Monday, China’s $586 billion dollar stimulus plan appears to have positively reverberated around the world’s stock markets. China’s own indicies were up more than 7 percent, while major indexes in Asia were up 2 to 5 percent on Monday. Even Europe got in on the fun, with its major indexes up 1 to 2 percent. Is the world going Keynesian again, returning to 70s era deficit spending? Will a huge financial spending package in China be enough to mollify stock markets, ending their bear runs?

I am not normally one to attribute rhyme or reason to the movements of stock market indexes. In most cases, only a fool would say how a market is going to move on any given day. Yet today, with the news from China’s central government that it would encourage its domestic market to invest and consume more, it appears to have moved markets in a straight-forward correlation. Certainly, Chinese investors have come to expect the government to step in to prop up stock markets. Last week, it was a rumored $50 billion ‘buffer fund’ that prompted China investors to rally.

US investors are not so easy to impress. The Chinese spending package was not enough to dent the malaise over the US markets, which today were hit by the new of the bankruptcy filing of a major electronics retailer, Circuit City, and layoffs at the US subsidiary of DHL. Finally, the spectre of a slew of possibly negative economic data to be released later this week, including the trade balance, may be prompting caution.

But, back to China, the relatively huge gains in China and other Asian markets indicates, to me at least, that China’s economic news does have the power to help stimulate regional stock markets. But will the package, as China’s leaders claimed, actually help stabilize the world economy? Put another way, can China’s economy save the world’s?

To elaborate on that point, one must not imagine that China will quickly start spending its half trillion dollars to ramp up imports, thereby helping its trading partners. The main effects of this package will be to further push China’s economy toward domestically-fueled expansion via consumption and investment.  It is China’s biggest package ever, the equivalent a $2 trillion package for the US economy, but it will do little to help the world economy, other than encouraging a stable China.

China can afford the package without running a huge deficit, but is there any other cost? Inflation, possibly. One thing is clear, China is most definately now a Keynesian. I hope it can avoid the fate of Japan of the 90s, which tried, and is still trying, to spend its way out of the economic doldrums. Nobody wants to see another lost decade.

Categories: Consumption, Drivers of the Drivers, Investment, Primary Growth Drivers, Pro-business Policy
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Last week in a major environmentally-themed speech in Washington, Al Gore called for complete elimination of carbon-based energy generation in the US within ten years. It was a bold statement, equivalent to Kennedy’s Man on the Moon address, and then some: Achieving his goal will not only require the full participation of the US government, but also that of every consumer in the United States, a far more ambitious effort than the manned moon landing. It’s an inspiring speech that I highly recommend:

Predictably some feel this is a long-shot, if not an impossibility. Yet perhaps that is the point: By aiming for the stars, at least we may reach the moon.

And I’ll go one step further to say that, if the US is to have any chance of success, China’s participation will be needed as well, to provide many of the products needed - the solar water heaters, the wind turbines, the batteries to store power in electric cars, among other things.

A growing number of Chinese firms listed domestically and abroad are positioned to profit from China’s own environmental woes by taking them as the newest business opportunities. We make this point in Supertrends of Future China (scheduled for release in about three weeks, just before the Olympics), where we devoted a full chapter to what we call the Greening Supertrend.

In brief, Greening is the intersection of China’s national environmental policy with the domestic and global trends towards clean energy and pollution reduction. A new generation of entrepreneurs in China is embracing this modern Green Revolution. By taking advantage of the domestic market size and manufacturing power, they will put China at the forefront of environmental technologies, first domestically and then, if present trends continue and Gore’s vision becomes a reality, globally.

Red Star Greening Over China

The central government has put green development as a prime objective of the 11^th Five Year Plan for China’s economy. The target is further outlined in the Five Year Plan for Environmental Protection. Many critics rightly point out that national policy is often ignored at the local levels, but last year’s promotion of the State Environmental Protection Agency (SEPA) to full ministry status is a sign of how seriously the central government is taking the issue.

