Why New China-U.S. Talks Hinge On Energy

Ethical Markets Reforming Global Finance

By Sam Hopkins | Thursday, December 4th, 2008
On December 3, Vice Premier Wang Qishan and U.S. Treasury Secretary Henry Paulson continued multi-year negotiations centering on energy security and renewable energy progress.

As part of their ongoing Strategic Economic Dialogue (SED), each country is looking to the other for answers to pressing questions. Product safety and currency valuation have come up, but most prominent is the role energy plays in binational relations and financial health.

Power production is down in China due to lower coal and steel demand, as well as declining export totals. The drop in factory energy use may give some slack to energy supplies, but it’s the wrong kind of relief. China is also set to implement a retail fuel tax at the beginning of the year as part of a broader oil price overhaul, and national oil company CNPC’s latest acquisition came in an area America knows well…

In November, CNPC became the first foreign oil company to ink a deal in Iraq since 2003, with a 23-year long service agreement for the Adhab oil field.

Don’t let the downturn lull you into energy complacency. China’s continuing international oil deals show how seriously Beijing is taking the energy demand of coming decades. They’re also serious about cleaning up their act and increasing the clean energy portion of the Chinese economy.

Reforming China’s Economic Growth with Energy First
“China is under growing tension from its large population, limited resources and environment problems, and needs faster reform of its economic growth pattern to achieve sustainable development,” Hu said succinctly to top Party brass last week.

At the same time as Hu calculates steps to ensure the economy’s health, the country is getting ready to commemorate former leader Deng Xiaoping’s January 1979 economic reforms. Deng opened China to international trade and investment, setting it on the path to greater prosperity and participation in the global community.

Deng’s oft-quoted aphorism, “To get rich is glorious,” also challenged Maoist dogma, shaking up the ideological foundation of Chinese Communism.

Dial the clock forward from 1979 to today.

While the general trend has been toward economic openness, information is still censored and “ideological security” is as prominent as national security or energy security in many political circles.

Having swarmed the metropolises in search of jobs as factory workers, construction laborers, and domestic helpers, the credit crunch and stock market tail-spin hit migrants hard in recent months…

A torrent of some 20 million migrant workers are returning to villages from major eastern cities like Shanghai and western boomtowns such as Xining.

Keep in mind that those rural denizens made heavy use of internet cafes and cell phones to communicate with friends and families back home, and they will certainly take advantage of new media to express their frustration.

That’s a simmering pot that President Hu and others are watching carefully.

What a Difference a Few Years Make
The first time I traveled to China in 2005, the country’s best days of the new millennium were actually right on the horizon. China had yet to run through a stock market boom-bust cycle or host the Olympic games. But that year, there were 87,000 riots (labeled “mass incidents”) in the Middle Kingdom.

Now that 2009 GDP growth is expected to hit only 9% instead of double-digit rates China enjoyed in recent years, uncertainty is the prevailing emotion across the country, and Hu hears an alarm.

China has tried to draw reasonable parallels to the West’s Industrial Revolution. It’s true that London and New York choked with soot a hundred years ago. Factory fires and tenement squalor led to political violence, eventually settling into the labor movement and strong regulations to encourage responsible growth.

In the Kyoto age, though, China’s double-digit GDP growth became more of an excuse for the United States than it was for China. George W. Bush and his pals—still busy right now, gutting environmental regulations before Obama takes office—opposed emissions restrictions on the grounds that China and India weren’t held to the same standards.

This, in turn, might have doomed China to repeat our mistakes from the turn of the last century. Instead, Chinese leaders looked at their polluted rivers and streams (China has 17 out of the 20 most polluted waterways in the world), took a deep and noxious breath, and took their own steps to mitigate environmental damage.

China has pledged to have at least 15% of the country’s energy capacity come from renewable sources by 2020, doubling green output and adopting a Green GDP that factors environmental costs into national economic growth.

Progress towards those goals has given us a slew of U.S.-listed renewable energy companies. They were brought public with financing fed by highly capitalized investment banks that were eager to tap China’s energy hunger… even if the payback periods on these companies’ technologies were so long that similar U.S. firms would get laughed at.

I’m talking about companies like Solartech International Holding (Pink: STKQF) and Solar Nigh Industies (PINK: SLND) that debuted to much fanfare but quickly fizzled to the Pink Sheets or became defunct.

Now, one major topic of discussion between Paulson and his Chinese counterpart is China’s intent to devalue its currency. That runs in the opposite direction of what U.S. trade representatives have wanted in recent years. They think China’s exports are too cheap already, and they want the yuan currency to float freely.

But with the export economy cooling, China wants to keep the yuan down against the dollar…
That means oil will be more expensive in yuan terms, and it also means that Chinese-produced renewable energy products may be cheaper than ever to move around the world.

The result is huge volume for Chinese-based solar, wind, and other renewable energy companies.