Bryane Michael, senior fellow at the University of Hong Kong Law Faculty’s Institute of International Financial Studies and co-author of a new paper on solar securitization in China with Simon Zhao and Dariusz Wojcik, discusses how regulators can make the industry into a world-beater.
China represents one of the world’s largest solar energy markets – potentially providing a revenue-generating bonanza for willing investors. Estimates of current solar (photovoltaic) production on the Mainland place the value China’s solar industry at about EUR37 billion (RMB300 billion) – representing roughly 40% of the world’s solar panel production. Geometrically extrapolating China’s photovoltaic sector production at current growth rates leads to market sizes of at least EUR100 billion by 2017. For financial firms that can provide the money to grow out this sunrise industry, the profits could be staggering. Securitisation (or “chopping” solar companies’ assets and liabilities into papers which investors can trade) can provide the resources the China’s solar industry needs. Yet its financial centres – like Shanghai and Hong Kong – seem unable and unwilling to provide the services necessary to do this. What can China’s aspiring financial centres (and particularly Hong Kong) do to provide funds to this infant industry? How can regulators help encourage China’s financial firms to securitize solar assets — before US firms swoop in?
Just How Big is the Funding Opportunity?
China’s solar panel exports represent the tip of the iceberg for China’s solar energy industry. Market sizes of EUR100 billion only take into account revenues from the sale of solar panels. China also represents an important market for solar energy consumption. Like in the US (think about SolarCity), China will need companies which provide panels, install capacity, provide finance for customers, engage in research and development and other activities. The development of a domestic market could add another US$100 million in revenue opportunities. Yet, to seize these opportunities, China’s solar companies will need to find financiers which are willing to take risks today.
Securitisation allows China’s solar companies to sell their current and future assets and liabilities to a wide range of investors. In our full paper (available online) we describe the range of things, such as intellectual property and even loans from banks, which China’s solar industry can “chop up” into pieces of paper and sell as securities. The example of their plant, property and equipment (PPE) provides an example. Looking at the value of these companies’ PPE based on their riskiness. we found that companies belonging to the safest and riskiest tranche had returns on their PPE assets of around 13% and 7% respectively in 2012. Imagine if these companies could “sell off” – in the form of securitisation – these assets instead of hold them on their balance sheets. Investors win because they get access to the assets they want. The companies win because they get more working capital. For financial intermediaries offering these PPE securities, they can earn commissions on the trade of US$7 billion in the value of these assets. As we describe in our longer paper, the value of all securitizable assets and liabilities easily comes to US$100 billion.
If financial firms can capture solar financing across the Asian region, the value of photovoltaic energy revenues in Asia alone could top half a trillion dollars. As we show in our paper, if countries like the Philippines, India and others manage to expand access to electricity beyond current levels (rather than simply replace coal, gas and oil with solar), market sizes could be much bigger. Thus, the market for solar power could be much, much larger if financial institutions in places like Shanghai and Hong Kong could figure out ways of providing flexible and low-cost finance to solar technology producers and users.
The United States provides more finance to China’s Solar Industry
US-based financial intermediaries have captured a far greater share of China’s solar industry finance than one might expect. The Hong Kong-listed Hanergy and Xinyi have market capitalisations in excess of other companies. Yet US listings comprise a large part these companies’ equity finance. Moreover, US intermediaries have inserted themselves into funding channels – even when those channels involve mostly Chinese (including Hong Kong) listed or funded solar panel companies. US-based solar funds have plugged themselves into the centre of equity and lending relationships going through Hong Kong. Hong Kong broker-dealers like HSBC and Standard Chartered hold a relatively larger value of Hong Kong-listed Mainland solar companies’ shares than US broker-dealers with specific solar offerings like Blackrock (iShares), Van Eck (Market Vectors), and Guggenheim. Yet these broker-dealers have positioned themselves in investment networks more centrally – that is, with holdings in the widest number of mainland solar companies. They hold relatively large concentrations of these companies’ shares and hold larger ranges of solar companies’ shares than Hong Kong-based intermediaries. Clearly Guggenheim Solar and Market Vectors Solar ETF represent go-to funds for investors looking to invest in global solar. Funding centred around Beijing, Shanghai and Shenzhen for these companies remains extremely low.
Something about Chinese (including Hong Kong) financial law clearly impedes the packaging and distribution of solar investments. Most academic authors argue that China’s securitisation law does not allow Chinese-based financial intermediaries (including Hong Kong based ones) to compete with their London and New York-based rivals. What can these financial centres do to tap into this trillion dollar industry which they are losing to the US?
Making Chinese financial centres hubs of solar securitisation
If Hong Kong (or Shanghai for that matter) can implement the innovations made in the US, their banks and brokers stand a chance at taking back the securitisation money they are losing. Our study describes just how easily investors can obtain information about US-listed Chinese solar companies – and how difficult they find it to obtain such information for those listed in Hong Kong.
Regulators like the Hong Kong Securities and Futures Commission place high barriers for companies looking to educate investors about investing in productive solar securitisations, but they do not need to. The California-based crowdfunder site Mosaic provides a prime example of a financial intermediary – and the financial laws governing that intermediary – that encourages the securitisation of solar company assets and liabilities.
From Mosaic to the Guggenheim Solar ETF, the US provides numerous examples of the kinds of innovations needed in China. Such innovations start with changes in Chinese financial law, particularly for securitization. With the proper changes in financial law, explained in full in our paper, investors would be able to buy the risks and returns they want in China’s solar industry right at home, be that in Shanghai, Shenzhen, or Hong Kong.