How China Is Winning In The Green Energy Transition - David Fishman
David Fishman is a Principal at The Lantau Group, a boutique strategy and economic consultancy focusing on the Asia Pacific energy industry.
Fishman's areas of expertise cover regulatory and economic intelligence for the Chinese power sector, including solar, wind, coal, nuclear, hydro, transmission grid, and power markets.
His specific project experience includes the Chinese power market and policy intelligence and forecasting, solar and wind tariff policies, renewable asset transactional due diligence, China business matchmaking, and green power procurement support for multinationals operating in China.
He also writes a delightful blog detailing the less-covered corners of China’s economic transformation. He writes about topics including poverty alleviation, small-city economic trends, countryside solar deployment campaigns, rural rejuvenation, and ethnic tourism.
You can find it here: https://www.feelingthestones.com/about
We talked about how China is Achieving The Holy Grail Of Clean Energy and the lessons we can learn from it.
This is the 48th episode of The Front Row Podcast.
TIMESTAMPS:
00:00 Intro & Trailer
01:13 China's Energy Landscape
06:09 The Global Implications of China's Energy Transition
09:00 How China Scales Green Tech
14:09 How China Innovates
20:40 Is Overcapacity A Challenge?
24:57 China's Energy Policy
28:21 Chinese Government As VC
29:40 Why Are SOEs Not As Prominent?
33:03 Downstream Impact of Chinese Policies
34:15 What Happens After China Peaks?
34:34 China's Clean Tech Transition: The Road Ahead
37:19 Can China Turn The Corner?
38:20 Understanding the Average Chinese Citizen
44:34 The Median City In China
48:11 The Practical Implementation of Common Prosperity
50:39 How China Does Infrastructure Development
57:20 The Myth of Chinese Ghost Cities
01:00:24 Lessons From China's Development Model
01:04:51 Advice For A Fresh Graduate
Transcript
Today I have the privilege of speaking with David Fishman. David is a principal at the Lanau Group, a boutique economic and strategy consultancy based in Hong Kong. Today we'll be talking about China's green energy transition alongside his other areas of interest, China's urbanization and development process. I hope you will enjoy my conversation with David.
Keith 00:01:13
China is the world's largest emitter. I think that's a fact that most people know. And it is also simultaneously the world's largest investor in green energy. I want to maybe first get a sense of the messy reality of China's energy sector. What are some of the things that people should look at when they look at the amount of pollution and at the same time the huge investment in solar?
David Fishman 00:01:38
It's of course true that because China is so large, everything scales along with China's size. So when we look at how much electricity is used, how much energy is used, how many emissions there are, how much clean energy there is, you see plenty of things that are of course very big numbers. But you have to consider them on a per capita basis always to figure out if they're actually out of the ordinary or not.
And we do see that for most of those indicators once you try to put it on a - you scale it back to the size of the Chinese population - the numbers are fairly normal, fairly ordinary. On an energy consumption basis China is on a per capita basis still getting close to developed country standards. On a per capita emissions basis the same thing.
And so the story gets complicated of course because it is still true that as an individual entity, China is going to the biggest for a lot of things positive and negative. I think what you'll see maybe for the renewable additions in the last couple years that even on a per capita basis, Chinese renewable energy capacity is very high on a per capita basis in terms of new capacity installs or at least above average. But again, if you're scaling everything back to Chinese size, you have to be really really big or really really small before it actually starts to be meaningful on a per capita basis. China's just really messy like that.
In order to meet its huge energy needs, it needs tons and tons of generation capacity and that's where we get all the coal from. In order to do an energy transition, it needs tons and tons of renewables and that's where we get all the renewables from.
Keith 00:03:19
If you could maybe steel man the criticism of China now. You read a lot about it online where people are saying that China is a huge emitter. Their criticism is essentially that you're such a big country you also have a lot of resources you can essentially dictate policy for 1.4 billion people.
David Fishman 00:03:38
It's an interesting argument when you say because you're large you have more responsibility, right, you should take on more responsibility. It's an interesting argument. I'm not sure the Chinese side would agree. They'd say our first and foremost priority is to the Chinese people and to the rest of the world at large. Second, if we can help the rest of the world or do the right thing along the way, of course, we're not allergic to doing the right thing on a global basis, but our priority will always be what we think is right for the Chinese people. And so sometimes you might think that there's some conflict there.
I think the idea that China should step up into more of a leadership role and attempt to do better than the average, attempt to hold itself to a higher standard than other countries is a fair one. Actually, over time, if China wants to be able to be seen as a leader in that position, it should try to break out from that trap of always comparing itself to countries that are doing more poorly, like for example, the United States, especially noticeably recently. And instead of saying, "Well, we're doing good enough because at least we're doing better than the US," it's like, "Well, can you hold yourself to a better standard than that?" Because that's not a great standard anymore.
