The green economy can set a new trajectory for China ties

02 May 2023
Posted By: ACBC

If we’ve learnt anything from the pandemic period, it’s that Australia cannot solely rely on its cornerstone sectors of commodities, education and tourism alone. Instead, we must diversify and explore other ways to move up the value chain.

One path that offers exponential two-way economic growth is through our respective green economies and the impact they can have.

At a national level, Australia and China have made significant commitments on carbon emissions reduction and are moving to use more clean energy.

In 2022, China’s renewable capacity overtook coal capacity for the first time [1]. It is also home to the largest share of the world’s solar photovoltaics and wind turbine manufacturing and accounts for 70% of the world’s EV manufacturing, according to the International Energy Agency.

Meanwhile, Australia intends to shift 80% of its energy to renewable sources over the next seven years to 2030.

The scale of the challenge is huge, and so are the opportunities. What’s more, both markets need each other.

Australia is a leader in managing the integration of renewables onto the grid, which is proving to be the challenge of every Chinese province. More broadly, Australia has a world-leading training regime for renewable science, engineering solutions, and installation, which will be prized in China.

Conversely, Australia needs know-how in advanced manufacturing and also needs international investment if Australia is to achieve its “renewables superpower” ambition.

Clearly, this is an exciting prospect but we are in an intensely competitive environment for

capabilities and capital. For example, China is already engaging with several markets across Southeast Asia – so Australia needs to get moving.

However, the relationship still has some way to go before it’s stable and many of the opportunities across the green corridor are not fully understood by either Australia or China.

There has been some traction: BHP announced last month that it signed memorandums of understanding with two Chinese copper producers to reduce emissions and improve energy efficiency in the smelting and refining processes. Elsewhere, the Chinese Ambassador remarked that the green economy could be the “new frontier” of Australia and China engagement.

Several challenges will also need to be overcome before companies on either side will be fully prepared to dive in, including removing concerns about future economic sanctions and being confident that supply chains meet company ESG obligations.

So where can Australia start the process of building these green ties?

First, it’s important for every industry to deep dive into how it can move up the value chain. Emphasis should be applied to Australia’s strengths including EV / battery processing, green steel technology, methane-reducing agricultural technology, and renewable technology manufacturing.

Delegations, like the Australia China Business Council, will also help build bridges of knowledge and connection as well as bring back insights to guide Australia’s strategic engagement.

Elsewhere, banks like HSBC will be conduits. Transition finance is a core part of our strategy and banks like ours are pivoting more lending towards supporting clients and industries that are showing meaningful transition inroads.

But more will need to be done to formally encourage and create commercial stitching across this green corridor.

One way to do this could be for Australia and China to develop a green economy agreement – similar to the one Australia inked with Singapore in 2022, which the Asian Development Bank cites as the gold standard of green agreements [2].

Like the Singapore agreement, the Memorandum of Understanding would outline what is meant by the green economy, what the specific sector opportunities are, and could articulate the shared expectations upon Chinese and Australian companies around issues like supply chain transparency and ESG risk.

Whilst non-binding, it at least sets the path for more formal arrangements including eventually developing an ESG chapter to the existing Australia / China Free Trade Agreement.

No-one said the energy transition was going to be easy. The costs will be high but the alternative of failing to meet climate risk is non-negotiable.

There will also be substantial opportunities, particularly for those countries who are fast to embrace both change and like-minded investment partners.

Australia and China’s prosperity and survival is intricately linked – that is why we need to collaborate to achieve net zero faster, together.

The green economy offers a chance to re-programme our collective economic and political trajectory in a way that is positive and necessary for all.

[1] HSBC Global Research, “Asia’s Gamechangers”, April 2023