Developing Domestic Demand

An interesting analysis from Andy Xie today, focusing on one of the ways China can begin to re-establish new sources of economic growth. In this case, solar power.

I don't know if Andy's positivity on solar power is supported by current technology, but given the long-term benefits, this is an excellent idea. However, there are some important considerations.

First off is the acknowledgement of labor conditions in solar panel plants. Forced labor in implicated in these industries in China. It is no accident that the plants are located in Xinjiang. The near-enslavement of the Uighur people in Xinjiang is a stain on Xi Jinping's legacy and a constant issue in international tensions.

China suffers under numerous trade sanctions because of its insistence on continuing this reprehensible practice. Ultimately I hope the price in terms of sanctions will continue to rise until the government finally ends its campaign against these minorities, which has gone on in earnest now for a decade.

However that is another post, for now we can say that the labor force to drive this growth that Andy envisions is not stable nor scalable, at least not at present labor costs.

Labor conditions in these solar panel factories is also a huge concern. If workers are going to spend the next decade modernizing China, it'd be nice if they got, say, pensions, and healthcare.

There's some good analysis on this issue in this article from SCMP. Supporting migrant labor is definitely a good way to boost domestic demand, and supporting migrant labor means labor law reform.

So Andy doesn't really explain how that is going to work, but that's a much bigger issue in Chinese society today. The labor law is precisely where we should start in modernizing China, but that won't happen soon, if at all.

Another related issue is connecting up the nationwide grid, so that inefficiencies can be reduced. This piece by the China Project goes through some of the difficulties, and, interestingly, echos Andy by advocating for industrial-sized plants in the northwest region.

I'm struck by the decision, criticized by the China Project, of building solar in less efficient areas of the country. After the revolution, the government focused on localized resources, if for no other reason than a national highway grid didn't exist. Prioritizing localized energy resources has sense to it, and if they are redundant in a vast grid can have real value. Energy produced elsewhere always will contain a cost of movement and a doubt about transmission. Bloomberg also has a good run-down of the system. In many cases, it could well be a case of the government mandating to local government or industry to get those panels up there, and so they do so in the cheapest way, meaning they'll have poor efficiency. That's often how government mandates work, the result will be bare minimum.

We will also have a mix of local interests, and the bare minimum analysis of efficiency. Unlike the US, which subsidizes private entities as they try to maximize the gains of their monetary investment, in China it will be a system where builders have to get something up on the roofs of the buildings. Not based on efficiency but based on roof space. No output requirement, only a physically-present requirement. They might get free units, or discounts, but they also might not. That is a very inefficient and wasteful method.

Because the essence of this is that electricity needs to be cheap if China is going to move forward, and if these government investments are to have value. In order to drive out coal, to support the EV industry, and to reduce household costs, electricity needs to be inexpensive. People will switch to electricity for most things if it is the cheapest option, and I can say only if it is the cheapest option.

Less efficient solar generation is potentially a problem if it leads to higher prices. In an environment with ample production, then these less efficient installations can still very valuable. But the scheme only works, as Andy emphasizes, if China goes big on solar.