ChinaWatch: Sunny Economics

Welcome to ChinaWatch, WMB’s digest of news from the country with the world’s second largest economy. Whether we like it or not, China has a major impact on our financial health, so we keep tabs on what the big news is from our rival.


Driving Domestic Path

China's leadership is promising to steer the economy in a new direction in its blueprint for the next five years that would empower consumers and narrow a yawning wealth gap but require politically contentious reforms.

The latest Five-Year Plan calls for creating self-sustaining growth based on domestic consumption and reducing China's reliance on exports and investment.

That will require a cut in subsidies to state industries and curbs on local development plans that could provoke a backlash among some in the ruling Communist Party.

The leadership has said for years that China needs to alter a system Premier Wen Jiabao has declared “unbalanced, uncoordinated and unsustainable.’’

But they avoided major reforms until the global crisis wiped out millions of export-dependent factory jobs and drove home the danger of over reliance on trade.

“The road map is clear, but the extent to which the political will and power is sufficient remains to be seen,’’ says Alistair Thornton, China analyst for IHS Global Insight, in an interview with the Associated Press.

If carried out, the plan could drive a far-reaching transformation of the world's second-largest economy from low-cost factory into a major consumer market.

It would shift money from companies to households, which could narrow the gulf between a rich elite and fledgling middle class who have profited from economic reform and China's poor majority.

More consumer demand could help to boost imports, narrowing China's trade surplus with the United States and other major economies.

Soaring Solar Power

China, the world’s biggest electricity consumer, is trying to figure out how to capture a larger share of the solar-energy market without losing money, according to Bloomberg News.

The government will spend at least a year studying Europe’s system of paying above-market prices for solar power before deciding if there’s a better way to spur clean-energy plants across China, says Wu Dacheng, an adviser to national power regulators.

The delay has stalled projects planned on Chinese soil by developers such as U.S.-based First Solar Inc.

“We need to learn from European countries like Germany” that pay subsidized rates to spark solar-panel installations, says Wu, vice chairman of the Solar Photovoltaic Committee of China’s Renewable Energy Society.

Europe, which attracted more than $65 billion in solar plant investment in 2010, is providing lessons for China.

Germany, the largest panel market, together with Spain and France carried out four unscheduled subsidy cuts in 2010, trying to slow a torrent of projects by developers and speculators.

China’s wait-and-see strategy on projects is part of a broader industrial plan to take a leading global role in harnessing energy from the sun.

China is first focusing state support on its own equipment manufacturers. That helps them gain market share and cut prices, lowering the eventual cost of a nationwide solar construction program China plans for itself.

“China is definitely playing a longer game in solar,” says Daniel Guttmann, head of renewable energy strategy at the consulting firm PricewaterhouseCoopers in London. “It has done a lot to subsidize its manufacturers.”

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