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MILLTRUST INTERNATIONAL
 

China under the Weather

July 28, 2021

BY Alexander Kalis
MANAGING PARTNER

Update commentary on the Climate Impact Asia Fund following recent market events in China.

China has experienced some difficult market conditions in the past few days due to the Chinese government’s regulatory tightening policies in the Technology sector (Alibaba and Meituan lost their monopoly), the Education sector (conversion of the private tutoring business into non-profit which essentially deemed the profit margin of EDU, TAL to be zero) and financial woes facing the Property sector, in particular China Evergrande Group, the world’s most indebted developer, having touched all three of the Chinese central bank’s red lines and raising significant concerns about credit defaults in the country’s highly-leveraged real estate sector and possible wider contagion which pundits are calling a possible systemic risk in China).

As a fund investing in the leading innovative Asia Pacific companies developing scalable solutions to enable the adaptation to or the mitigation of climate change, The Climate Impact Asia Fund, managed in partnership with WWF-Hong Kong, has not been exposed to any of the sectors of concern and has largely managed to avoid the market-associated losses triggered by global investor liquidity withdrawals.  

General investor sentiment has clearly deteriorated however and with the U.S. Fed currently meeting and looking set to debate when and how to kick off a bond taper, there are no immediate signs to suggest an abatement in foreign selling. As such, The Climate Impact Asia Team feels that risks at this stage are more skewed to the downside and therefore we have chosen to reduce our exposures in China and reposition the fund more defensively whilst we navigate these uncertainties. 

We nevertheless believe that when the dust settles, sectors that are supported by the government – Renewable Energy, Energy Management Services, and Recycling & Environmental Services will come out strongly.  

Renewable Energy
China’s national energy administration (NEA) has set a target for renewable power to account for over half of total installed capacity by 2025 to help support the country’s emissions goals. At the end of 2020, Renewable power made up 42.4%, or 934GW. The NEA includes hydro, solar, wind, and biomass power in China’s renewable energy mix. But the utilisation rate of some renewables, notably solar and wind, is relatively low.  China generated 2.2 trillion kWh of renewable power last year, meeting 29.5% of total electricity consumption, with 61% or 1.35 trillion kWh coming from hydropower.  Non-fossil fuels made up 15.9% of China’s primary energy mix last year, the majority of which was hydropower.

Energy Management Services
China has proposed ambitious plans to promote smarter energy use in urban cities, requiring at least 50% of all new urban buildings be “certified green buildings”, increasing the energy efficiency opportunities in the region.

Recycling & Environmental Services
China has recently installed the largest waste to energy capacity globally, now equivalent to 40% of all OECD countries combined, and growing. Other countries in Asia are developing similar environmental services.

We are well-positioned to benefit from the ongoing structural growth trends in these sectors as China and neighbouring Asian countries continue to drive their economies towards net zero. In the shorter term, with first half earnings season in August, our companies are expected to report strong numbers and fundamentals are likely to take a front footing once again. 

We would welcome the opportunity to speak with you should you have any questions: [email protected]

Alexander Kalis & Henry Soediarko

Sources: China Datang Corporation Renewable Power Co, Greenbiz, Waste Management World,

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