I think there is some space for that kind of argument where you say, "Stop comparing yourself to other countries so much. Compare yourself to yourself and say, could we do better on our own basis?" And from that perspective, well, I mean, it's still tough. They still have tons and tons of new energy needs every single year, especially new electricity needs and those electricity needs have to be met by something.
The argument is that until clean energy additions are able to meet all of the consumption growth then non-clean energy will be needed to fill that gap. And for a while that's very reasonable kind of logic. The further question is is there something further you could have done to remove or ameliorate some of that huge growing demand? Could you have trimmed it a little bit? Could you have made it easier for clean energy to meet the growing demand? Are you using energy inefficiently? Are you allocating it inefficiently? Did you build energy facilities in one part of the country that can't get to another part of the country and so you have unevenness?
Those are some valid arguments I would say. But those are more sophisticated arguments also normally than what the standard kind of critique of China in terms of energy and emissions will be.
Keith 00:06:12
You made a point earlier in one of your essays in which you talk about missing the forest for the trees, which is that the critiques usually leveled against China's energy mix misses a bigger point which is that if China's able to get the green energy problems solved, it would be a huge net positive for the world. And I think you pointed to a statistic in which - if I'm not wrong - it's the energy consumption increased by 7% but the coal mix or the use of coal only increased by 1%.
David Fishman 00:06:44
We're talking about humanity and the way it uses energy approaching a shift to the next stage of whatever we're going to be doing, right? If you think back, we went from biomass to steam and we went from steam to turbines and then we went, and that now we're getting from the fossil fuel phase, the fossil fuel era is about to wrap up as we get into this kind of new energy era. And that's the era that's going to carry us through for the next whoever knows 50 years, 70, 80, 100 years, something like that.
That era arrives but we still have a billion two billion people in the world who have insufficient energy. They live way below an equitable level of energy consumption in those countries. And so we say how can we transition into this new world while also ensuring that we're not leaving behind that big part of the global population that never managed to reach anything close to energy equity under the previous phase of energy development.
And that's where I really think the forest rather than the trees is that China is by scaling up this level of clean energy deployment showing that there is a model where you can continue to meet a developing country growth rate of new energy consumption every year and do it with mostly and eventually I think from this year 100% clean energy sources. So then you can point to the other developing countries in the world and say we have resolved a big part of this fundamental conflict between equitable energy use and clean energy use.
It doesn't have to be one or the other. Now there's a template there's a blueprint to have both at the same time. That's the forest that I think China is developing. And then the individual trees are of course it's like well this year emissions went up a little bit. This year China is still building coal plants. Yes, that's true, too.
But the bigger story is the whole world is going to be facing the same problems as China. And now the whole world, I think, has a better, more equitable, cleaner model to pursue their energy transformation.
Keith 00:09:03
Can you give us a better sense of what that model looks like, especially in terms of its scaling up of deployment of green technology?
David Fishman 00:09:09
On China's scale, the model is huge for a lot of the countries that I mentioned where you've got maybe one or two billion people who still live at very low levels of per capita energy consumption. It doesn't have to be much. We're talking about either going from no electrification to your first electrification at all. That means just, you know, replacing heating and lighting and cooking activities with electrification instead of mostly biomass, right? Where parts of the world that are not yet electrified are still using biomass. So that's one thing. Then you can do that with wind and solar off-grid solar solutions plus batteries, right?
And then when you talk about improving beyond that very basic level, we say, okay, now we have enough energy in our community to satisfy basic cooking and heating and lighting applications. Well, now we need a little bit more energy per community member per capita because we want to start having washing machines. We want to start being able to replace some household chores with electrification instead. We want to actually start investing in some type of light manufacturing that requires stable electrical supply. Right?
When you get to that next level, well, now we're talking about still energy for generation. Maybe wind and solar and batteries can still do some of that, but maybe we also need to think about hydropower or small nuclear or maybe something else that's still developing. Maybe geothermal makes sense in some places. And you know what? For some places, they actually maybe should be considering a fossil fuel like natural gas because that would be fair and equitable for them too. They can still add a fossil fuel to bring their people up to an equitable level of consumption can only be enabled if the rest of the rich countries in the world are doing their part to reduce their emissions at the same time.
And then we're unlocking a new part of the community's economic potential, right? When we say now we're electrifying household chores and activities and we have washing machines and we are allowing maybe a big part of the community to engage in leisure activities other economic activities other educational activities that's the kind of model that I'd really like to see more of and that if China is going to export its model of clean energy development also empowering general community electrification that's the model that looks like in the parts of the world that are still at that phase of development.
Keith 00:11:39
I still cannot as a lay person perhaps wrap my head around the scale in which China has deployed green technology. I think part of this because I'm a Singaporean and Singapore is really small. So short of maybe touring the entire country which I have not and you probably might have - could you give us a sense of the kind of investment or the kind of scale of deployment in which China is investing not just investing but actually actively using green energy in this transition?
