Getting Carbon Under Control

by Paul Goodwin on November 20, 2014

This is an excerpt from Cabot China & Emerging Markets Report, which seeks to capitalize on the big boom in China and other emerging market countries. Editor Paul Goodwin, Cabot’s international investing guru, provides your passport to profits.

Stories about China—its economy, its people and its companies—are a hot commodity on financial websites. Some of these stories are just clickbait, like warnings about how China is going to either dominate the world or come apart into an economic basket case.

But most stories about China are just reporting the facts, including everything from press releases from the Communist Party to social and economic news from inside and outside the country. And the more you learn, the more interesting it becomes.

Here are a couple of those interesting stories and a little commentary about them.

The first piece of interesting news came on November 11, when China and the U.S. announced a joint plan to reduce carbon emissions. The agreement was a result of more than nine months of quiet, behind-the-scenes talks between high-level delegations, and was signed by President Obama and President Xi during Obama’s visit to China for the Pacific Summit.

The first remarkable thing about the agreement is that it was reached at all. The resistance of China and the U.S. to emissions limits has been a big sticking point for any global agreement on the topic. China opposed limits because it needs cheap fossil fuels to provide the power for its continued economic development. The U.S. opposed limits because Congress has stubbornly resisted ratifying negotiated agreements.

So having the leaders of the #1 (China) and #2 (U.S.) carbon emitters shake hands over any kind of agreement is a major step.

The second remarkable thing about the agreement is that anyone who has been to China in recent years can see in the sky the reason for China’s commitment to carbon emissions reduction. Controlling pollution isn’t just a global issue, it’s a continuing embarrassment and political issue in China itself. But even with a domestic air pollution problem that makes global headlines, China agreed only to reduce emissions after they peak in 2030. Presumably, Chinese leaders believe that the 15-year lead time will allow them to ramp up alternative energy sources while still generating the energy the country needs to continue its development.

The failure of the U.S. and China to institute carbon emissions controls has been a global problem, as many developing nations have used the failure as a justification for their own foot-dragging. So this agreement may have beneficial knock-on effects.

The second interesting story is a presentation of results from a survey of senior executives at manufacturing companies with annual sales of at least $1 billion. The survey, conducted by The Boston Consulting Group for the third year, asked these executives about possible plans to bring manufacturing operations (that had previously been sent to China) back into the U.S.

About 16% of those surveyed indicated that they were already actively doing this kind of “onshoring.” This is up from 13% a year ago and 7% when the survey was first done in 2012. More than half of the execs surveyed also indicated that they were interested in doing the same.

The reasons given are interesting as well. Nearly 80% of respondents cited shorter supply chains and cheaper shipping as prime reasons. Over 70% said that there was better access to skilled labor in the U.S., that it was easier to do business here and that local control over manufacturing processes improved both quality and yield.

From the Chinese perspective, this is good and bad. On the one hand, it’s never pleasant to lose jobs in a country where workers continue to move from rural villages to new cities, where they need employment. On the other hand, one big reason for the shift in the economic advantage for manufacturers from China back to the U.S. is that Chinese wages are rising. That’s a plus both for the laborers themselves and for the Chinese economy, as the higher wages will be put to use in purchasing domestic goods and services.

This is the kind of news that can show up in our stock selections, as Chinese retail and other goods and services businesses reap the benefits.

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