Climate change: no way around China

China is one of the largest emitters of greenhouse gas (GHG). At the same time, the country is also the world’s largest investor in climate transition technologies and controls vast swathes of key supply chains. Franklin Templeton argues that economic self-interest will dictate sizeable future investments. We talked to Marcus Weyerer,  Senior ETF Investment Strategist at Franklin Templeton ETFs EMEA about China’s role in climate change.

AsiaFundManagers.com: Investors are increasingly considering climate risks and opportunities. But you argue, they are often focused in the wrong direction.

Marcus Weyerer: Yes, in our view, the focus of investors when it comes to climate change is unduly lopsided. Europe and the United States get the bulk of the attention, whereas emerging markets, and China in particular, are somewhat cast aside.

This is even more true given the outsize role that China already plays in the global economy, its political clout on the world stage and the fact that it is now the largest emitter of GHG. At the same time, the country is also by far the biggest investor in the green transition and controls large swathes of the supply chains for key future technologies. We believe that in China – perhaps more so than in most other regions – climate risks and opportunities uniquely align to represent two sides of the exact same coin. And as investors, we unquestionably cannot afford not to be acutely aware of either.

AsiaFundManagers.com: What sets China apart with its climate change ambitions compared to the West?

Marcus Weyerer: China has a vital economic self-interest in tackling climate change, and that it is not by accident that in recent years the government has taken a global lead in the matter. According to the World Bank, if climate change was to continue unchecked, China’s economic losses could amount to 0.5% to 2.3% of GDP as early as 2030.

As an example, close to two-fifths of China’s GDP is generated by the five coastal provinces (out of 23 total) most at risk from rising sea levels. These coastal hubs depend more on foreign demand and trade than some of the inner regions. 65% of Chinese trade is conducted through the South China Sea and many of the country’s critical ports lining the coast could be negatively impacted. China is particularly vulnerable to sea level rises due to its low elevation and coastal geology. In fact, the country ranks 13th globally in terms of exposure to flooding (including riverine, flash, and coastal) and 6th in terms of cyclone risks.

I think the underlying message is remarkably consistent: The mitigation of and adaption to climate risks are fundamental to the future economic success on both micro- and macroeconomic levels. Companies’ bottom lines will be affected in various ways, and the economy as a whole will be deeply impacted. Eventually, this is going to feed through to financial markets and ultimately, investor returns.

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AsiaFundManagers.com: China has no time to lose in this scenario.

Marcus Weyerer: And it doesn’t either. Also, China simply has overwhelming dominance. With well over a quarter trillion dollars, China’s investments in climate transition technologies surpass the next six largest players combined. The World Bank concludes that the country’s ‘advanced technological capabilities mean the pathway to carbon neutrality will open new avenues for development’.

As of 2022, China controlled 77% of the global battery production capacity, an indispensable element for a carbon-neutral future. China also is far ahead in other key technologies; according to the International Energy Agency, the country is expected to control a whopping 95% of parts of the solar panel supply chain by 2025.

To put this number in context, to reach net zero by 2050, it is expected that 70% of electricity generation globally will have to come from solar and wind power. Today’s share is a measly 10%.

We also know that China is in an enviable position regarding onshore wind. Simple math then tells us that in less than three decades, a single country is poised to have at least some degree of control over half of the world’s electricity generation – at a minimum.

Or to sum it up: without China, there simply is no climate transition.

AsiaFundManagers.com: Thank you very much for your insights.