With little doubt, a breakthrough in U.S.-China relations on numerous fronts occurred in Washington this week. The dialogue was broader "in scope, substance and approached," as defined by Mrs. Hillary Clinton, U.S. Secretary of State. But what about climate "control?" Will environmental stocks benefit from government policies favoring clean energy companies?
For example, China's SunTech Power, which trades in New York, is up 65% year to date. This needs to be footnoted that during the financial crisis, it dropped to $5 per share from $80.
One driving force behind this rally is the perceived notion that China and the U.S. will find away to agree on carbon emissions. At lunch yesterday at the National Press Club in Washington, Senator John Kerry, Chairman of the Senate Foreign Relations Committee, was bullish on government action but spelled out risks. He said that he and Senator Lugar hosted a breakfast yesterday for Chinese delegation to the U.S.-China Strategic and Economic Dialogue. They said they held "frank, direct and productive" talks about "what was accomplished this week."
Regarding this "week's accomplishments, the dialogue is a bit fuzzy. The two governments signed a "Memorandum of Understanding to Enhance Cooperation in Climate change, Energy and the Environment." This agreement creates a new sub-dialogue now called "Climate Change Policy Dialogue." Interestingly, this new sub-dialogue will address new broader categories such as clean water which may partially explain why Duoyuan Global Water, an enterprise in Beijing, listed in New York, is up a whopping 88% since its IPO on June 24th. After the U.S.-China Strategic and Economic Dialogue, it is clear that this company is fitting into demand for Chinese environmental stocks. Are traders  betting that the Obama administration will lead an environmental victory when 192 nations will gather this December in Copenhagen, Denmark to hammer out a new global treaty?Â
Senator Kerry is banking his optimism on a Congressional break through before the Copenhagen meeting on a McKinsey and Company report which argues that 40 percent of America's potential reductions in emissions would pay for themselves and so would a $70 billion investment in energy-saving emissions reductions in China.
Obama is betting on incentives. The U.S. has the technology, the world wants cleaner air, and there is plenty of dirty air in China. Just a people buy better food when their income increases, it is reasonable expect a similar line of thinking with the Chinese environment.
While the U.S. and China signed a Memorandum of Understanding, Senator Kerry pointed out that here was nothing said in the memorandum about timelines and roadmaps towards an agreement. Pointing out that 40 percent of emission come from the US and China together, Kerry argues that an agreement is necessary and he is bullish that an agreement will be reached.
This Kerry-type of bullishness is obviously spilling over into the equity markets for solar producers. A roundup of 28 security analysts by Yahoo Finance average SunTech Power's December, 2009 yearly earnings at only $0.35 per share but expect a doubling in 2010 to $0.74. The Wuxi based company announced last week that it had entered into a strategic agreement with China Energy Conservation Investment Corporation to develop large solar projects in Qinghai province, Shizuishan city, Ningxia province and Panzhihua city.
It is hard to see how China can jeopardize its 8% growth plans by shutting down for retooling its coal-fired electricity production system, but the "guanxi" feelings flourishing between Beijing and Washington should be able to find a way to control emissions. Just as Washington is having a large influence on Wall Street, the "new" diplomacy between Washington and Beijing is surely influencing in a positive manner the environmental equity markets