Green stocks will get hit if oil falls on China slowdown

In addition to a rapidly down-turning construction sector and tightening credit at the Big 4 banks, the World Bank also believes China requires institutional reform, particularly more oversight of huge state-owned corporations.

Even though green energy stocks are alternatives to oil, short term price swings are often influenced by swings in oil pricing, which is likely headed down in coming months, based on the Chinese slowdown.

SUMMARY: Perhaps lighten up on green energy stocks and funds until a correction takes the oil price and the clean power sector down, and when everyone is panicking, that will be the time to go back in and bulk up.


China faces an economic crisis without reforms

by Bob Davis in Beijing, WSJ

CHINA could face an economic crisis unless it implements deep reforms, according to a report by the World Bank and a Chinese government think tank, which urges Beijing to scale back its vast state-owned enterprises and make them operate more like commercial firms.

The recommendation is contained in ‘China 2030’, a report set to be released Monday, according to a half-dozen individuals involved in preparing and reviewing it.

The report, which addresses some of China's most politically sensitive economic issues, is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. It challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's second-largest economy has steadily expanded.

China 2030 cautions that China's growth is in danger of decelerating rapidly and without much warning, as has occurred with many high-flying developing countries once they reach a certain income level, a phenomenon that development economists call the "middle-income trap". A sharp slowdown could deepen problems in the banking sector and elsewhere, the report warns, and could prompt a crisis, according to those involved with the project.

It recommends that state-owned firms should be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship.

"China's state-owned sector is at a crossroads," said Fred Hu, chief executive of Primavera Capital Group, a Beijing investment firm. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship".

Even ahead of its release, the report has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions.

China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will help to shape discussions among Mr Xi and his allies about whether to make changes to a state-led economic model that has alarmed Chinese private entrepreneurs and is becoming a source of growing tension between China and its main trading partners, including the US.

The report's authors argue that having the imprimatur of the World Bank and the Development Research Center, or DRC – which reports to China's top executive body, the State Council – will add political heft to the proposals. The World Bank is widely admired in Chinese government circles, particularly for its advice in helping China design early market reforms.

"The report lays out recommendations for a development growth path for the medium term, helping China make the transition to become a high-income society," said World Bank President Robert Zoellick in a statement announcing the report would be released.

Neither the World Bank nor DRC would comment specifically on the China 2030 findings.

Chinese Vice Premier Li Keqiang, who is expected to be named premier next year, endorsed the Chinese-World Bank project when Mr Zoellick proposed it during a trip to Beijing in September 2010. Its authors are also counting on the Number 2 official at the DRC, Liu He, who is also a senior adviser to the all-powerful Politburo Standing Committee, to help ensure that its findings are considered seriously by top leaders. Mr Liu declined to comment.

Among the most contentious areas in the report: how to manage state-owned enterprises, which dominate the nation's energy, natural resources, telecommunications and infrastructure industries and have easy access to low-interest loans from state-owned banks.

US Treasury Secretary Timothy Geithner and other Western officials argue that subsidies to those firms distort international competition. Domestically, critics complain that the firms choke off internal competition, use monopoly profits to expand into other businesses and pay only meager dividends.

The World Bank and DRC argue that asset-management firms should oversee the state-owned companies, say those involved in the report. The asset managers would try to ensure that the firms are run along commercial lines, not for political purposes. They would sell off businesses that are judged extraneous, making it easier for privately owned firms to compete in areas that are spun off.

"China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barrier to private firms," said Mr Zoellick in a talk to economists in Chicago last month.

Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate.

The report also recommends a sharp increase in the dividends that state companies pay, which would boost budget revenue and pay for new social programs, said those involved with the report.

Chinese and US economists say that dividend money from profitable state-owned firms now are often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.

"It's an innovative proposal," said Yiping Huang, a Barclays Capital economist.

But others argue that the proposals don't go far enough. Neither the World Bank nor the DRC proposed privatising the state-owned firms, figuring that was politically unacceptable.

SASAC and the Communist Party's personnel agency name heads of state-owned firms and can replace them, giving the government great sway over the firms' decision-making. It isn't clear whether the report recommends changing that arrangement or proposes how the asset managers should be hired and fired.

How to handle such personnel "was the most contentious issue and was debated until the last hour," said a "China 2030" participant, who added that participants often differed on how much credit should be given to the state for China's economic development and how big a role the government and party should continue to play.

Even so, said individuals involved with the report, SASAC bitterly criticized the proposal in meetings of the "China 2030" group and would strive to block them from coming into being, out of concern it could lose power. Indeed, many of the recommendations are considered so politically fraught that the Chinese insisted that the report be labelled a "conference edition" – meaning that it is subject to change after comments at the Beijing conference where it will be presented Monday. SASAC didn't immediately respond to a request to comment.

Mr Liu, the DRC official, was among the top Chinese staffers who drafted the current five-year plan and is considered close to China's current leaders as well as Mr Xi, the presumptive next head of China's government and party. Mr Liu, who meets regularly with US officials, has argued publicly that foreign pressure and ideas can help build momentum for change in China.

"Liu decides the flow of information, gives policy makers recommendations and organizes meeting agendas," said Cheng Li, a China scholar at the Brookings Institution in Washington DC.

In a signal of the challenges now faced by Chinese businesses, a gauge of nationwide manufacturing activity was slightly higher in February but remained in contractionary territory for the fourth straight month. The preliminary HSBC China Manufacturing Purchasing Managers Index was 49.7 in February, compared with a final reading of 48.8 for January, HSBC said yesterday. A reading below 50 indicates contraction from the previous month.

China now is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own, a problem that limits the growth of many developing countries.

South Korea was able to keep growing rapidly after it hit a per capita income level of $5,000 – about where China is today – because it pushed innovation. China lags behind South Korea badly in patents produced per capita, he said, an important measure of innovation.

China 2030 urges a big expansion of early-childhood education and nutrition to make sure that poorer Chinese youngsters don't quickly fall behind wealthier ones, said those involved with the report. While such programs are commonplace in wealthier countries and Latin America, they pose a particular challenge in China because of its system of revenue collection.

Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. That has led to deep resentment among poorer Chinese as village officials underpay for land on the outskirts of cities and sell at steep profits to real-estate developers. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.

"We'll be recommending that all resources be put on budget," Mr Zoellick said in his Chicago talk, and "that public finance needs to be transparent [and] accountable."

Additional reporting: Kersten Zhang and Aaron Back