Recently, the government has made some regulatory steps which are actually putting China in the lead of global environmental policy: For example, the plastic bag ban I discussed last week was announced, implemented, and accepted by the national population in just six months.

Replacing those bags with environmentally-sound reusable bags is just one of the new opportunities that China’s entrepreneurs have already jumped into. On a much larger scale, China’s wind and solar energy industries are taking center-stage.

The World Wind Energy Association currently ranks China as number five in a list of global wind users. China has approximately six thousand megawatts of generating capacity, about a quarter of world-leader Germany’s capacity, and not even one percent of China’s massive energy needs. Shi Pengfei, the vice-president of the Chinese Wind Energy Association, said that the National Development and Reform Commission had increased China’s target of wind-energy generation to 100,000 megawatts by 2020, five times as much as Germany’s present capacity.

Xinjiang Goldwind Science and Technology Company (SZ 02202), China’s leading wind turbine producer, went public on the Shenzhen stock exchange in 2007. Although large scale wind farms face many obstacles in China, such as an electric grid that is oriented towards cheaper coal-powered energy generation, on the strength of its domestic market growth, some analysts (additional link) believe Goldwind and other Chinese companies can rise in the next three years to challenge the world’s biggest turbine manufacturers including GE.

By 2020 the central government has pledged meeting 15 percent of China’s energy needs through renewable energy sources, including wind, biofuels, water, and solar. By 2050, the ratio is to be 30 percent including nuclear power. This means huge investments are required, but China is already a world leader in the use of at least one clean energy technology: Solar.

Star light, star bright

In many of China’s second, third or fourth tier cities, rooftops are covered by solar water heaters. The cheap, ubiquitous devices use the sun’s rays to heat water so that even rural workers can afford to take a hot shower after a long day’s work. In China, 200 million people have their water heated in this way, according to the NDRC. China has more than 50 percent of both the world’s production and use of solar water heaters, and other forms of solar energy are starting to grow as well.

Suntech Power (NYSE:STP) is the world’s third largest solar cell producer after Q-Cells of Germany and Sharp of Japan. It had US$1.4 billion in revenues in 2007. Revenues are expected to increase quickly as solar cell-generated electricity starts to approach price parity with carbon-based energy sources such as coal and currently high-priced oil.

The government is also active in solar energy policy, mandating that China should increase its current 100 million square meters of solar water heaters to 150 million by 2010, and 300 million by 2020.

With China set to take its place as the world’s largest economy by mid-century, its power needs will also dominate and, if it is not careful, the pollution problem will reach unprecedented levels. Green technologies promise to be among the best industries to be in during this challenging period of growth.  While China’s domestic market alone is a considerable prize for any green company, globally the potential is astronomical.  Gore’s call to action may help considerable to raise a green star over China.

Related Information:

A number of other commentators have written on China’s Green potential as a business opportunity. Here are a couple of articles that I recommend:

China: A Clean-tech gold rush

China’s Coming Environmental Renaissance

China’s Green Leap Forward

China’s Silver Lining

A possible Olympic legacy: A greener China

Sphere: Click here to see related content on other China blogs and news sites

Categories: China Supertrends, Drivers of the Drivers, Greening, Pro-business Policy
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This week in Japan, the G8 leaders pledged to cut greenhouse gas emissions by 50 percent before 2050. In the same week, China announced it would immediately cut more free plastic bags. What is the main point of difference between these countries’ environmental policies? It could be summarized thus: More talk versus real action.

The G8’s move to cut greenhouse gases (primarily CO2) by 50% was immediately decried by some environmentalists and tagged as insufficient by the group of developing countries, including China, on the sidelines of the summit.

For example, the pledge didn’t even make clear whether the cut was to be from 1990 levels (as is the general practice of the UN and the Kyoto Protocol when measuring emissions reductions) or present levels, which would significantly decrease the impact of the pledge. The US in particular has increased carbon emissions in the subsequent 18 years by 20%. From a BBC report:

…the US has refused to set any interim targets for cutting emissions - and environmentalists have criticised the progress at talks as “pathetic”.

