Evergrande’s problems signal fundamental shift in China’s economic model

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The Evergrande crisis in China made headlines focusing on the huge debts and irresponsible management of the real estate company. But fewer have sought to highlight the story behind the story: that Evergrande’s struggles signal a fundamental shift in China’s economic model.

It is clear that the economic engines, such as real estate, that have fueled Chinese growth for at least two decades are running out of steam. What is less clear is what type of growth engines can be found to take over.

One, however, is obvious. Green technologies are seen as a positive force to help save the planet and as the impetus to usher in a whole new era of Chinese growth and economic transformation.

The link with Evergrande is direct. By suppressing the real estate market, Chinese authorities hope to free billions of dollars in future capital that can be better used to finance solar farms, wind farms, electric vehicles and new forms of clean energy.

This point was made clear by Zhang Xiaohui, dean of the School of Finance at Tsinghua University, last month. She estimated that China’s net zero emissions strategy would require an investment of up to $ 46.6 trillion until 2060, when Beijing pledged to achieve carbon neutrality.

This investment, if made, will represent $ 1.2 trillion in investment each year by 2060, much of which is dedicated to green infrastructure. In perspective, this is equivalent to investing the entire current GDP of Indonesia each year for the next 39 years.

“China should follow its own pace when pushing to meet peak carbon and carbon neutrality goals (and) strive to balance economic development and reducing carbon emissions,” said Zhang, former deputy governor of the People’s Bank of China, Bank.

So how will all this money be collected and in what areas is it likely to be invested? The answer to the first question is crucial. If China tries to fund its next green craze by relying on local governments (as it did during the housing boom), then it will perpetuate the structural weaknesses and institutional corruption that plague China today.

A better way for Beijing to finance its “big green leap” would be through the bond market, allowing a huge increase in the number of “green bonds” issued. These could be issued by companies, and not by local governments, which would reimburse bondholders from project-specific revenues.

Now that solar and wind power are among the most profitable forms of power generation in China, the sustainability of green infrastructure has become a reality. It should be possible for pension funds to finance part of China’s huge pension deficit by investing in green infrastructure bonds.

Chinese companies in several different industries are responding to the green siren. Sinopec, the world’s largest petroleum refining conglomerate, said in August that it plans to invest $ 4.5 billion to build hydrogen stations at its 30,000 service stations. By 2025, it aims to set up 7,000 solar charging stations, he added.

Chinese wind turbines are getting closer to the world’s leading edge. A second Chinese company, CSSC Haizhang, launched a 10 MW wind turbine last month, like Dongfang Electric. Vestas and GE are still producing larger wind turbines, but Chinese industry is catching up.

The potential of the Chinese electric vehicle market is so well known that some heavily leveraged startups are reaching sky-high valuations. China’s Nio, for example, is valued at nearly twice the level of Ferrari, the industry’s generator of totemic profits.

It is unclear at this point whether China’s transition from real estate-driven growth to a model more reliant on green technologies can go smoothly. But the scale of the ambition is already clear.

If Beijing even achieves some of its lofty green goals, it will amaze the world. It could also help save the planet.

James Kynge is editor-in-chief of #techAsia, an Asian tech newsletter that combines top reporting from the Nikkei and the Financial Times. He is also the editor of the FT’s Global China, writing about China’s growing footprint around the world, and won the Wincott Foundation Award for UK Financial Journalist of the Year in 2016. His award-winning book, “China Shakes the World”, has been translated into 19 languages.


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