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.”

ChinaWatch

ChinaWatch: 'Rotten' Apple Worries

Welcome to ChinaWatch, WMB’s digest of news from the country with the world’s second largest economy. Click the links for more info.

No Rotten Apple?

Apple restated its pledge to provide safe working conditions for workers assembling of its products after environmental groups in China released a report criticizing the tech company for failing to be transparent about its suppliers.

“Apple is committed to ensuring the highest standards of social responsibility throughout our supply base,’’ says Apple spokeswoman Carolyn Wu in a statement.

The company requires all suppliers to sign Apple's code of conduct before the contracts are made. Compliance is then monitored through factory audits and measures to correct violations.

However, Apple would not directly comment on the report, which had the backing of 36 environmental groups from China.

Titled “The Other Side of Apple,” the report faulted the tech giant for failing to respond to inquiries related to the working and environmental conditions at its suppliers, while also refusing to disclose who the company's suppliers are.

The 26-page document pointed to suppliers reportedly connected to Apple that had violated environmental regulations or poisoned workers because of working conditions.

“Apple is so famous for their products. They are fashionable and user-friendly. But the company also should take care of the ones are who making these products,’’ says Wang Jing Jing, vice director of the Institute of Environmental and Public Affairs, one the groups behind the report.

Apple says it is actively working to improve working conditions at its suppliers' facilities, and has even made progress reports available online.

Closer Ties Urged

Heavy equipment maker Caterpillar, whose stock is a key piece in many American retirement funds, is urging a stronger trade relationship between the United States and China on the heels of the Chinese president's visit to the States.

The Peoria, Ill., company, the world's largest maker of construction and mining equipment, says it’s inked a memorandum of understanding as part of the U.S.-China Trade and Economic Forum that it hopes will support greater American exports from Caterpillar in the future.

China is already one of the largest export markets for Caterpillar products, with more than $2 billion in products delivered there in the last five years. Caterpillar has more than 7,700 employees across China.

“We realize there are important and substantive issues that exist between the United States and China, from currency valuations to the protection of intellectual property, and that these need to be resolved with a sense of urgency,’’ says Rich Lavin, Caterpillar group president with responsibility for growth markets, including China.

“But we also know the way we resolve disagreements is important,’’ Lavin says. “Caterpillar will continue to urge policymakers in both the United States and China to resolve differences in an atmosphere of mutual respect — not by threatening a trade war. We continue to believe that quiet diplomacy and multilateral forums offer a preferred path for resolving differences.’’

Caterpillar's statement comes after Chinese President Hu Jintao's high-profile state visit to the United States. The visit resulted in job-creating business deals worth billions of dollars to U.S. companies.

The business deals were among the highlights of a trip seen as key to building trust between the world's top two powers. The two sides played down differences and stressed areas of cooperation, though Hu faced a critical audience when he met with American lawmakers.