China’s Clean Energy Strategy

 

30 September 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

As regular readers of this site know, we have been pretty appalled with, and confused by,

 

30 September 2010. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

As regular readers of this site know, we have been pretty appalled with, and confused by,

the way China has been handling its “crisis” – the reasons for which we still don’t see – with Japan.

That disturbing recent sequence of events aside, we have consistently argued that

the value of China’s currency is NOT a significant factor

in its economic relations with the US and other “advanced” countries.

In our view, China keeps piling up massive trade surpluses with them because of real economic factors,

above all, the combination of a highly-educated and –skilled work force

that, at least until now, has been willing to accept low wages.

From our perspective, there have been two key points about China’s economy:  

First, the generally, albeit not universal, effective control of the banking sector by the government,

which has, at least until now, stopped them from embarking on the same kind of foolishness that produced Black September 2008,

and the current brutal recession that has ensued,

as the Too-Big-To-Fail sector of the banks basically manipulate the political system to make sure their profits and prerogatives are protected,

whatever the cost to any other members of American or other “advanced” societies;

and, relatedly, the thorough-going effort made by that same government elite

to move China from the bottom to the top of the value-added chain,

especially by supporting its rapid – and solid – development of clean / green high-technology,

above all in the transportation and energy-production sectors.

For quite a while now, we have argued these are the real stories about China’s economy, especially the latter,

and now, it appears, the Western media is finally beginning to realize

the key issues in China’s economy lie at the TOP of the value-added chain,

and not at the bottom, where, as the Chinese themselves recognize,

they are already losing out to even lower-cost / equally high-skilled manufacturing forces such as Vietnam.

In this context, much more attention is now being paid to the “advancing sectors” in the Chinese economy,

although, as usual, the coverage is almost completely ahistorical,

focusing on “government protection” practices that the US used throughout the 19^th century in building its economy,

and were a structural feature of the British Empire.

While there is little doubt China’s political elite has been deeply involved in

helping these “infant industries” – as they were called in America –

ramp up quickly to serve the global market,

we frankly find the constant Western criticism of these practices

as disingenuous as the “outrage” about China’s “undervalued” currency.

In our view, the most significant point is that

the government is helping companies develop technologies

that are going to benefit the whole world from an environmental AND economic point of view –

and we see nothing wrong in this,

especially given the difficulties facing Western companies in their home countries,

which will be a topic we’ll be discussing briefly below and at greater length in the future,

but which is easily inferred from the fact we continually note about the US banking sector, namely,

its pronounced UN-willingness to LEND the money it receives from the Federal government at ZERO INTEREST,

preferring instead to put it into foreign, short-term securities that quickly and safely fatten its bottom line.

But apparently that’s all right.

In any event, while we agree the Chinese government is taking an active role

in helping the development of companies in its green / clean / high-tech sector,

we see nothing wrong with that –

especially since, as you will note, several of the companies they are helping are NOT Chinese,

but, rather, AMERICAN firms that were unable to get the assistance they need

from sources “at home”, while being welcomed by China.

In the end, the crucial question is whether the products and services these clean / green companies

are offering the world are going to make it a better place or not –

and we think the answer to that is stunningly self-evident.

 

I

Until very recently, Hunan Province was known mainly for lip-searing spicy food, smoggy cities and destitute pig farmers.

Mao was born in a village on the outskirts of Changsha, the provincial capital here in south-central China.

Now, Changsha and two adjacent cities are emerging as a center of clean energy manufacturing.

They are churning out solar panels for the American and European markets,

developing new equipment to manufacture the panels

and branching into turbines that generate electricity from wind.

The booming Chinese clean energy sector,

now more than a million jobs strong,

is quickly coming to dominate the production of technologies

essential to slowing global warming and other forms of air pollution.

Such technologies are needed to assure adequate energy

as the world’s population grows by nearly a third,

to nine billion people by the middle of the century,

while oil and coal reserves dwindle.

But much of China’s clean energy success lies in aggressive government policies that help this crucial export industry.

A visit to one of Changsha’s newest success stories offers an example of the government’s methods.

II

Hunan Sunzone Optoelectronics, a two-year-old company,

makes solar panels and ships close to 95 percent of them to Europe.

Now it is opening sales offices in New York, Chicago and Los Angeles

in preparation for a push into the American market next February.

To help Sunzone, the municipal government transferred to the company

22 acres of valuable urban land close to downtown at a bargain-basement price.

That reduced the company’s costs and greatly increased its worth and attractiveness to investors.

Meanwhile, a state bank is preparing to lend to the company at a low interest rate,

and the provincial government is sweetening the deal by reimbursing the company for most of the interest payments,

to help Sunzone double its production capacity.

