China's Financial Markets: The Risks and Opportunities of Stranded Assets

"Stranded assets” are assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities. Over the course of the last two decades, the challenges surrounding technological innovation, investor behaviour, and business resilience have become magnified in the context of environmental change. In particular, the issue of stranded assets has emerged as a sustainability concern beyond regulatory action on competition policy. Evidence shows that asset values are being impacted across a wide range of sectors and countries. For example, air pollution and water scarcity in China threaten coal-fired power generation, which has changed coal demand and affected global coal prices.

Chinese decisions to move away from a high pollution and high resource intensive economies and build an ‘eco-civilisation’ will have implications both for existing assets, as well as the trajectory of future capital investment. This paper suggests that the shift could bring about opportunities to secure an optimal rate of asset stranding, to avoid technological lock-ins, and maintain a smooth and gradual transition pathway. The paper also shares lessons from international experiences through five case studies where environment-related risks are stranding or threatening to strand assets in different sectors.