David Fishman 00:12:04
I can offer like a pretty down-to-earth anecdote from the month of May specifically. Now May because there was a policy change coming in June. May saw a record-breaking high number of installations of wind and solar. It was probably several months of installations that would originally have been spread out over May, June, July, August and they were all pulled forward into May so that the project developers could enjoy the policy regime at that time before it changed in June.
Now because of that I think it was something like 93 gigawatt of solar were installed across the country. Now, gigawatt's a big number. It's a little bit abstract, but I did see somebody tried to work out the math and they said that translates to something like a hundred solar panels installed every second over the entirety of the month, right?
So, if you say 100 solar panels installed every second, then how many projects are building simultaneously each second or each minute or each hour? And you say a single project if it's going a 100 solar panels a second time 60 per minute times 60 per hour. How many workers are there for swinging hammers and installing and connecting wires at the same time? Once you start multiplying your math out like that, you get numbers like hundreds of panels a second, thousands of panels a minute, tens of thousands, hundreds of thousands of workers per day doing things perhaps even a million millions of workers every day installing things for such a number to be possible.
So yeah, it's some serious serious scale and you can observe it. You don't have to visit every single site, of course, but if you ever take a high-speed train rail across the country and you're looking at the villages on both sides of the rail tracks, you'll see the villages with solar panels on their roofs. If you ever take a flight over certain parts of northern China, you cruise low enough, you'll see the endless wind turbines stretching out across the mountain peak, stretching out across the plains. It just seems like they go on and on and on and on. And then you start to really grasp the scale that a plane can fly for an hour and you see an hour of wind turbines.
Keith 00:14:09
There is a part that is still I think underappreciated which is also the technology scale up. Not just in terms of deployment but developing better products within China. So the closest analogy now if you're talking about the green energy or the one that most people are familiar with would be the EVs for example is that China went from perhaps a joint ventures or licensing and then going directly into manufacturing through some state policy that encourages innovation and development of EVs and then eventually by market forces or market competition you get the best EVs right. What is that a similar playbook that we see in green energy innovation or is it a different playbook for them?
David Fishman 00:15:03
Very similar. So the EVs, the batteries, the solar panels, they share a couple of features. EVs are maybe a little different compared to the other two, but broadly similar and that we're talking about a technology path that did not originate in China, right? The first efforts for these technologies were decades ago maybe in other countries and maybe they reached some type of natural wall with competitiveness or cost efficiency or whatever it was and it was put down and it didn't progress much farther it got stuck at a certain point and then it was picked up in China.
In many cases it was picked up by private companies not so much the state sector but the private companies were able to earn a lot of backing from the state through industrial policy investment plans, through subsidies, through affordable credit, through land usage policies, things like that. And then they were given a whole lot of leash to try to do better.
In the case of the EVs, yeah, there are also some state players in the EV sector. But for PVs and PV solar and batteries it's really remarkable how little involvement there is from stateowned enterprises and that it's really the state investment apparatus choosing to work through the private sector instead of backing SOEs.
And then you end up with iteration right you say if we get 1% better at this and 1% better at that and also that other company over there has the exact same idea they're also trying to get 1% better so we can we get 1.1% better to stay ahead of them and we better lower our price at the same time because we have a commodity product and we're all selling the same thing and we're all at about the same level. So maybe we can get a little bit cheaper too and maintain market share.
And this kind of horrible, terrible, destructive in some cases competition also pushes the bar lower and lower for cost and higher and higher for quality and features and efficiency. And so eventually you end up with these hypercompetitive companies with hypercompetitive products that are always trying to eke out this additional 1%.
It's like an arena of brutal ruthless competition. Now the arena was created by the state. They maintain some rules in the arena but the way the gladiators so to speak if I'm going with this metaphor conduct themselves how they fight is mostly up to them.
We have seen a little bit of exception to that recently. I think a couple weeks ago there was the state might be stepping in to try to manage some of the really aggressive price competition in the solar PV sector because at this point they're just grinding themselves to pieces and they've been unable to resolve their pricing wars on the internal industry association level and so maybe the state wants to step in now and try to ease some of that intense competition. And I saw news about that quite recently.
But overall, the state sets the arena, sets the rules, creates some incentives, and then unleashes a bunch of hungry private sector players to duke it out with each other.
Keith 00:18:06
I actually read Kai-Fu Lee's book about Silicon Valley innovation and then China's technological innovation. He charts out a similar dynamic, but it was more constrained towards the internet consumer space, right? But the dynamics essentially that because everyone's trying to go in and target because everyone's copying each other and trying to out innovate each other, you essentially create a condition where it's close to perfect competition in classical economics. So everyone's just trying to fight and be the last one standing.
