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A Model to Avoid

The dark side of Chinese state capitalism.

Oct 24, 2011, Vol. 17, No. 06 • By YING MA
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On July 23, a high-speed rail accident in southeast China killed 40 and injured about 190 passengers. Officials blamed signal failure, but outraged citizens and journalists (including many from the state media) have demanded investigations. While China has built the world’s largest network of high-speed railway in under seven years, this undertaking has been plagued by corruption and shoddy construction. In February, Liu Zhijun, China’s minister of railways and architect of the country’s $300 billion high-speed rail network, was fired and arrested, accused of taking $152 million in bribes—not to mention keeping 18 mistresses. In April, China’s railways ministry announced that trains traveling at the top speed of 350 kilometers per hour, the fastest in the world, would be slowed to 300 km/h in July. The faster speed garnered prestige for China but created serious safety concerns and should never have been instituted in the first place. Since the July accident, the ministry has expanded speed reduction and suspended the construction of new rail projects.

Though President Obama has endlessly repeated the desirability of crisscrossing America with high-speed rail, China reminds us that when state planning goes awry and government spending goes unchecked, citizens pay—sometimes with their lives.

But inconvenient truths don’t deter the Obama administration from pointing to China’s state-centric approach to defend its own grand, left-wing plans. Aside from infrastructure projects, nothing makes liberal knees wobble more than visions of an America covered in green technology funded by taxpayers. Liberals love to remind us that China has already made an aggressive, government-funded push into this area and threatens to leave the United States behind.

Not surprisingly, the Obama administration has served up this justification for its disastrous $528 million loan to now-bankrupt solar panel maker Solyndra. At a congressional hearing in September, Jonathan Silver, executive director of the Energy Department’s Loan Programs Office until last week, defended the administration’s Solyndra decision. He said, “[In 2010, China] alone provided more than $30 billion in credit to the country’s largest solar manufacturers through the government-controlled China Development Bank. That’s roughly 20 times larger than America’s investment in the same time period.”

On, Barry Cinnamon, CEO of Westinghouse Solar, offered a different view: Solyndra’s spectacular failure resulted largely from its bet on the wrong technology, not from Chinese competition or a lack of U.S. government support. According to Cinnamon, while Chinese solar panels are 10 to 20 percent less expensive than U.S.-made panels, Solyndra’s panels, by some estimates, were 100 percent more. Joel Cannon, CEO of tenKsolar, Inc., another solar company, concurred and wrote in a letter to the Wall Street Journal: “Most in the [solar] industry will argue that the smart money .  .  . was never interested in Solyndra.”

Having funded Solyndra with quite a bit of dumb money, the Obama administration remains undeterred and continues to cite China’s government-backed green tech dominance as a reason for the United States to pick winners and losers in the renewable energy industry. Once again, China itself offers the evidence for why its record of state investment is not worth imitating. According to a report issued in April by the Unirule Institute of Economics, an independent think tank in Beijing, the average return on equity of state-owned industrial enterprises in China was much lower than that of their nonstate counterparts between 2001 and 2009. When preferential government subsidies (such as free land and cheap loans) for the state firms are factored in, the real return on equity registers at an embarrassing -1.47 percent.

Moreover, 70 percent of all net profits made by Chinese centrally owned enterprises in 2009 came from a mere 10 companies that had been afforded heavy market advantages by the state. The unflattering flipside, writes the Hoover Institution’s Zhang Jialin, is that a vast majority of the remaining state-owned companies are poorly managed or suffer from overcapacity.

In other words, a future that follows in the footsteps of Chinese central planning may not be as dreamy as Obama imagines.

Furthermore, it is unclear that China’s grand projects even produce lasting benefits. In the environmental area, the world oohed and aahed at the speed with which Beijing acted to improve the city’s notoriously poor air in preparation for the 2008 Olympics. Yet even authoritarian zeal has its limits.

China’s rulers implemented a series of drastic measures, including plant closures and relocations, furnace replacement, new emission standards, and stringent traffic control, and spent over $10 billion to clean up Beijing’s air. 

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