China is at a fork in the road. Ahead, the path diverges, offering two possible futures.
Route A maintains the status quo. In this scenario, China stays a dirty superpower, highly dependent on coal to fire its furnaces and state-owned banks to continue to fund an economy that has generated much wealth, but left land and air in a state of disrepair.
Route B is the riskier but better option, offering a future in which China cleans up its act. It innovates furiously, its vibrant capital markets finding clever solutions to any number of long-unchecked problems, from household refuse to rivers choked with industrial waste.
It becomes a hydrogen power and is the first large economy to achieve net-zero on carbon emissions. Its best young corporates, backed by local and global capital, invent ways to clean up toxic spills, grow animal-pain-free meat or transmute discarded plastics into pure seawater.
Change is in China’s hands. It can choose to arrive in Glasgow armed with solutions to its and the world’s problems
Not only that, but it exports these new ideas far and wide at discounted prices, giving other countries a chance to benefit and profit from its super-charged ingenuity. In doing so, it is transformed into a place that its own people aspire to live in, and which foreign governments want to befriend.
All of this will be at the forefront of the ruling Party’s thinking in the months ahead. The coming year will be as important as any in its 100-year history. The decisions it makes will define the nature and pace of its development for decades to come.
Key dates come thick and fast. In early November, a senior Chinese delegation is due to attend the United Nations Climate Change Conference in Glasgow. After COP26, it is back to Beijing to lay the foundations for a twice-in-a-decade congress in late 2022 that could see Xi Jinping extend his term as leader, and perhaps announce himself president-for-life.
In between, there is the Winter Olympics, to be held in February in Beijing, and the challenge of re-opening borders that China all but shuttered in early 2020.
For large stretches of time, the eyes of the world will be fixed on China. Its cadres need to arrive in Glasgow with a clear plan, for three reasons:
Costing net-zero
First, it cannot hope to hit net-zero by 2060 – the current plan – without costing the process. Investment bank China International Capital Corporation (CICC) reckons this will require Rmb140 trillion ($21.65 trillion) in green investments, spread over the next 40 years.
Right now, most green investments are funded directly by state lenders, but 40% of all green investments will have to come from equity and bond financing, CICC says. So, something has to change. Perhaps China will arrive at COP26 with a plan to massively accelerate the inflow of foreign capital into environmental, social and governance (ESG) projects.
Commercial opportunity
Second, the Party has to stop seeing climate change purely as a risk. In June, Mark Carney said climate change also presented an “amazing commercial opportunity”.
The former Bank of England governor and current UN special envoy on climate action and finance is spot on in his assessment, and no nation has a better chance to move the dial than the world’s biggest emitter of carbon dioxide.
“China can be a leader in waste-water management, renewable energy, blue and green hydrogen,” says a Hong Kong banker focused on ESG issues. “Take any dirty business – and there’s plenty to choose from in China: cement, steel, heavy manufacturing. In terms of the positive value it can create, there is no limit.”
China can move mountains when it feels the need. It is home to the world’s second-largest market for green bonds, with Rmb800 billion outstanding, against less than Rmb5 billion in 2015.
Redefining itself
Third, the months ahead offer Beijing a chance to redefine itself in the eyes of the world. The ESG banker calls Glasgow “a significant opportunity for China to emerge as a climate leader, as opposed to its reputation in the west as a climate laggard”.
This will require it to revisit the way in which it sees the world: to strike new partnerships, to be supple-minded in environmental diplomacy, and conciliatory with those with which it may not agree.
China has scared the heads of state of countries from Europe to Africa to Asia into quiet submission on any number of issues in recent years.
That might play well at home, but it has not made it many friends abroad. In Portland Communications’ 2021 soft-power rankings, France topped the list, followed by the UK and Germany. China came 27th of 30 nations, behind Greece and Brazil.
The Party is painfully aware of its low external popularity. Even attempts to do the right thing can backfire, such as when it trumpeted deliveries of vaccines to nations suffering from a made-in-China pandemic. Soft powers do not need to proclaim their righteousness from the rooftops.
But change is in China’s hands. It can choose to arrive in Glasgow armed with solutions to its and the world’s problems. It can decide to be more pliable on the stage and behind the scenes, and not seek to define the debate and overwhelm discourse.
And after the dust from COP26 settles, it can quietly go about changing itself and the world for the better. It can find a way to channel more non-bank capital to its best young companies. It can share clean-energy and clean-industry technology with developing countries and sell them life-saving drugs in bulk at a fraction of the cost.
The Belt and Road Initiative, a global infrastructure project championed by president Xi, has been criticized for the cost of projects and the lack of green due diligence. Even before the pandemic, officials quietly furloughed the grand plan.
Do not, however, be surprised to see it rebranded and revived in the months ahead as ‘green belt-and-road’.
“I expect a less hard-edged China to emerge: softer, cuddlier, promoting greener infrastructure, and a greener and better world,” says the Hong Kong ESG banker.
A softer and cuddlier China? Now that really would be a sight to behold.