So what happens is that you have what starts out as a copycat but actually ends up becoming a gladiator of sorts in the market and especially with the me-too phenomenon where you see a couple of companies doing quite well at it and then other companies say we could do that too. China's so large if we can just capture a couple percentage points we'll be doing well as well. So you end up with many many players entering. Not all of them will survive. In fact, many of them will not survive. But they get quite long runways. Maybe they've got venture capital backing. Maybe they've got some personal wealth, personally wealthy founder backing them. Or maybe they've got some municipal government backing them.
But for whatever reason, you end up with a lot more players on the supply side than typically the market quote unquote market looks like it should support. And then one theory says that once your supply is oversupplied then eventually they have to consolidate they have to collapse in on themselves they have to merge or the competition caused by that intense supply side competition brings prices down so much and then you end up with kind of new applications new demand appears because the competition has made the products on the supply side so attractive.
And so now with solar PV so cheap what could we put solar panels into if they're as cheap as dirt. Could we stick them? I mean, I was just at Yiwu, which is the small commodities sourcing hub of China. And I'm seeing all the places that they can put solar PV into when they're super super cheap. Could we put them in camping equipment? Well, sure. Could we put them in fans? Okay. Could we put them in little stoves? All right. Everywhere that you can insert a solar panel becomes a new product category because the solar panel itself is so cheap. And that was caused by the supply being so aggressively competitive and wide.
Keith 00:20:42
And that seems to be a lot of the criticism about so-called overcapacity. That was the issue. I think a lot of countries that are even maybe taking maybe more protectionistic stance against China, not necessarily the US only, but I think you look at countries like South Korea for example, they're looking at maybe in a specific case of vehicles, right? They're worried because your competitive dynamics has some negative externality and spill over. What do you think about that and maybe in your domain of energy how countries are responding to these dynamics that spill over into their local markets?
David Fishman 00:21:22
You've got a basic conflict between scarcity economics which says you need to have some degree of scarcity. There needs to be some meaningful gap between supply and demand to inspire a price differential that can be captured by the producer who goes out to create this thing. And when you have too many producers and too much supply, you've destroyed scarcity and you've destroyed scarcity economics and now nobody can make money doing anything. And to try to get yourself out of the situation, you try to offload your excess supply somewhere else.
In a purely economic sense the way you might learn about it in a textbook that's perhaps true but in reality the way everybody responds the way other users consumers of these products respond is one they find new ways to use the product which is nice right they find new sources of demand and number two in our specific products sense in the case of clean tech there is an additional outside of economic theory that is driving or should be driving our motivations which is the urgent need to address man-made climate change.
And that in that sense there can never really be an oversupply of clean tech while we're still using fossil fuels. What we need to do is do a better job of incentivizing their creation on the demand side and if supply side has gotten out of whack so that scarcity economics have gotten messed up and now suppliers don't want to produce anymore okay we need to fix that we need to address that but only insofar as we allow the clean tech deployment to continue.
Any actions that address or attempt to attack oversupply that lead to a slowdown of the installation of the very clean technology that we need to fix the problem that we've got ourselves into is just cutting off our nose despite our face. You're trying to fix a short-term economic issue while ignoring the forest that's on fire behind us. That's what it feels like when I hear people complaining about oversupply of clean tech.
Keith 00:23:32
In this specific case, it seems to me that I think even when I speak to economists in Singapore, a lot of them say that the case to be made is that you should try to subsidise more in your country as opposed to maybe putting tariffs or slapping tariffs to inhibit demand. So countries should look more specifically at the kind of industrial policies in clean tech which they can promote and develop.
And definitely on that note it would be useful to hear your two cents on what are some of the specific policies you think the Chinese government has done really well at that really allow that kind of served as a catalyst for that kind of rapid innovation and scale up the deployment of clean tech.
David Fishman 00:24:11
When you start with a product that was too expensive to be competitive versus alternatives, right? Solar power in 2010 is too expensive to be competitive with coal power in 2010. So, at that point, it made sense to really pour subsidies and effort into increasing the economic competitiveness on both the production and the consumption side.
So, on the production side, you would have had very attractive land use policies. You would have been having tax credits, right? Anything that can get the solar producer to produce that solar panel or that wind turbine at a lower price point. Now, it comes out the cost point is lower, but it's still too high to be competitive on the consumption side. Well, now we also need to sweeten the deal on the consumption side.
You say, no matter what you paid, we will make sure that your price for power generated is higher. We will make sure that you are still profitable despite paying a lot more for that power because we'll give you a feed-in tariff and your feed-in tariff will be very high and it will cover all of your costs and then some. So, it's profitable and you're inspired to do this.
