China's giant strides in harnessing clean energy

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 in south-central China.

Now, Changsha and two adjacent cities are emerging as a centre 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. By contrast, clean energy companies in the United States and Europe are struggling. Some have started cutting jobs and moving operations to China in ventures with local partners.

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 9 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 in ways most other governments do not. These measures risk breaking international rules to which China and almost all other nations subscribe, according to some trade experts.

A visit to one of Changsha’s newest success stories offers an example of the government’s methods. Hunan Sunzone Optoelectronics, a 2-year-old company, makes solar panels and ships close to 95 per cent 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 subsidised land and loans for an exporter like Sunzone are the rule, not the exception, for clean energy businesses in Changsha and across China.

But this kind of help violates World Trade Organisation rules banning virtually all subsidies to exporters, and could be successfully challenged at the agency’s tribunals in Geneva, said Charlene Barshefsky, who was the US trade representative during the second Clinton administration and negotiated the terms of China’s entry to the organisation in 2001.

If the country with the subsidies fails to remove them, other countries can retaliate by imposing steep tariffs on imports from that country. But multinational companies and trade associations in the clean energy business, as in many other industries, have been wary of filing trade cases, fearing Chinese officials’ reputation for retaliating against joint ventures in their country and potentially denying market access to any company that takes sides against China.

WTO rules allow countries to subsidise goods and services in their home markets, as long as those subsidies do not discriminate against imports. But the rules prohibit export subsidies, to prevent governments from trying to help their companies gain in world markets.

The WTO also requires countries to declare all national, state and local subsidies every two years, so that if one country’s exports surge suspiciously, other countries’ trade officials can easily check to see if that product is being subsidised.

Violations

But China has virtually ignored the requirement since joining the WTO. Contending that it is still a developing country struggling to understand its commitments, China has filed just one list of subsidies that were in place between 2001 and 2004,
instead of submitting the itemised list every two years, as the rules require. And that one list covered only central government policies while omitting local or provincial subsidies.

The Chinese mission to the WTO, which is part of China’s commerce ministry, would not comment for this article. After reading questions ‘The New York Times’ submitted by fax last week, mission officials declined to respond, saying that any comments might affect China’s standing in other trade disputes.

Sunzone and other Chinese clean energy companies also benefit from the fact that the government spends $1 billion a day intervening in the currency markets so that Chinese exports become more affordable in foreign markets. Systematic intervention in currency markets to obtain an advantage in trade violates the rules of the International Monetary Fund, of which China is a member, although the IMF has little power to punish violators.

Chinese wind and solar power manufacturers further benefit from the government’s imposition of sharp reductions this summer in exports of raw materials, known as rare earths, that are crucial for solar panels and wind turbines. China mines almost all of the world’s rare earths. WTO rules ban most export restrictions.

Of course, China’s success in clean energy also stems from assets enjoyed by many of the nation’s industries: low labour 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. But the fuel propelling clean energy companies in China lies in advantages provided by the government.

Other countries also try to help their clean energy industries, but not to the extent that China does — and not, so far at least, to the point of potentially running afoul of WTO rules.

No doubt 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 $6,85,000 per megawatt of capacity, while western wind turbines cost $8,50,000 a megawatt.
The question is whether China is building this industry in ways that are unfair to overseas competitors and make other nations overly dependent on a Chinese industry whose approach to the business may not be economically or politically sustainable.

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 subsidising renewable energy if it means importing more goods from China instead of creating jobs at home.
The rapid rise of China’s solar and wind industries illuminates how the government helps many export industries, as well as the challenges for the west now that the country has emerged as the world’s second-largest economy, surpassing Japan and gradually gaining on the US.