Five of the world’s biggest emerging economies said the G8 should increase its targets to more than 80% by 2050.

China, India, Mexico, Brazil and South Africa - who will join talks on Wednesday - also urged developed countries to commit to an interim target of a 25-40% cut below 1990 levels by 2020.

Meanwhile, in China, the Ministry of Commerce on July 11 announced changes to the plastic bag ban policy. Effective immediately, restaurants, bookstores, and clothing stores will also be required to eliminate free plastic bags, charging customers for each one issued. In fact, this was a clarification of the already-implemented plastic bag ban law, which came into effect on June 1 this year.

Is Red China Becoming Green?

One law eliminating free plastic bags does not a green country make, but I believe that China’s environmental policy is frequently unfairly derided by critics as unenforced. In fact, such a broad generalization is inaccurate: Here in Shanghai, it’s true that not every store has implemented the policy at present, and it seems many of the aforementioned clothing, restaurant and bookstores presumed the law was meant to apply to groceries only, but this loophole has now been closed. In hypermarts, supermarkets, and convenience stores, it is already impossible to get free plastic bags, so I expect the new revision will take effect quickly in restaurants and other venues.

In our new book Supertrends of Future China, we cover the plastic bag ban law as an example of China’s new environmental movement and the central government’s willingness to put its words into action. The G8 really should pay more attention instead of just making more hollow promises.

Related information:

For more details on the plastic-bag ban update, the resourceful China Environmetal Law blog has a post on the matter, describing the hitherto unknown-to-me existence of ‘produce department hooligans.’

Categories: China Supertrends, Drivers of the Drivers, Greening, Pro-business Policy
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Two months ago I discussed in this post the effects of regulation on the stock markets in China. My theory: After the precedent China’s regulators set in April by offering two investor-friendly policies timed to pump up the markets, China’s investors would now get in the habit of looking to the government for a bailout whenever the markets were in trouble.

At the time, I predicted that the existing market fundamentals affecting China (high inflation, decreasing exports, high oil price etc) would eventually re-register with investors, and we might see another dead cat bounce. Well, the cat is back:

The above chart shows China’s CSI 300 Index, the measure of both the Shanghai and Shenzhen stock exchanges.

Two periods to take note of: First, April 20 to 24, when the two regulatory actions were announced, a clear jump in the markets was evident. Overjoyed would be an apt description of investors when their stamp duty was reduced.

Second, May 12 to 19, the week following the Sichuan earthquake, there was market confusion until May 20. Thereafter indexes began their slide over uncertain earnings growth and worries about the 8.5 percent April inflation figure, announced just before the earthquake, started to sink in.

So, what now?

The China Securities Regulatory Commission faces a dilemma: Does it toss the market a bone, perhaps by offering investors margin trading as some are predicting? Or will it finally let modern investors learn a hard lesson in stock market bubbles? As of June 11, the markets are setting new 2008 lows and volumes are dramatically down as investors start waiting for the bailout.

While I am in favor of China’s use of industrial policy to grow the economy, my admiration doesn’t extend to such shallow tactics as propping up the stock markets. Margin trading, suddenly thurst upon the investing public at such an uncertain ecomomic time, would be an unmitigated disaster in my opinion. China’s development needs to be sustainable, so supporting the pusuit of easy money is not one of the solutions China’s leaders should be considering.

Categories: Affluencing, China Supertrends, Drivers of the Drivers, Pro-business Policy
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A number of excellent blog postings, for example over at China Herald, have covered the nuts and bolts of China’s telecom restructuring announced in late May, but few have mentioned the ramifications the announcement is having on critics of China’s industrial policy. Such critics, it is fair to say, run the gamut from free-market Friedmanites to political appointees of the Bush administration, who inevitably say China’s telecom market is closed to outsiders and anti-competitive. After this restructuring, it turns out they are still half right.

