China's Government Could Screw Up Its Big Alternative Energy Plans

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China is introducing all sorts of subsidies to get more alternative energy in place, while at the same time restricting foreign companies from entering the its market to take advantage of those subsidies.

In the short run that boosts the country’s burgeoning alternative energy industry. In the long run, it could hurt the industry.

Keith Johnson at Environmental Capital highlights this passage from a monster report on cleantech in China. While China’s government is responsible for creating a large alternative energy market, it could also be responsible for its limitations:

The benefits of China’s concentrated and state-dominated greentech markets are offset by poor incentives; lack of competition reduces efficiencies and innovation that come from open and competitive markets. The challenge for any nation, including China, is to know how and when to strike a balance between these two sides. China has utilized competitive pressures to achieve balance in its telecommunications and banking sectors in the past, and now has the opportunity to do the same in greentech.

Dominant market players, particularly state-controlled entities, have historically enjoyed relatively easy access to capital, which sometimes discouraged efficient economic practices. China’s ‘Big 4’ commercial banks (Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China) have occasionally been subject to policy-directed lending. Even though they appear to have become more disciplined in recent years, with non-performing loan ratios dropping from nearly 16% in 2004 to under 3% in 2008, policy-directed lending continues, and several market analysts suggest that these non-performing loans are currently on the rise.3

There are circumstances under which policy lending may not in itself be bad for the development of markets. For example, China’s directed lending strategy under its current economic stimulus plan is expected to be a considerable driver of local greentech markets. It is important however, for policy concerns not to override commercial risk considerations in order to channel funding to the most economically beneficial uses.

Since most greentech markets rely on relatively new and rapidly changing technologies, limiting competition can negatively impact the development of efficient and innovative solutions. For example, in China’s early push to promote wind power, regulators used policies to direct China’s existing conventional energy generating enterprises into the wind sector, yet excluded foreign wind farm developers from national concession projects and limited the extent to which foreign turbine manufacturers could supply national projects. While this approach may have enabled China to build up its infrastructure rapidly with a view towards optimising its operations in the future, it contributed to China’s early wind farms being less efficient and requiring higher ongoing maintenance costs than those in other countries.

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