BUZ LIVINGSTON: We are better than China

Buz Livingston

The chasm between the US economy and China’s is not dissimilar from football in the SEC and the ACC. Top to bottom, the USA, like the SEC, is light-years ahead. The United States has the world’s dominant economy while China still is considered an emerging market country like Brazil or India.

Morningstar recently published a contrarian view on Chinese electrical demand and their report may explain why Chinese leaders agreed to limit carbon dioxide emissions. The Chinese have used cheap and plentiful coal to fund economic expansion but they are poisoning themselves. The Lancet, a medical journal, estimates air pollution alone causes over a million premature Chinese deaths annually. Before Obama’s Asian trip the Chinese had already taken important steps. Beijing, for instance, will close all coal-fired plants in the city by 2017.

Politics and economics are always linked. Two inflection points on coal, Morningstar argues, one political and the other economic, will force changes in how China uses the commodity. First, China’s economy will flip from an industry-heavy, services-light model to the opposite. The analysts expect electricity use to grow at less than its half current rate. Political priorities will force a shift to nuclear, hydro, wind and solar. Cheap coal is costing the Chinese a lot. As the Chinese People’s Daily wrote last year, “If people can’t breathe, what’s the point of faster economic growth?” 

Morningstar predicts 2014 will be the peak year of Chinese coal-fired generation. Currently coal provides three-quarters of their power but that share will shrink to sixty percent by 2020. While the United States has dawdled in solar production, Chinese solar power has exploded over the past two years. In terms of annual solar installations the Chinese lead the world. While Congress argued (aided and abetted by a lackadaisical media) over Solyndra, the Chinese shot past us. For the record, the Department of Energy’s renewable-energy loan program is expected to repay over five billion to taxpayers (Bloomberg, November 12, 2014). 

Like American politicians, I’m also skeptical of Chinese politicos. The Chinese know any treaty has to be ratified by the Senate but they appear to be making changes in their use of coal with or without the United States’ approval. Chinese air quality standards are abysmal. We should not lower our guidelines to a third world levels. Two thousand years ago China was far more advanced than the West. We left them in the dust and the only way they will catch us will be if we let them. The Chinese are adapting renewable energy sources far more rapidly than the United States. We could be heading the opposite direction. Case in point: The 112th House of Representatives passed a bill lowering clear air standards. Clean air costs too much; walk me through that one.

Emerging markets have higher expected rates of return than developed markets but emerging market are more volatile. If the Chinese succeed, investors will also prosper.

Even though Buz Livingston is a fee-only Certified Financial Planner this should not be considered personal advice. For specific recommendations visit us online at livingstonfinancial.net or in our office in Redfish Village, 2050 Scenic 30A, M-1 Unit 230.  Follow us on Twitter @BuzLivingston.