New Energy Industry - A Big Winner in China's 5 Year Plan

China has just announced its next 5 year plan (its 12th) and one of the industries that will be a clear winner of the policies is New Energy. Now that the country has become the world's biggest producer and consumer of power, it's become a political imperative to develop clean and renewable sources of energy.

The plan is still in draft form so there is room for change but the headline figure is that by 2015 the country will develop 235 million Kilowatts of clean energy production. All renewable sectors have been singled out for specific developments in the plan too.

Hydropower

It may not be a favourite of environmentalists and the country may pay a high ecological price later on down the road, but there's no denying that hydropower is the most effective renewable energy source available today. 120 million Kilowatts is expected to be found from 3 major new hydro-electric projects on the Jinsha, Yalong and Dadu rivers.

Wind Farms

There will be a total of 8 new major wind projects, 6 on land and 2 to be built offshore in coastal areas. These projects are expected to enable another 70 million Kilowatts of power.

Solar

Solar is still an emerging technology and with typically poor returns compared to the energy collected and difficulty in storing that power for long-term use it's not surprising that it's the smallest part of the plan at the moment. In the future we'd expect a major increase in solar as it becomes more efficient and storage technologies improve. For the moment 5 million Kilowatts is expected to be produced by new solar farms in Tibet, Yunnan, Inner Mongolia, Gansu, Qinghai, Ningshia, and XinXiang.

It's not all good news though; there will still be a ramp up in gas and oil consumption and the plan also allows for nearly 150,000 kilometres of pipelines mainly to Asian republic states from the old Soviet Union to allow more efficient transportation and delivery.

With China already emerging as the world's biggest investor in New Energy it's not surprising that there is strong political will to begin implementing some of the world's largest investments in practical projects. For investors in the country this is a major opportunity to field these technologies and prove their effectiveness while gaining return on those investments to further research and development in the area. The best of the New Energy companies are looking at a very prosperous 5 years indeed.

China's Latest 5 Year Plan - Opportunities and Threats for Business in the Region

The key to the latest (12th) 5 year plan is the reduction in the target for economic growth for China. It's been reined in again to 7% underlying government concerns that runaway growth is causing damage to the stability of Chinese society. Optimists have already noted that this long-term reduction of targets hasn't actually prevented the country from exceeding those targets anyway.

However while this may be true in the short-term there are some serious warning signs on the horizon.

The World's Manufacturer

China may have succeeded in becoming the factory and production base for the world, but this success has impacted on local wages. In fact Chinese workers have benefited from massive wage inflation over the last few years, and while this may not seem substantial to their counterparts in the west, locals are now among the best paid in the region.

Which is not good news for the low-end "pile it high, sell it cheap" producers. It's likely that over the next 5 years China will start to lose this business, as it becomes cheaper to use other countries in the region for unskilled labour and other emerging states like Bangladesh.

Food and Housing Costs

There's also going to be some serious inflation of the cost of basic resources, with China facing its worst drought in 60 years it's very likely that basic staple foods are going to increase dramatically in price. This means that the internal economy which is already fragile compared to developed nations may be at risk as more of a worker's budget goes on necessities than ever before.

To make matters worse rents and costs of ownership in China for housing are also spiralling upwards, with an unending pressure for rural workers to be able to migrate to cities this isn't likely to slow down any time soon. And again this takes money away from the internal economy.

So where are the opportunities?

China is now faced with similar problems to Japan in the 70's. And similar solutions may enable China to make the final move to world economic giant.

Quality Industries and High Tech

Japan pulled itself out of economic stagnation by moving the economic focus from cheap mass produced products to high quality production. China must now have its own "Kaizen" or "TQM" style revolution by building on what is now a semi-skilled production base and enabling it to become highly skilled. This will justify the increased wages and ensure greater profit margins in the future, and make the economy better positioned for the inevitable exodus of low end manufacturing.

While Japan completed its quality revolution before moving on to become a high technology provider, China will almost certainly have to undergo this in parallel. With enormous investment earmarked for new and existing technologies that are perceived as high value. The challenges will include turning the "new energy" sector into a viable, reliable and cost-efficient alternative to existing fuels. Ensuring that China's automotive sector becomes an efficient exporter to match the successes it has had within its own borders. And making better use of fossil fuels which are an essential part of continuing growth until such a time as new energy can take up the slack, particularly in terms of implementing low power technologies such as LED in new city developments.

The Internal Economy

The other massive opportunity in China comes from enabling the Chinese to spend more at home. This is hugely problematic at the moment; locals tend to save much more than their Western equivalents despite much lower wages. They do this because there is no safety net built in their system, no health care, no state support or pensions for the elderly, etc.

But there is also a focus on buying cheap non-sustainable products with no service and support. This is an area that offers huge growth potential in transforming purchasing habits to high quality and high service products. It's not without risk as Best Buy discovered recently but it is a key to bringing cash flow to the economy.

There's much more to the 5 year plan than a headline rate for growth, but even that simple figure offers enormous opportunity to those willing to seize the day and work with China to bring sustained success.