2009 was the year that China played an important role in leading the world out of deep recession. Worldwide stock market indices rallied 60-80% from March lows, and most achieved a 10-20% gain for the year. While the Chinese market gained strongly as a result of swift policy-making from central government, more stable economic indicators show 2010 may be an even better year for the Chinese market.
Friday's December PMI number, watched closely by global economists, was reported at 56.6%, 1.4% better than November. In sub-categories, raw materials and energy companies reached 70%. Many investors worried if the better economic numbers will force governments to withdraw liquidity in 2010. Well, that is not the case for China. Premier Wen has said China will not withdraw stimulus in 2010 as more stable signs in the economy need to be seen. However, the following signs from China in the last weeks of 2009 have sent signals to Wall Street that China is likely to lead the world economy again in 2010.
1. China-ASEAN Launches Free Trade Area
China and the Association of Southeast Asian Nations or ASEAN launched one of the world's largest regional trade areas on New Year's day. The new free zone would allow trade between China and the six initial ASEAN members, Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand at a reduced tax rate. It is estimated that the new zone would involve a trade volume of US4.5Trillion. This will serve as a growth engine in this region for the next decade. 2010 will see economic activity boosted in this region as the new decade kicks off. This is contrary to the recent rising protectionism seen in the western nations. Asia seems to understand better than the US and Europeans that protectionism holds back growth. It is estimated that this free trade agreement will add 1-2% to China's GDP growth in 2010.
2. China pledges Investment in green energy in the next five years.
The Chinese government has set the green energy industry as the nation's strategy to lead the world in the next industrial revolution in order to overtake Japan and the USA in becoming No.1 in terms of GDP. According to the Xinhua news agency, government has allocated US$454B to invest in renewable energy sector, such as wind and solar energy, and it is well known that China has already been leading technologically. Chinese congress passed a law to force electricity-grid operators to purchase all the electricity generated from renewable sources even when it is more expensive and more complicated to use than electricity from coal-fired plants.
The government in China knows better energy independence will not come for free. The 5 year plan has set the goal to achieve 15% renewable energy usage by 2020. It is debatable whether China can achieve a 45% green house cut in 2015, however it is clear that government wants to use this as an opportunity to achieve energy independence and surpass Japan as the world's 2nd economy in 2010. While China will be utilizing its wind and solar power in its domestic needs, China will also be exporting to ASEAN through this new free trading zone.
The new energy star, A-Power Generation (OTC:APWR), has reached the rest of Asia, selling its technology to Thailand, Pakistan, Vietnam, Africa and North America. The company plans a new wind turbine factory in Nevada, targeting markets in both North and South America. Brazil is going to open a bidding process for its 20GW wind farm projects in 2010, and both the U.S. and Chinese turbine makers will have a chance to enter this growing market. Brazil is not alone, UK's Gordon Brown will announce a $160B green energy revolution to develop wind farms in January.
3. China's Sovereign Wealth Fund (CIC) Invests Heavily in Green Energy
In accordance with the green energy policy of the Chinese government, CIC has been actively endorsing the nation's energy policy. When A-Power Energy Generation signed a definitive deal in December to provide a wind turbine for the 600MW wind farm in Texas, the little known company became known on Wall Street. The company may be little known on Wall Street, however its business has reached most continents except North and South America. A-Power has a unique advantage in accessing low-interest loans from wealthy Chinese banks and CIC for its global reach. Competitors, such as India Suzlon [SUZL.BO], Australia Infigen Energy [IFN.AX], the German Wacker Chemie [WCHG.DE], and Denmark Vestas Wind power business [VWS.CO], have to pay higher interest rates in financing projects. CIC is also supporting many other Asian green energy firms, such as Haier, Suntech Power (STP) and Goldwind.
4. 2010 World Expo is a chance for China and the rest of the world
Historically, the world expo brings economic growth to the country which hosts the event. This year Shanghai is going to host the world expo in May, the topic of this year's expo is green energy and the cleaner world. Renewable energy such as wind energy, solar energy and other forms of green energy will be hot topics then. Chinese companies who are leading in this sector will be demonstrating various technologies. These include Suntech Power, Solarfun Power (SOLF), Trina Solar (TSL), A-Power Energy Generation; global giants such as General Electric (GE), Siemens (SI) and First Solar (FSLR), etc. Solarfun recently has been actively expanding its business both domestically and overseas. Its business may have much higher upside than its peers in 2010.
The best investments are usually the ones nobody is talking about, or even better, the sectors that Wall Street experts hate. Green energy is in such a situation currently, experts believe global warming is not real, so investing in coal and oil is the right way to make money. The fact is however that green energy is picking up market share slowly; nobody can say burning coal is good for our air quality. It will need some time for these nay-sayers to acknowledge the advantage of green energy. History is a mirror that investors can use for guidance of better investment. For example, when the first personal computer came to this world in 1981 from IBM, people were saying it was "way too expensive", "it has no future", "who can afford it?" just like what we have seen in green energy. Yes, green energy is more expensive than coal and crude (keep in mind, wind energy is cheaper than crude). But now, who doesn't have a PC?
Disclosure: long GE, SI, APWR, FSLR