Thursday, March 12, 2009

Ready-Fire-Aim: China's "New Energy" Vehicle Policy

The current version of me is a scholar, and as a scholar, I endeavor to conduct dispassionate analysis "without fear or favor". If anything, I may lean harder on the American government because they take money from me, and I have opinions as to how it should be used.

As a China specialist, I also have plenty of criticism for China, but that criticism is often tempered by fascination -- fascination for how things work so differently in China, yet often manage to achieve success (to varying degrees). However, while the headline of this post may be interpreted as a criticism, it is anything but.

What fascinates me about China's policy for encouraging development of "new energy" vehicles (新能源汽车) is the manner in which it has been formulated. When it was first announced in January, some observers (myself included) were critical of the lack of details contained in the policy. The government announced a general commitment of 10 billion RMB to support the development of "new energy" vehicles, but no details of how this 10 billion RMB would be spent.

This is only one example, but it is not at all atypical of the legislative process in China. The State Council hammers out general rules, either leaving the details to be worked out by relevant ministries or local governments, or working out the details themselves over a longer period of time. The interesting thing here is that the Central Government frequently commits itself to big plans, often without knowing how they will be implemented -- apparently knowing that, in time, they will have to figure it out.

Deng Xiaoping's notion of "crossing the river while feeling the stones" continues to guide China's leaders.

Contrast this with the legislative process in Washington, D.C. in which laws must contain the basic details of their implementation. Because of the necessity of providing a detailed roadmap for implementation, legislation takes much longer to pass; it is these details over which much of the haggling takes place. And while Presidents and presidential candidates may often make promises regarding fiscal restraint or transparency, recent legislation, including the stimulus bill and yesterday's appropriations bill, demonstrate very clearly that the President has very little influence over legislation. (I recognize that, historically, some Presidents have exercised more legislative influence than others.)

My point here is not to claim that China's system is superior to America's -- both have their pluses and minuses -- but to point out that, sometimes, it may make sense to start firing your gun before you've had time to take aim. This is a way for a government to commit itself to big plans without having to work out all of the details in advance. It is also a way for factional governments to tie their hands so that those who may object to a policy will have a difficult time reneging on their (possibly grudging) support at a later date.

Today, an official of China's Ministry of Industry and Information Technology (MIIT), in an interview with Caijing, mentioned a few details that are being considered for support of "new energy" vehicle development. They are discussing what, by any standard, are rather generous subsidies of anywhere from 10,000 to 50,000 RMB per car, depending on how much energy a given car model is able to save.

If you do the math, the 10 billion RMB currently set aside would fund subsidies for anywhere from 200,000 to 1,000,000 clean energy vehicles. The midpoint would be about 600,000 cars.

If automakers are wondering whether there will be a market for the "new energy" cars they are being "encouraged" by the Central Government to make, numbers like this should offer some encouragement.

The MIIT official also pointed out that this is part of a "long-term incentive policy". China's government, it would seem, is determined that China become a major player in the global market for alternative fuel vehicles.

Are other governments willing to go this far? Are they able to go this far? Should they go this far?