And then the state itself says, "Well, now we've signed up to buy this power that is more expensive than the other power. It's more expensive than the coal power. How do we deal with this?" We'll take some of the burden. We'll sub, and then we'll spread out the rest of the burden to actors in the end user sector so that it's so small that nobody complains too much. We'll have a renewable energy fund surcharge and it will be very very small.
If anywhere throughout that situation anybody felt like they were getting a raw deal, there would have been push back against this system. If the end users felt like they were paying too much additionally in order to subsidise the installation of solar panels, if the grid company felt like they were losing money because they were forced to take it on the chin and absorb the losses, right? So they managed to make the losers very very small and managed to make a bunch of winners throughout that situation.
And then over time economies of scale improve so things get cheaper. The technology improves so things get cheaper. Innovation drives costs down and you end up with the production side and the consumption side both can begin to reduce the perks they receive and we get closer and closer to a true market equilibrium where where we are now is getting really really close to that.
Producers of solar panels and wind turbines and EVs. Yeah, you might be able to trace back where some of them are still getting some production subsidies, but especially on the consumption side, you don't really need to sweeten the deal that much anymore to convince consumers to consume these clean tech things. You don't need to offer free license plates in Shanghai to electric vehicles anymore. You don't need to offer a really, really attractive feed-in tariff for wind power anymore. We can pull those back and pull those back until eventually we end up with something very close to a true market dynamic.
China handled both ends of it really really well so far. And we'll see in the next phase whether these clean tech options can continue to be really effective and competitive in a world where they're basically getting almost no perks.
Keith 00:27:22
The dynamics you've pointed out sounds very much like a VC firm. If you look at it maybe in the western markets right it's something like Uber essentially the VC is subsidising the rides that you pay but the hope is that eventually you can capture market share and then I won't say monopolise the market but you would be very competitive but in China it's almost it's a state directed where the visible hand moves along with the invisible hand.
David Fishman 00:27:51
Yeah and maybe another difference is that the VC specifically tries to pick a winner, right? You pick a horse to back and you throw your money at it. Whereas sometimes China, Chinese state investment picks winners, but more often it does feel like a level playing field among the companies that are fighting for the same slice of the funding or the backing, right?
There'll be a key national project and anybody can apply to become designated a key national project. Where you might see there's some winner activity, winner picking going on is maybe if it's independent companies versus stateowned companies. Stateowned companies it might seem like they always have a little bit more of an advantage something like that but by and large is a little bit less or maybe not at all really this idea of picking winners whereas a VC is all about trying to pick the winner.
Keith 00:28:41
Why are the SOEs in China not as prominent in the clean tech space as maybe in the traditional other traditional sectors in which they have dominated in China?
David Fishman 00:28:54
Starting from market reforms in the 80s, there was at the very basis of it was this idea that there were certain products, commodities, goods, sectors that are safe to decentralise and liberalise and certain sectors that are so integral to national security or national competitiveness that we must continue to maintain them through stateowned enterprises and through the state sector.
And over time, the list of things that were allowed to be liberalised got longer and longer. And the list of things that were still grasped by the SOEs got shorter and shorter. But traditional energy production has stayed on that list of just so key critical statebacked that SOEs have always dominated in it. The capital expenditures that are needed, the level of state support that's needed, the coordination between the Ministry of National Resources and the Land Use Bureau and the Ministry of Energy and all those different things. It really helps to be stateowned. It's not that a private player can't invest in a coal plant. It's just, you know, it's more of a space for SOEs.
By contrast, the business of doing clean tech, at least on the production side, solar panels and EVs and wind turbines, those are commoditised goods. And by and large, the state has gotten out of the business of competing for commoditised goods and competing to produce commoditised goods. Those are totally free to be market competitive.
The installation of them into a power plant might still make sense to have heavy state involvement. And in fact, it still does. Independent power producers of course exist and they can exist but a lot of the times it's just more competitive for an SOE to be doing that job. So we get this interesting situation where almost all the solar panels and wind turbines are produced by private companies and then these days increasingly they're installed and built and operated by stateowned companies.
Keith 00:30:50
If you look at it just from outsider perspective you might think that the government would actually be much more involved. I mean these I think for in the eyes of economic planners on the Chinese state side are things that could and should be commoditised and that maybe the advances and the cost competitiveness for small commoditised goods perhaps is best achieved through the private sector. I don't know if that's entirely true, but I think there's a belief there that if there are certain areas where the market will bring us the outcomes we're hoping for and certain areas where the market might be able to bring us the outcomes we're hoping for, but it's pretty risky.
And then a final category where we say, ah, we don't really trust the market can ever give us outcomes that are very reliable. And solar panels really appear to be in that first column. And only now when we see really really intense destructive price competition does the state think about stepping back in and saying okay fellas can we try to regulate your prices a little bit you're actually killing each other.
So that's I think that's logic that's been pretty consistent starting from the reforms and the philosophy of the reforms in the 80s and then coming through over the last 40 years at this point.