Heavily subsidized land and loans for an exporter like Sunzone are the rule,

not the exception, for clean energy businesses in Changsha and across China,

Chinese executives said in interviews over the last three months.

China’s success in clean energy also stems from assets enjoyed by many of the nation’s industries:

·        low labor costs,

·        expanding universities that groom lots of engineering talent,

·        inexpensive construction and

·        ever-improving transportation and telecommunications networks.

For example, engineers with freshly issued bachelor’s degrees

can be found here in Hunan Province for a salary of only about $2,640 a year —

not significantly more than blue-collar workers with vocational school degrees can make.

China’s aggressive tactics are making clean energy more affordable.

Solar panel prices have dropped by nearly half in the last two years,

and wind turbine prices have fallen by a quarter —

partly because of the global financial crisis, but mainly because of

China’s rapid expansion in these sectors and the accompanying economies of scale.

Large Chinese wind turbines now sell for about $685,000 per megawatt of capacity,

while Western wind turbines cost $850,000 a megawatt.

But there are potential dangers in this approach,

quite aside from consistent Western complaints about WTO violations for help to exporters,

something most nations in fact either now or did practice, but about which China is unusually open.

Because China’s clean energy industry has relied so heavily on land deals and cheap state-supported loans,

the industry could be vulnerable if China’s real estate bubble bursts,

or if the banks’ loose lending creates financial problems of the sort

that have plagued Western financial markets in recent years.

Other countries may also become less enthusiastic about subsidizing renewable energy

if it means importing more goods from China instead of creating jobs at home.

III

Barely a player in the solar industry five years ago,

China is on track to produce more than half the world’s solar panels this year.

More than 95 percent of them will be exported to countries like the United States and Germany

that offer generous subsidies for consumers who buy solar panels.

By contrast, the Chinese government has relatively modest solar subsidies for its citizens.

Instead it has devoted more money to helping manufacturers,

allowing them to cash in on other countries’ consumer subsidy programs.

China is also on track to make nearly half of the world’s wind turbines this year.

China offers financial incentives for utilities to use wind power,

which is less costly than solar power,

and the country passed the United States last year

as the world’s largest wind turbine market.

Meanwhile, China itself imports virtually no wind turbines or solar panels,

instead protecting those developing industries,

as every industrial nation has done at this stage in its economic history.

For example, China until late last year required that

70 percent of the content of each wind turbine and

80 percent of the content of each solar panel

be made within China.

China quietly dropped that rule after objections from American officials,

but also because its own industries had become the world’s largest, lowest-cost producers.

Now China strongly opposes suggestions in Congress that the United States or Europe follow China’s example and

impose “local content” rules to help their own struggling renewable energy industries.

“Now if the U.S. sets up that kind of regulation, it will really be a problem”

said Li Junfeng, a senior Chinese energy policy maker.

“We need to buy from each other.”

China’s expansion has been traumatic for American and European solar power manufacturers,

and Western wind turbine makers are now bracing to compete with low-cost Chinese exports.

This year, BP shut down its solar panel manufacturing in Frederick, Md., and in Spain,

and laid off most of the employees while expanding a joint venture in China.

NB: Expanding a joint venture in China.

Evergreen Solar of Marlboro, Mass., plans to move the final manufacturing steps for its solar panels

from Devens, Mass., to China next summer, eliminating 300 American jobs,

after struggling to borrow money in the United States

and after finding that costs in China were lower.

Which means the villain here is NOT the company, which is simply trying to get off its feet,

but the banks and other elements of the American financial sector

that remain consistently UN-willing to lend to such ventures,

UN-like the Chinese government, which is more than willing to help.

The victims may indeed be the workers,

but the real question they should be asking is

why the company is being more or less forced to move to China,

rather than remain in the US.

 

IV

Here in Changsha, Sunzone’s general manager and chief engineer, Zhao Feng,

represents a new breed of Chinese clean energy entrepreneurs.

A former professor of semiconductors at Hunan University,

he has a daughter studying for a doctorate in bioengineering at the University of Chicago on a Pentagon grant,

and he owns a house in Chicago a block from President Obama’s.

Mr. Zhao is quick to point out that state and federal governments in the United States

have also encouraged the development of the clean energy industry.

“Our provincial governor has come several times to our plant,

just as Gov. Arnold Schwarzenegger has made several visits to solar power companies” in California, he said.

With government help, Sunzone lined up financing and received all the permits necessary to build a factory in just three months

under an expedited approval system for clean energy businesses.

It took only eight more months to build and equip the factory.

“The construction teams worked 24 hours a day, seven days a week in three shifts,” Mr. Zhao said.

