A bright idea for China: jump-start the economy with solar power push

Beijing is right not to step in to rescue the ailing property sector, which would only reinflate the real estate bubble
If it must use stimulus, it should dedicate around 3 per cent of GDP a year to boosting solar energy, which could make the country energy and food independent

Andy Xie

Published: 4:30pm, 10 Jan 2024

Why you can trust SCMP

This is likely to be another tough year for China’s economy. The path forward is to focus on productive and competitive economic activities. If stimulus is pursued, it should go into renewable energy like solar, given that technologies are coming together to make near-zero electricity costs possible. Solar singularity – the point at which solar power becomes so cheap it is the default choice for new power generation – seems within reach.

Currently, a deflating property sector continues to weigh on the economy. The stock of property under construction experienced a second year of contraction. However, the adjustment needs to be over 50 per cent from the peak of over 9 billion square metres. It is a relatively slow process that may take a decade to complete. This gives the affected parties time to clamour for policy change, such as quantitative easing, to revive their fortunes.

Since the property bubble began around 2006, the government has repeatedly come to the rescue of the real estate market. But it stood firm last year and is likely to do so again. Faced with the US’ aggressive containment actions, Beijing’s priority is to cap downside risk, not risk everything on reviving the party or starting another.

This year could turn out to be tougher than last year. The boost in domestic tourism greatly helped the economy in 2023. The same won’t happen again. Auto exports are also likely to slow. The unwinding of the electronics inventory could be ending, a positive for exports. In all, though, there are more negative than positive factors that will influence China’s growth in 2024.

There will be huge pressure for more stimulus. Good stimulus can be positive in both the short and long term. In 1998, Premier Zhu Rongji kick-started a national highways programme which boosted the construction and commodity industries. The resulting network integrated the nation’s goods and labour market, realising the potential for scaling up, given China’s size.

Construction workers at the Gaolan Harbor Interchange, the second phase of the Hezhou-Gaolan Port Highway in Guangdong province, on May 5, 2022. On completion, the 35km highway will be an important channel linking the west bank of the Pearl River estuary with the Guangdong-Hong Kong-Macau Greater Bay Area. Photo: Xinhua

Size doesn’t matter, though, if there are many disjointed bits. The national highway system has been key to China’s growth over the past two decades and remains its most important infrastructure. If China is going to implement another major stimulus programme, it has to focus on its productivity potential after the short-term demand boost.

The next productivity revolution will be in energy and China is in a perfect position to be the first to capitalise. In four years, solar cell prices have dropped by over 80 per cent to below 7 US cents per watt.

The key technology in solar power – the solar panel – is becoming almost irrelevant to the total cost. The price of solar cells has come down so much because production happens at a massive scale.

Innovation at scale is very powerful in pushing productivity. Other components of solar investment haven’t experienced the same price decline. Distributed and project-based solar investment in low-tech components doesn’t offer economies of scale.

Even at 70 US cents per watt – the overall development cost of solar power last year – China has a good case for scaling up solar power. It could deliver electricity to the power-hungry east from the sunny west at an even lower cost, not including the price of local distribution. Solar power is competitive against coal.

Nevertheless, solar accounted for only 4.7 per cent of the 8,388 trillion terawatt hours electricity output in 2022. And electricity from the grid only accounts for 27 per cent of China’s energy consumption. Despite its rapid growth in the past two decades, solar power remains insignificant in China’s overall energy picture. That shouldn’t be the case.

01:52

China starts first ultra-high power transmission project in the Gobi Desert

China could dedicate around 3 per cent of GDP per annum to a solar push to reach net zero. It could all be done by 2040, 20 years ahead of the government’s target. Spending on such a project would stimulate the economy and plant the seeds of productivity for the future. As scale rises, the cost will come down.

For example, if China were to complete a project to cover much of Taklamakan Desert, the scale efficiency would apply to every component in the solar investment. Autonomous systems could be developed for equipment production, installation and maintenance. Solar singularity could be reached.

Plentiful and near-zero-cost electricity would open up new possibilities. First, the coverage provided by solar panels and the water used to clean them could help the desert turn green and become grazing land.

Second, pumping water from the southern side of the Tibetan Plateau to the arid north would become economical, which could irrigate millions of hectares of land there. The solar push could make China energy- and food-independent.

China engineers complete largest solar farm on Earth in UAE ahead of Cop28

Such a massive project is likely to lead to new expertise and technology, similar to the case of high-speed rail development. In a decade, China could export this system to others in the Global South, bringing cheap energy to billions of people and alleviating global hunger. The resulting prosperous nations could trade with China on a new scale, to the benefit of both.

Money must be spent on the future, not the past. Quantitative easing could revive the moribund property or shadow banking sector for a short time, but would merely delay the inevitable and worsen the aftermath.

The deflating bubble is good news for China. As the US keeps its bubble economy going, China has time to digest the cost of its own bubble deflating. Hopefully, when the US bubble pops, China’s economy will be healthy enough to withstand the shock.

Andy Xie is an independent economist