By Julian Wong Mar.3.2010
In: capital and finance, policy

How Green is China's Stimulus Package?

I had the opportunity to answer this question as a member of a panel discussion at the Center for Strategic & International Studies, a Washington DC foreign policy think tank, two weeks ago.   The event was held on February 17 to mark the one year anniversary of the American Recovery and Reinvestment Act, and sought to explore the effectiveness economic stimulus packages in the US and globally in catalyzing green investments.  My remarks begin at about 24’21 into the video below:

My simple answer?  There is no simple answer.  The lack of transparency of what exactly is being allocated, how those allocations are being spent, and how the uncertainty around the lesser known story of bank lending (or monetary policy), that is separate from the fiscal stimulus figures into clean energy investments makes it nearly impossible to know just how much money is hitting the clean energy road in China.

The following is the prepared outline on which I based my remarks on, in case you find it onerous to sit through the video presentation:

I.                    Basic Facts – first thing to highlight is the opacity of it all.

a.       Central vs provincial contributions:  Of 4 trillion yuan ($586 bill) total, 1.18 is from central government while the rest is from sub-national govt and private sector.  OECD says 600 bn yuan is from sub-national govt while rest is from private sector (and most of this is from bank loans to private sector).  This is last bit is significant as we shall discuss in a bit.

b.      Change in allocations: from Nov ’08 to March ’09 – not clear what implications are for “green”

i.      Sustainable development share decreases from 350 bn yuan (9%) to 210 bn yuan (5%)

ii.      Infrastructure decreases from 1.8 tr yuan (45%) to 1.5 tr yuan (38%)

iii.      Technology advances and industry restructuring increases from 160 bn yuan (4%) to 370 bn yuan (9%).

c.       How much new versus repackaged is also a source of uncertainty.

II.                 There have been bullish estimates of the “greenness” of China’s stimulus package.

a.       What do we know?

i.      About $220 billion to infrastructure, which is gird, rail, highways, bridges.  Some estimates peg grid and rail allocations to roughly $100 billion.

ii.      By end Aug ‘09, some nearly 1,000 miles of rail, sewage treatment capacity of 5.18 million tons/day, waste disposal capacity of 16,000 tons/day, energy-saving capacity of 6.69 million tons of standard coal (4 million cars per yr), 131 million tons of water-saving capacity

iii.      Also ecological restoration, BUT nothing for renewables.

iv.      The real stimulus story is not the $586 billion package, but the monetary stimulus, some $1.5 trillion in 2009.  Cf. China GDP of 4.5 trillion.  In fact, some suggestion (OECD) that much of $586 billion was not fiscal, but from bank loans (as much as 4 – 1.18 – 0.6 = 2.2 trillion yuan)

III.               All that Glitters is Not Green

a.       Many of the bullish analyses include all rail and grid investments

b.      Competing sectors of highway construction, earthquake reconstruction, and other developments – how green were these?  PLUS Oversight of large infrastructure projects for pocket-lining.

c.       Green passage vs. curbing of “shuang gao” projects

d.      Overcapacity

e.       Push for consumption-based growth.  Cash-4-clunkers/appliances.

f.        Latest economic numbers, 10.7% Q4 yoy GDP growth, may seem robust, but it is all driven by fixed asset investment and industrial production.

g.       Sustainable?  With all the bank lending, some analysts fear a day of reckoning and suspect official debt to GDP ratio of 20% is a gross underestimate.   More like 50%.  à reigning in of monetary policy, increase in bank reserve ratios à what implications for green projects?

IV.              Lessons

a.       Going green is not just about fiscal or monetary policy

b.       Just as crucial for rebalancing or restructuring the economy, which is what every Party official is saying needs to happen, is getting the prices right, …The root cause of the structural imbalance is distorted incentive structures, especially depressed factor costs. Until more decisive steps are taken to liberalise factor markets, adjusting economic structure could remain on the top of policy agenda every year for a very long time.

c.       Lesson for America is clear.  ARRA provides us with a good green jumpstart, but it does not take us to the promise land.  We need a comprehensive approach instead of temporary measures.  We need to get factor costs right, and in the U.S. context, among other things, that means putting a price on carbon.

V.                 But China’s investment in Green is Serious

a.       National energy conservation and renewable energy targets.  Compliance with China’s new goal to reduce carbon dioxide emissions per unit of economic output by 45 percent requires an annual investment of $30 billion for a decade, according to analysis by Renmin University.

b.      Market creation policies drive manufacturing prowess and now emerging, innovation activities.  863 program, New Scientist article on Chinese scientific journal articles, increasing # patents

c.       Lots of investments outside of stimulus package, especially in renewable energy and nuclear.

d.      Bank loans have been a huge boon.  How much of these are going to wind projects and other green energy projects?

e.       Debate about repackaging highlights the long-term strategy that China was embarking on anyways.

f.        State-owned eneterprises are vehicles of clean energy investments: CECIC, or the China Energy Conservation Investment Corp (going big on solar partnering with Suntech at home and seeks to build projects in Europe), 180 or so subsidiaries and more than 11000 employees.

i.      But challenge is to provide better financial support for SMEs to participate in the clean energy sector – they are better job creators and better represent the entrepreneurial spirit, but have not benifited as much from stimulus package or bank lending (those funds, some complain, tend to go through the more established govt-backed channels of large SOEs)

g.       Long-anticipated new energy development plan in the works, some $440 to 660 billion over 10 years according to some reports last year.  Given short term discussion of too much credit and inflation fears, and concerns of industrial overcapacity, I am not sure we will see a new energy fiscal or monetary package coached in stimulus package terms.  Planners will have to be more strategic.

Picture Credit: Green, Lean Ideas

Comments (7)

  1. jim rothstein Mar.6.2010@7:22 pm Reply

    Your talk is excellent – good you present a few numbers + overview + nuanced interpretation, which is most valuable analysis, at least in my own experience in China.

    I’ll try to find New Scientist article, but a little surprised China produces most science papers; are these peer-reviewed journals? (Separate issue, I’d like to get better feeling of quality of research in China. The (very) few labs and equipment I saw did not seem modern.)

    Strongly agree that China is also making many mistakes west made, esp. auto transport – many Chinese I met wanted to get a driver’s license.

    Last quick note, the $30 billion per year, for 10 years, to meet 45% carbon intensity goal- is this truly a large number for China?

    Good work.

  2. John Romankiewicz Mar.8.2010@6:55 pm Reply

    Hey Julian,
    Not sure I follow this math…
    (as much as 4 – 1.18 – 0.6 = 3.2 trillion yuan). Do you mean =2.2 trillion yuan?

  3. Julian Mar.8.2010@7:04 pm Reply

    Jim, many thanks. Here’s the New Scientist article:
    Re: the $30 billion, may not seem big by itself but it is unclear from that official’s statement if this is $30 billion on top of the dozens of billions they would have spent on energy efficiency projects and other clean energy infrastructure projects or not. Again, it lacks the proper context to draw a definitive conclusion.

    John, I think its called “fuzzy math”…something which you know something about! ;-) Thanks for pointing that out, I’ll fix it!

  4. even Mar.9.2010@5:52 am Reply

    Hey Julian –
    Any chance you could throw this on Youku? I’d love to share with colleagues who may not have VPN access.

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