Markets by Trading view

Guangzhou: The Beating Heart of China’s Electric Vehicles Push


Back in 2001, five years before China’s GDP surpassed that of the UK, the Chinese government introduced an initiative called the “863 Programme.” Under the oversight of then-President Jiang Zemin, the 863 was designed to promote innovation in a wide range of technologies and, through this, improve China’s competitiveness in the global economy.

The Chinese government of the time identified one market which they accepted they could never be competitive in: automobiles. They simply lagged too far behind; the United States had been mass producing cars since the 1920s, with various global corporations just too dominant for China to make any waves. The government therefore took the strategic decision to “leapfrog” the traditional combustion engine, and look instead to the technologies of the future.

Under the 863 Programme, $130 million was invested into emerging technologies which had the potential to revolutionise the automobile industry: fuel cell, hybrid and electric engines. The last of these, of course, led to the development of the electric car: a technology now being increasingly embraced worldwide as a greener form of car travel. Already, China produces half of the world’s entire supply of electric vehicles and is well poised to become the leading automobile market of the future.

Partly because of such initiatives, China overtook the mighty Germany in car production numbers as early as 2007. The effect of the 863 was not limited to economic policy; it proved to the world that China was ambitious enough and able enough to take on – and beat – economic giants like the Eurozone’s largest, most successful economy. This had itself followed Shanghai company SAIC Motor’s acquisition of iconic British manufacturer MG Motors in 2005, perhaps another symbolic victory for China in its rapid economic rise.

Indeed, the development of electric vehicles can almost be read as a case-study in the success of the Chinese economy since the late seventies: an example of the long-term economic planning, and shrewd government investment, that has allowed the private sector to flourish – albeit under the iron fist of the state. A crude but effective mix of public funds and planning with private sector enterprise.

While Chinese car manufacturers still remain relatively unknown to Western consumers, there is every chance that it will be Chinese brands that will dominate the automobile market of the future. We have already seen brands like XPeng Motors, which specialise in electric vehicles, list on the New York Stock Exchange and establish headquarters in California, in what seems to be a direct challenge to companies such as Tesla. Chinese-owned car companies are exporting to Western economies in ever-increasing numbers, and the trend is only going in one direction.

This trend could be accelerated as the world turns to electric vehicles as an answer to problems surrounding global warming. Electric vehicles emit no tailpipe emissions, and fewer greenhouse gases and air pollutants than petrol or diesel cars. Replacing just one traditional petrol-run automobile with an electric vehicle can save an average of 1.5 million grams of CO2 per year. As consumers worldwide become more eco-focused, it is little wonder that, according to the Society of Motor Manufactures and Traders (SMMT), sales of electric vehicles continue to rise rapidly every single year. In the UK, September 2021 saw 49.4% growth in the sale of battery electric vehicles compared to the previous year.

This is where the city of Guangzhou comes into play. Once serving as a the terminus point of the Maritime Silk Road, which connected China to markets around the world, Guangzhou has long been a major hub for Chinese trade. It remains a highly industrial city to this day. Over 70% of the area’s produce is based around automobiles, electronics and petrochemicals and it is the primary manufacturing hub of the Pearl River Delta – one of the most important commercial regions in mainland China.

It is also home to the Guangzhou Automobile Industry Group. This is a state-owned holding company that owns a number of other Chinese carmakers, such as GAC Group. It is also the Chinese partner to major Japanese companies like Toyota and Honda. Such companies, and Guangzhou itself, could be well-placed to benefit if the world’s transition to electric vehicles continues at pace. But to do this, it needs an entire green economic infrastructure surrounding it. This is so Guangzhou can attract larger amounts of international capital, assert its green credentials on the global markets, and thereby open up a wider array of exporting opportunities.

The Chinese authorities are certainly trying to create such an infrastructure – just look at the recent launch of the Guangzhou Futures Exchange (GFEX). Partly owned by Hong Kong Exchanges and Clearing Limited (HKEX), and China’s four operational futures exchanges, the GFEX has been launched in order to introduce carbon emission trading to the Chinese mainland.

