The Meaning of Xi Jinping’s “New Energy Warning”

Chinese President Xi Jinping has warned against overinvestment in the new energy sector. At an official meeting with business leaders, he pointed out that “we must not focus only on the new three major export items (electric vehicles, lithium-ion batteries, and solar power).” This is drawing attention as an appropriate response suited to China’s current circumstances.

With the United States and the EU raising concerns about China’s overproduction problem, the reality is that China needs an effective response to international pressure. Given the possibility that China’s trade environment could worsen, a short-term boom could instead become a risk to the Chinese economy. Of course, it may end up being nothing more than a diplomatic remark intended to deflect concerns in the Western world.

Considering that China has a state-led economic system, President Xi’s remarks could also serve as an opportunity to preempt risks the Chinese economy may face. A state-control model can be effective when the direction is correct, because it allows for rapid responses. In fact, by its very nature, the new energy sector carries very high investment risk and market volatility.

On the other hand, when a state-led approach goes in the wrong direction, it can produce major tragedy. Over the past 10 years, as policy has reverted to a government-led business model, private firms have shrunk and the rigidity of the economic structure has increased. This amounted to dismantling the private-sector system that had made China’s spectacular past growth possible.

In general, government control and support policies rarely produce good results. China’s rapid growth was possible because it allowed a private-sector economy and adopted an open policy that revitalized trade. If it returns to an economy controlled and led by the government, the Chinese economy will inevitably contract further.

New energy is a trap that even advanced countries fall into. South Korea as well, lured by the illusion of “new energy” and “renewable energy,” has seen government ministries waste budget resources, while the power industry has been undermined and Korea Electric Power Corporation has been saddled with enormous debt.

Statism and environmentalism have a mutually reinforcing structure. Because the state takes the lead, policies can be pushed through even when they are unrealistic. Based on social awareness about the environment, governments can use their power to impose them on the public. In fact, the new energy and renewable energy sectors have industrialized more vigorously in countries where state control and support are more easily implemented.

For China, which seeks future global dominance, increasing investment in new energy may seem natural given its government-led economic system. But it is unlikely to achieve large results. Only a system shaped by private choices in the market can guarantee efficiency over the long term.

It is arrogance to think that the market will move exactly as the government decides. What the government should do is create an environment in which the market can expand. Deciding on businesses in place of the market and supporting them only causes further confusion and creates nothing more than a short-term boom.

Governments and political leaders cannot always make the right decisions. In reality, the likelihood that they will is very low. We must remember that only by breaking free from the illusion that government directives and control are a cure-all can the right policy direction for new energy become possible.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

---

Original title: 시진핑 '신에너지 경고'의 의미

Author: Sung-no Choi

Date: 2024-05-31

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=2&idx=26697