Building and equipping a solar panel factory in the United States takes 14 to 16 months,

and getting environmental and other permits can take years,

said Tom Zarrella, the former chief executive of GT Solar in Merrimack, N.H.,

a big supplier of solar manufacturing equipment to factories in the United States and China.

And Americans wonder why innovative companies move to China ???

The heavily discounted price of land offered to Sunzone by Changsha was a key element of the deal.

It was one-third of the official price then for industrial land from the government.

Industrial land in this desirable neighborhood now sells for $720,000 an acre,

giving Sunzone an eightfold profit on paper.

The company carries the land on its books at this market price, and can borrow against it, Mr. Zhao said.

The valuable land also means the company has big assets and little debt on its balance sheet,

which should help attract investors for a planned initial public offering in 2012.

Executives at three other clean energy companies in and around Changsha said

they, too, had been allowed to buy government land for a third of the regulated price.

“Because so much of the cost in clean energy comes at the beginning,

if you change the initial interest rate half a percent or 1 percent, the difference is amazing,”

says Dennis Bracy, chief executive of the U.S.-China Clean Energy Forum,

a discussion group of Chinese energy officials and former American cabinet officials.

The local government of Zhuzhou, a city near Changsha, is even more generous.

“For really good projects, we can give them the land for free,”

said He Jianbo, the deputy director of the city’s flourishing high-tech zone,

which already makes everything from electric buses to solar panels,

and is preparing to build electric cars.

“This land subsidy is not available to traditional industries, only high-tech industries.”

Many state and local governments in the United States have also built roads,

installed power lines and made other infrastructure improvements

that have increased the value of private land as part of programs to attract clean energy.

Tax holidays for such businesses are common in the United States, as in China.

Sunzone’s Zhao, back in Changsha, said that whatever the global trade rules might be on export subsidies,

the world should appreciate the generous assistance of Chinese government agencies to the country’s clean energy industries.

That support has made possible a sharp drop in the price of renewable energy

and has helped humanity address global warming, he said.

The subsidized land will also help Sunzone afford plans to sell solar panels

below cost to poor people in western China, Mr. Zhao said,

adding that he hoped the effort would build good will and lead to more sales there.

V

As Sunzone prepares to double its manufacturing capacity by the end of this year,

state banks and the municipal government are ready to help.

The company has reached a tentative deal to borrow $11 million,

to increase employment to 600 workers.

The bank will lend the money at an interest rate of about 6 percent,

but the provincial government will then give Sunzone a direct rebate to pay more than half the interest on the loan.

“Just yesterday, the bank general manager brought his staff here to see how they could be of service to us,” Mr. Zhao said.

“We don’t need to go to the bank; they come here.”

Low-interest loans from government-run banks are crucial to China’s clean energy success, some experts say,

because of the high cost of factory equipment at the start of the process.

China has been pumping loans into clean energy so rapidly that

even $23 billion in credit offered by the China Development Bank

to three solar panel exporters and a wind turbine maker since April has barely raised eyebrows.

China Development Bank, owned by the government, exists to lend money for strategic priorities.

Evergreen Solar, the Massachusetts company mentioned above,

struggled for three years to raise money in the States,

but had no trouble doing so in China.

Chinese state banks were happy to lend most of the money for the factory on very attractive terms,

like a five-year loan with no payments of interest or principal until the end of the loan,

said Michael El-Hillow, the company’s chief financial officer.

“You can’t get a penny in the United States, it doesn’t matter who you call — banks, government.

It’s awful,” he said. “Therein lies the hidden advantage of being in China.”

Only it’s not so hidden.

Because the start-up costs for clean energy are so high,

the willingness of Chinese governments at all levels

to offer innovative start-ups significant breaks in terms of land and financing

are the key elements in what will probably end up making them

the global leaders in this key, job-creating sector.

To be sure, many Chinese clean energy executives argue that China should offer more subsidies for its own people to buy renewable energy,

in addition to helping export-oriented manufacturers, according to this extensive piece in the New York Times.

But until domestic demand takes off, government support will remain crucial.

“Who wins this clean energy race,” Mr. Zhao of Sunzone said,

“really depends on how much support the government gives.”

And if Americans –

having bankrupted themselves in preserving a TBTF sector

that should have been allowed to fail,

as is supposed to happen in a “capitalist” system – don’t like it,

then they perhaps should re-think, in a deep way,

the appropriate relationship between politics and the market,

above all, which economic actors the government SHOULD be helping:

TBTF banks that won’t lend the money they are literally given for free,

while taking huge salaries and bonuses in the meantime –

or innovative entrepreneurs in sectors that are obviously

 going to create real jobs for at least a generation to come.

Put bluntly, there’s a lot the US could learn from what China is doing now –

but the unwillingness to do so is one of America’s major problems, for which it alone is responsible.

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com