Keith 00:32:02
Yeah. What are the downstream effects of these policies or not just the policies these competitive dynamics on the average Chinese citizen and average is something that I think we will have to expand into because average is not Shanghai or Beijing average is something else altogether.
David Fishman 00:32:22
If you're a consumer of these products where producers are engaged in an intense price war with oversupply of course you're a beneficiary right the goods the products are going to get better and better and cheaper at the same time. And unless you're an employee of one of those companies where you're at risk of losing your job because your company has such low margins, then you're a beneficiary. You're enjoying the fruits as a consumer of a price war on the supply side.
And so the consumer of EVs like EVs are super cheap now and the batteries keep getting better and the range is longer and the features are better and they have swivelling chairs and advanced cup holders and huge screens right it's a consumer paradise as long as you are not directly exposed to the companies that are grinding themselves to pieces either by being an employee or buying their stock or something like that.
Keith 00:33:21
Are there any areas of innovation in clean tech in China that you think is still under reported, underrated, and people are not paying enough attention to right now?
David Fishman 00:33:27
At this point, everybody's paying attention to everything in clean tech. So, if something's under reported, it's only relatively so because everything's getting a lot of attention. But I would like to highlight that, you know, everybody talks about China's carbon peaking goal, which is a 2030 goal. But then what happens between 2030 and 2060 when we get to supposedly get to neutrality is a totally different game plan, right?
Just peaking you can get to you can peak with building lots of clean energy with building wind and solar and covering 100% of your power consumption growth. No more coal additions. Okay, great. We've peaked. Now what? Right now we actually have to start drawing down the peak that we arrived at. And wind and solar and batteries will do part of the job. And nuclear of course, but it can't possibly do all of the job.
So the 2030 to 2060 period has to be also characterised by some new technology areas coming online. Are we going to find a really scalable effective use of carbon capture or not? Right now, a lot of those long-term decarbonisation models say carbon capture has to work at some point by 2035, by 2040. We need to be able to use carbon capture for our remaining coal plants or for our remaining gas plants or for cement because cement has unavoidable emissions that can't be addressed with anything else. Right?
So that's one of the things carbon capture right now hasn't shown really great results in terms of its pilot projects, in terms of its demonstrations. They're working on it, working on it in China and in Europe. But it's still early stage. So that's kind of a key one.
A second big question is what's going to go on with hydrogen? Right now green hydrogen went through a phase where everybody was talking about it and really exciting about it. Now it seems like it's on a bit of a downturn where a lot of people are realising like man green hydrogen's really expensive. It's really hard to make it cost competitive. It's really inefficient store of energy. Are we ever going to have hydrogen to power applications that really make sense? Hard to say. Maybe not. Are we ever going to have hydrogen transportation options that really make sense? Probably not.
But hydrogen could find a home in ammonia production, methanol production, decarbonising certain industrial segments. But right now, that's also very early stage. Green hydrogen production is still wildly expensive, still needs to iterate a lot. So while these sectors are being covered and certainly in the industry and in mainstream media, we're talking about hydrogen and carbon capture and maybe industrial decarbonisation, industrial electrification, things like that. They will become more prominent, I think, and more discussed soon.
I'm talking about them now because I'm trying to have everybody think about what happens after 2030. I think we will peak. I don't think that's a problem at all. I want to know how do we end up declining and not just plateauing and those technologies are the ones that are going to get us there.
Keith 00:36:23
Do you think China has the capability to kind of make it effective or to use your words to turn the corner?
David Fishman 00:36:30
You know, if you bet against PV in China and batteries and wind turbines in 2010 or 2008, you would have had a lot of egg on your face today, right? So, I have to imagine it's possible. A metaphor or a joke I make quite often is when China is trying to figure out how to make something 1% better the solution is a thousand PhDs from Tsinghua and you throw PhDs from Tsinghua at the problem until it resolves itself that's that seems to be the effort and the approach that's been taken with these other technology segments where it might have been assumed in past decades that we had already reached kind of the frontier of what was possible with that technology and then they threw a bunch of state money and a bunch of smart people at the problem until it wasn't true anymore.
I think that's what can happen, what will happen with these other frontier technologies. It'll just take time.
Keith 00:37:22
Now I have to get back to the other part of the question which was the average Chinese citizen or the average city. There is a thread in your work in which you look at development. So, so far we focused a lot on energy and the green transition but equally important in development is urbanisation and a lot of people when you talk to them about China it's always the tier one cities and people think of them as the ideal or they think of them as maybe the average rightly or wrongly they think of them as representation of China but if you were to look deeper and I'm sure you already have what does an average city look like?