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With the recent news of a reshuffling of China’s six major telecommunications providers, critics of China’s telecom industry have two less targets to shoot at, namely the de facto monopoly of China Mobile and the slow-pace of telecom industry reform in the post-WTO era. But these critics, including the offices of US and EU Trade Representatives, were firing blanks in the first place: China Mobile was never a true monopoly, and industry reform does happen, it just happens at China’s pace, not at the pace trade negotiators desire, as this implementation of pro-business government policy clearly shows.

On May 24 guidance on the telecommunications sector’s planned restructuring was finally made clear in a joint announcement by China’s Ministry of Industries and Information (MII), the National Development and Reform Commission (NDRC) and the Ministry of Finance: Where there were six operators before, now there will be three - China Mobile, China Telecom, and China Unicom - that will each have an existing fixed-line and a mobile phone business as a result of mergers and divestitures.

Furthermore, at the end of the process, new 3G licenses will be issued for each, on different technology platforms: China Mobile will get the home-grown and untested TD-SCDMA standard, China Telecom will get the stalwart CDMA 2000 system, and China Unicom will get a license for WCDMA technology, which has long been popular in Japan. The market will now decide which is best for China. Critics, however, have been fast to say that China Mobile’s long-dominant position stacks the deck and so it will likely emerge the winner anyway. This is not a foregone conclusion for two reasons.

A short history lesson can help to put this into perspective: Before restructuring, the dominance of a certain telecom provider was undisputed. It had the most subscribers and the largest cross-country network of telecommunications infrastructure, and its revenue and profits exceeded those of all of its smaller competitors combined. At its peak, it had more than one million employees. After deregulation the giant telecom provider would be forced to open its network to smaller competitors and have its competitive powers capped by the regulator, which would mandate rates for it and watch it much more closely than its younger, more nimble, adversaries. Does this sound like China Mobile? No, this was American Telephone & Telegraph, at the end of 1981.

AT&T, once the biggest telephone company in the world, was reduced to a mere shell of its former self following deregulation and the forced divestiture of seven regional operating companies in early 1982. After a few bad strategy decisions, parent AT&T ended up being bought by one of its own spin-off children twelve years later.

So, the first reason the critics are wrong: History shows that the preeminence of an incumbent is by no means assured. The second reason: Asymmetric regulation, whereby China’s regulators intend China Mobile to overcome greater obstacles than the other two, is going to be a burden for China Mobile. For example, it is being saddled with the smallest of the fixed-line operators, China Tietong, and receiving the TD-SCDMA 3G platform license, which is unproven in both its technology and market appeal. This means that China Mobile’s ability to maintain its monopoly is uncertain.

As to the slow pace of change that critics have leveled at China’s telecom deregulation process, it bears reminding that AT&T, the US’s dominant telecommunications provider for more than a century, with its dying breath, clung to its monopoly for more than eight years against a US Department of Justice antitrust suit lodged in 1974. Regional carriers in Canada have been known to drag proposed rate cuts through years of debate and court action to avoid changing their business practices, meaning Canada only started deregulation of its telecommunications industry in April 2007. In that light, the speed of China’s telecom restructuring has not been slow.

In fact, China’s telecom regulators have shown remarkable brevity when it comes to implementing a given proposed change. For example, China significantly reduced rates for all mobile phone users in the last two years, most recently by cutting roaming charges in March by up to 80 percent. China’s telecom industry has some way to go before it will be totally transparent and fully-competitive, but it is far from the unchanging, anti-competitive sector that US and EU trade representatives paint it to be.

One thing the critics get right: It is true that China continues to groom its national champions, much as the economies of Japan, Korea and, to a lesser extent, Malaysia and other Asian economies did in their high-growth periods up to 1997.

Yet while economists regularly point out the folly of governments picking winners versus a Darwinian policy of survival-of-the-fittest free-market selection, so far China has bucked the trend: It now has three formidable national competitors that will all undoubtedly become global companies fighting over the title, “The biggest telephone company in the world.”

Categories: Pro-business Policy
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