic growth, especially given the fact that on a per capita basis China still uses about one-fifth as much energy as their counterparts across the Pacific in the U.S. If China is ever able to get all of its citizens up to U.S. living standards it will have to be through clean energy programs since there is not enough oil and coal to support a continually growing Chinese economy that is fast approaching developed market levels in many areas of the country. Due to these trends and the likely massive spending program, the following three ETFs look to be good long-term plays to take advantage of growing Chinese demand for alternative sources of energy [also read the Definitive Guide To Clean Energy ETFs].
Arguably the biggest push towards clean energy in China has come through wind power which is quickly growing into the alternative power source of choice for the world’s most populous nation. In fact, China erected more wind turbines in 2009 than any other country and may install a record 18 gigawatts of wind-power capacity in 2010, Bloomberg New Energy Finance estimates show. One way to play this growing trend is with the PowerShares Global Wind Energy Portfolio (PWND) which follows the NASDAQ OMX Clean Edge Global Wind Energy Index. The fund has a heavy weighting to European countries with its top holdings going to European giants Vestas Wind Systems (11.8%), Iberdrola Energias Renovables SA (9%), and EDP Renovaveis SA (8.7%). Slightly more than two-thirds of the fund’s assets go towards European firms which could allow China to buy up more wind turbines should the value of the euro continues to fall against the world’s major currencies. Despite these positive trends, the fund has done very poorly in 2010; so far it is down 27.2% this year however it is up 8.7% over the past month suggesting that the wind may finally be blowing in PWND’s direction [also see Wind ETFs Head-To-Head: PWND vs. FAN].
Nuclear power is quickly gaining favor as a source of power in China; of 60 nuclear power plants currently under construction worldwide, one-third are going up in China, said Fatih Birol, chief economist of the International Energy Agency (IEA). One fund that stands to benefit from this push to nuclear power in China is the PowerShares Global Nuclear Portfolio (PKN). This fund tracks the WNA Nuclear Energy Index which is designed to track the overall performance of globally traded companies which are engaged in the nuclear energy industry with representation across reactors, utilities, construction, technology, equipment, service providers and fuels. The fund has a heavy weighting in American and Japanese firms which combine to make up 63.5% of the fund’s total assets and in terms of market capitalization exposure, PKN focuses on large and giant sized companies while only allocating 5% to small and micro caps. PKN has held up better than most energy ETFs in 2010, posting a loss of just 2.2% since the beginning of the year [see Nuclear Power ETFs: Ready To Surge?].
Broad Clean Energy Sector
For investors not sold on either of the above options, the iShares S&P Global Clean Energy Index Fund (ICLN) makes for an interesting choice as a play on the broad clean energy sector; in total for 2009 China added 37 gigawatts of renewable power capacity last year, greater than any other country. The fund tracks the S&P Global Clean Energy Index, which allocates assets to companies engaged in biofuels, ethanol, geothermal, solar, and wind energy. It offers its second highest allocation to Chinese securities and has a heavy focus on medium sized companies which make up just under 40% of the fund’s total assets. In terms of individual holdings, the Energy Company of Parana takes the top spot with 6.6% while the National Electricity Company of Chile and the Energy Company of Minas Gerais trail closely with just over 6.1% each. The fund charges an expense ratio of 0.48% and like the rest of the sector has seen its shares tumble so far in 2010 posting a loss of 23.7% [also read Uncertain Future For Energy ETFs].
Disclosure: No Positions at time of writing.