David Fishman 00:38:05
You know, I got interested in this topic actually after thinking a lot about my energy topic. When I started thinking about saying what is per capita energy look like? What does per capita electricity consumption look like? I looked around me and I live in Shanghai. I've got four ACs in my home and a fan and an oven and a dryer component in my washer, right? I surely am like a top 1% electricity consumer in the country. Does that mean I am representative of what is the average level the per capita average level of energy consumption in the country? No, of course not. Well, who is what does that person look like? Where do they live?
It was that kind of question that got me on this alternate track where I look at Chinese urban rural development and try to figure out who represents the average. And certainly the average is using a lot less energy and a lot less electricity than I am.
The average Chinese citizen lives in a city that's probably got, you know, administrative population of like one to three million, something like that. They probably are from a large central province, like Hunan or Henan or Hebei, something like that. One of those central plains provinces. It's not especially rich and it's not especially poor. It's kind of an average province and they live in an average city in that average province.
The property around them is, you know, one-tenth of the cost or one-twentieth of the cost of the property in Shanghai. They make less money than somebody in Shanghai would make, right? But also, they pay a lot less for everything. They use a lot less electricity. They drive a much more modest vehicle than anybody I would know around me in Shanghai. They might not even drive a vehicle. They might actually I think I traced it out and I think the median Chinese citizen is just about to buy their first vehicle. But they still use an e-bike or a motorcycle for most of their daily transportation needs just based on how many people there are in the country and the car ownership levels, right?
When you start tracing this back to try to figure out what is the average or the median Chinese citizen doing for their consumption habits, for their energy usage, for their real estate preferences, all of that stuff. You realise how hard it is to find examples of that in our first tier cities like Shanghai, Beijing, Shenzhen, and even in our second tier big cities like Hangzhou or Nanjing or Wuhan. They're all far too developed and wealthy to be representative of that average person.
Now, that average person is also not living in like a mud hut in Gansu or Xinjiang, like they might have been a generation ago. Those places are, you know, still relatively poor in China. Certainly not so poor as to have lots of people living in mud huts. But you know the point being that representative and median also doesn't mean the very underdeveloped provinces which are catching up but still underdeveloped.
It means a place you don't even think about a lifestyle you don't even think about. A level of consumption that is so uninterestingly average that nobody talks about it. But you know who does think about it is the Chinese government of course because that's actually their core constituency. You know hundreds of millions of people that are making up this thick median Chinese lifestyle. That's who the policies are for.
When policy changes in a certain direction or it emphasises a certain type of development, they're thinking about the hundreds of millions of very median citizens. The average you add up all the first tier and second tier cities in China, you get like 200 million people maybe. It's a lot of people, no doubt. It's still, you know, just by itself, it's one of the largest countries in the world. But there's another 600 700 million that are just living that more median lifestyle. They are the majority. They are actually the bulk of the population.
Keith 00:41:52
I think a lot of discourse in say western media is really centred around the 200 million which is undoubtedly true but distorted if you take that lens right because you almost oriented I mean you just look at where they deploy their journalists right it's primarily in the tier one cities where they only cover that 200 million and therefore you don't have a sense of appreciation in terms of what the Chinese government is actually trying to do with maybe poverty elevation and urban development in the smaller cities.
David Fishman 00:42:23
What's interesting is a lot of the coverage jumps from extreme to extreme, right? If you're based in Beijing or Shanghai, okay, you're getting one limited top 10% view of China and then when you want to if you want to cover poverty poverty alleviation and you go to some village in Guizhou or whatever, right now you're seeing bottom 10%. Right? In both cases, you've actually missed the thick meaty median part of how Chinese people are living.
You're seeing undoubtedly it's worthwhile to also see what's happening in terms of poverty alleviation for the bottom 10%. But you know the median experience that I was talking about, they're not they left poverty behind a long time ago, too, right? They're not living in cliff villages. They're just living in boring cities. I don't want to use the boring I don't mean boring derogatorily. I just mean that it's not a first tier city and it's not a poverty alleviation place and there's not much coverage of these places. That's where all the people are though.
Keith 00:43:22
Can you give us a sense of what that the average city looks like? What does the average citizen there look like in terms of economic life and the kind of living standards that they have?
David Fishman 00:43:34
I try my best to report on this from like a data perspective, right? So this year the Chinese magazine does its ranking of major Chinese cities every year and they have this database methodology where they rank all 337 Chinese prefecture level cities from one which is Shanghai all the way to the bottom which is I think an autonomous prefecture in Xinjiang somewhere and then 337 cities the median city in their point-based system is one number 169. So that's where I would start from. I'd say city number 169 in this year's city rankings based on population, GDP, demographics, future development potential, transportation, all those different things.
This year it was a city called Linfen in Shanxi. So I would say let's look at Linfen. Let's look at Linfen city and then it's made up of counties and districts and cities. So let's find the most average province or the most average sorry the most average county in Linfen. And then we'll see how the people in that county or that district of this average city in Linfen are living.
