EXECUTIVE SUMMARY

    Cleantech investment in China increased 147 percent between 2005 and 2006. In 2006,investors placed US$420 million across 26 cleantech deals compared to US$170 million in 2005. The momentum is expected to continue through 2007. The US$154 million that was invested in Q1 2007 is almost four times the amount invested in 2005.

    Cleantech ranked as the third largest category for venture capital investment in China, behind only information technology and communications. Cleantech is on an upward trend, growing from about 8 percent of overall VC investments in 2005 to 19 percent of total venture investment in 2006.

    Overall venture activity in China was robust, with investors placing US$2.2 billion in deals in 2006. The percentage of China’s cleantech venture capital to its GDP is 0.016, which stands between North America (0.022 percent) and Europe (0.005 percent). While the markets for cleantech products are relatively new, investors see potential for growth as conventional energy supplies dry up, making renewable energy sources more competitive, and as stringent standards are put in place to counter global warming. Veteran investors see opportunity in cleantech that is akin to IT, which today is the dominant investment segment in China.

    Policy drives much of the interest in China’s cleantech industries. The enforcement of China’s Renewable Energy Law attracted a flood of venture capital investment into energy-related fields in 2006. The 11th 5-Year Plan is and will continue to be a stimulus on cleantech investment in the coming years. Some 70 percent of the US$420 million invested in 2006 was devoted to the solar energy sector. Energy efficiency, biomass, wind energy and other segments will contribute to cleantech’s dramatic rise in the coming decade. But it should be noted that the segments hold risks for investors as well.

    The Chinese cleantech venture capital market in 2006 and Q1 of 2007 covered four segments: Energy Generation, Water & Wastewater, Agriculture and Materials. Energy Generation made up more than 70 percent of overall cleantech investment, a pattern that is similar to European and North American investment. Second to Energy Generation, Water & Wastewater played an  important role in cleantech investment in 2006 and Q1 of 2007, with six deals totaling US$90 million. The Water & Wastewater segment shows potential as the next emerging segment in China.

    The Yangtze Delta area in East China topped the list for regional breakdowns both for the number of deals and amount of investments across the country. North China followed while the relatively developed South China was far behind. Generally, West and Central China have a long way to go to catch up with the East.

    Between 2006 and Q1 2007, eight Chinese cleantech companies went public, among which six were venture backed. NASDAQ in the US, the AIM in the UK, SGX in Singapore and NYSE in the US were the most popular exchanges for Chinese companies. But only one of eight companies chose NYSE, implying that the Sarbanes-Oxley Act of 2002‘s heightened requirements for listing and its related costs present a barrier for some companies. Nonetheless, Chinese companies still prefer to have initial public offerings in the United States. Trends emerging in 2007 point to more cleantech companies going public with at least four IPOs anticipated by Chinese companies in the solar segment in 2007.

    Chinese cleantech markets and venture capital investment will increase dramatically in the future. We expect the total amount of nationwide cleantech venture investment to equal approximately US$600 million in 2007, and surpass US$700 million in 2008. Energyrelated companies will maintain their position as the leading investment category, owing to global market demands on new energy and environmental restrictions in China. Energy-related venture capital is expected to climb to US$500 million in 2008. The Water & Wastewater segment will follow as the next booming segment because China is facing serious issues of water quality and water resources, especially in North China. Watertech venture investment is expected to reach US$100 million in 2008.