Indeed, the Head of the China Securities Regulatory Commission (CSRC) has stated said that he will be involved in guiding the development of green products in Guangzhou. With the Chinese government having set the goal to be fully net zero by 2060, it is hoped that this market will have the effect of incentivising the nation’s largest carbon-emitters to transition to cleaner forms of energy. This would also have the effect of making Guangzhou an epicentre for green commerce, a space in which electric vehicles play a huge role.

How is this market to work? Carbon emission markets usually operate by requiring businesses which emit more than a certain amount of carbon dioxide, or those operating in certain industries, to obtain allowances. One allowance represents the right to emit one tonne of carbon dioxide per year. If a company runs out of allowances, they must go to the marketplace in order to purchase more, at whatever the market rate is at that time. Those, on the other hand, who manage to reduce their emissions can sell their leftover credits on the market. This therefore offers a financial incentive to lower emissions and transition to greener energy sources.

Futures products are a more complex form of derivative that allow companies to purchase a credit effectively representing a promise to reduce a tonne of emissions.

The efficacy of such markets are debated. Many prominent Chinese figures have themselves expressed doubt regarding the scheme’s viability. In 2017, Xie Zhenhua, China’s special climate envoy, suggested that futures trading could lead to carbon traders losing sight of the market’s core purpose: limiting carbon emissions. He warned that “overinvestment” should be avoided. Many have argued that more speculative derivative products, like those now being offering in Guangzhou, lead to a greater focus on trading and profit-making, and lessen the focus on emissions themselves.

There is also the problem of working out what the best price for allowances actually is. In 2017, the European Union realised that the authorities were issuing too many allowances on its Emissions Trading System (ETS). This meant supply outstripped demand and prices were too low to deter companies from exceeding their carbon limits. But could an elevated price also be damaging? After all, the more a company is being sanctioned for emitting too much, the less cash it will have to invest in green transformation.

In an attempt to combat this, Zou Ji, the CEO of Energy Foundation and President of its China Region, suggested that China is likely to issue many allowances at first and then gradually tighten annual allocations.

Yet if the authorities can strike this balance, the rewards for Guangzhou could be considerable. The financial incentive to transition to alternative forms of commerce could lead to a “greening” of the local economy; driving up the quality of life for its 18 million inhabitants whilst also making the city a centre for the ever-expanding green finance space.

Situated barely a hundred miles to the north-west of Hong Kong, which itself has ambitions to be a major player in green financing, Guangzhou could tap into the capital available in one of the world’s financial powerhouses and use this to drive innovation in its green industries. With innovation in electric engines stretching all the way back to 2001 and the 863 Programme, China’s automobile industry has undoubtedly had a massive head-start in establishing itself as the world’s leading manufacturer of electric vehicles. Sales of electric MG motors are surging in the UK: many consumers already seem to be buying into a Chinese conception of “green.” The new financial activity taking place in Guangzhou could drive China’s manufacturers further ahead still.

Guangzhou, then Westernised as Canton, once played host to one of the great imperial battles. In response to China’s attempts to prevent the import of opium, the Royal Navy and East India Company utterly overwhelmed the Chinese defences to open up the country’s lucrative markets. Almost two centuries later, the Port of Guangzhou and the Maritime Silk Road could again be revived as a trading hub of global importance. But, with Guangzhou having every chance of becoming a world-leader in electric vehicles and green industry, this time it is likely the goods will be travelling in the other direction.

Chinese ships will depart a port once symbolic of long-gone British power, crammed full of automobiles that would once have been made in the United States.

Author: Harry Clynch

#China #863Programme #Innovation #SAICMotors #MGMotors #XPeng #Tesla #NYSE #ElectricVehicles #Guangzhou #GFEX #ESG #GreenFinance #HKEX #CarbonEmissionTrading

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