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China Is Ground Zero for a Green Energy Revolution

Alternative energy isn’t on a lot of people’s minds right now.

The first hurdle is a practical one: Energy remains cheap. Crude oil has swung between $80 and $110 a barrel for the last few years, but there seems to be underlying stability despite the short-term volatility. Also, natural gas remains extremely cheap thanks to the fracking boom.

It’s not a surprise, then, that Bloomberg New Energy Finance reports that clean energy investment dropped 11% in 2012.

But the real surprise is that while the broader market for green energy technology investments did fall, it soared in China. Consider this from the report, released in January:

“Investment fell 32 percent in the U.S., 51 percent in Italy, 68 percent in Spain and 44 percent in India. That offset gains in China and from small hydropower projects… China’s total surged 20 percent to a record $67.7 billion. It was more than 50 percent above the U.S., which reaped $44.2 billion for its clean energy industry.”

So while Western governments cut back on alternative energy subsidies and research, China is becoming a global superpower. In 2011, China was responsible for about one-fifth of total worldwide investment in green energy. In 2012, it spent more than one quarter of the $268.7 billion invested globally.

That’s hard to ignore.

Granted, leading in gross spending doesn’t always correlate to dominance — just look at high-priced CEOs that fail miserably. Consider this telling chart about the plummeting cost of solar power, borrowed from Uncommon Wisdom, and there might be a similar argument to be made for alternative energy.

cheapsolar2

To wit: There are ways to generate green energy that don’t break the bank … and it’s not exactly a secret that graft and inefficiency plague government spending in China.

But don’t just dismiss China out of hand. It has a big incentive to become a world leader in alternative energy — namely, its status as the world’s leader in greenhouse gasses.

So why not turn the negative into a positive by pushing big into alternative energy? That not only fixes China’s issues should the world tax carbon emissions or should its citizens rise up against dirty business practices, but also provides a great market for its work force to continue its growth into high-tech sectors and away from manufacturing.

Sounds like a win-win for China. But how can you profit from this?

Investors can play this trend by looking into Chinese alternative energy stocks, including SunPower (NASDAQ:SPWR), Suntech Power (NYSE:STP) LDK Solar (NYSE:LDK), Yingli Green Energy (NYSE:YGE), Trina Solar (NYSE:TSL), JA Solar Holdings (NASDAQ:JASO) and the oddly named Canadian Solar (NASDAQ:CSIQ). These are all China-based solar stocks, though SunPower and Yingli are the largest by market cap.

This segment of the alternative energy market seems the best place to start, since solar leads all categories. Of the $268.7 billion invested in 2012, over half of that ($142.5 billion) went to solar.

Another riskier investment — in wind — includes the small-cap China Ming Yang Wind Power Group (NYSE:MY).

Do your research thoroughly if you’re thinking about picking any of these players, but remember that many Chinese companies are notoriously opaque.

And if you still want China alternative energy plays but don’t like the risk of individual stocks, there also are exchange-traded funds that provide exposure.

The Powershares WilderHill Clean Energy Portfolio (NYSE:PBW) has SunPower as a top holding, though it also has Western companies including Tesla Motors (NASDAQ:TSLA). Get BPW details here at InvescoPowerShares.com.

A true global player is the iShares Global Clean Energy ETF (NASDAQ:ICLN) with only 14% exposure to the U.S., though it also is spread across South America and Europe as well as Asia. Get ICLN details here on iShares.com.

And a final note: This story about a pot of gold at the end of the alternative energy rainbow has been tossed around for years, with little long-term gains made for the players so far. SunPower is indeed up 60% in the last several months … but remains more than 85% below its 2008 peak.

There’s no sure thing in any sector, including alternative energy. But the rise of China and the long-term transition away from fossil fuels seems a compelling case for a long-term investment.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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