And when I did this exercise last year, I found it was a different city. It was a city in Henan last year, but I found the people of that province, you know, their average salary is like 4,300 yuan per month. Okay, it's about $600, $650 USD. Not that much money, but also they mostly own their own homes, right? Very few people rent in these small cities. If you're in a small city, you're usually from that small city and so you have family there and you buy a house. You don't rent.
But if you had to rent, it would be very inexpensive. We're talking less than a quarter of your salary. So 800 renminbi a month, 1,000 renminbi a month will get you a rental unit. But most of the time people own houses. So instead we talk about the home ownership market. What does a square metre of real estate cost? Well, a square metre of real estate in that city also costs about 4,000 to 5,000 yuan per month. So, one month of salary is equivalent to one square metre of real estate in your city.
So, how long do you have to save up to buy a house, right? What kind of lifestyle are you going to be living? Well, you want to buy what? A 100 square metre house. You need to put 35% down. We can start working back the math and we can say a person in the city needs to save for approximately 3 to 5 years before they can put a down payment on a home. Okay, that's a very different lifestyle from the median citizen of Shanghai who needs to save 30 years on their median salary to put a down payment on a Shanghai home.
All right. So then we say, "What about groceries?" Okay, well their groceries are half of the level that they are in Shanghai. Well, what about quality of public life? Oh, well, I mean, they've got parks, they've got movie theatres, they've got pedestrian streets, right? They've got lots of or most of all the same stuff that the big cities have, especially developed in the last few years. So, their quality of life is also, you know, developing and stronger, certainly better than it was 15 or 20 years ago.
I can actually trace through my imagined lifestyle of this median citizen in this median county in this median city. And then when I compare it to the first tier city life that I live or most of my friends and my contacts live, I see such a big gap.
I encourage everyone if you can take the opportunity, go out to not a Chinese countryside, don't go to a Chinese village, just go to a regular city that you've never heard of. And you know what? It's probably more representative of how most Chinese people are living.
Keith 00:47:16
How does that inform the policy in which you see the government is trying to implement in terms of especially if you think about the vision of the shared prosperity right a common shared prosperity in China how do you see that being implemented in the median city?
David Fishman 00:47:28
When you think about common prosperity right what is your goal what is your end state is it to have everybody living the same lifestyle as that of a Shanghai citizen? I don't think so. I think it's the goal is to create a median lifestyle that's not bad at all and then shove as many people into that bracket as possible.
That means pulling up as many people from the bottom end up into that median level through your poverty alleviation projects through real estate reform essentially that we have the entire real estate sector that is lagging. You know, on the top end, that hurts people who own multiple homes. Of course, those people in first tier cities and second tier cities who own multiple homes. But for a person who is still trying to buy their first urban home, they're still trying to get out of that bottom quartile and get up into that median lifestyle where you own a home, one home in an urbanised small city district.
The control over real estate prices or the sluggish real estate economy are good things. It makes property more affordable. Of course, if you own three or four homes, you're miserable. So, we say, what is the Chinese government's priority? Well, initially it was about making the life in the first and second tier cities more attractive. Allowing those real estate markets to expand, about enabling policies that would let those areas grow.
Now, it really seems like in the last few years, the policy has shifted away. It's like you're watering a different part of the yard, right? And now we're saying this middle middle Chinese lifestyle, how do we ensure more people get into that middle Chinese lifestyle? Will some people at the top end be unhappy about this? Definitely. They're not prioritised anymore. They enjoyed being prioritised for quite a few years or they enjoyed having a market that was more freely managed and less direct intervention. And as a result they benefited from it. Well, now there's a different policy regime in place and it really seems to be playing out for real estate or for development policies to benefit getting the lower tiers up into that median category.
Keith 00:49:41
You wrote this interesting essay about infrastructure development in China which is that it kind of contravenes or contradicts a lot of the prevailing say classical economics way of thinking right which is you only try to do projects or first you invest in say infrastructure projects either to maybe make your GDP figures look good or only to get a healthy return on investment but in some cases you don't actually the governments know that you're not going to get a return on it, but instead you do it as a way of development, human development and in a sense you cross subsidise it. So the richer parts of the country cross subsidise the poorer parts to actually achieve a level of development.
David Fishman 00:50:33
When we look at things like highways or bridges or high-speed rail connections, right? Of course on a profit and loss perspective, not all of them can be profitable. There are some connections where because of the terrain you're going through because it's all bridges and tunnels or flyovers, right? It just seems so unlikely that such a project could ever make itself make its money back through collecting tolls or anything like that.
And so you end up with well they're very long-lived assets right 40 60 80 maybe 100 years who knows. So they'll certainly have a very long lifespan. But then also should human development or giving should giving opportunities to people in very mountainous regions or very remote regions. Should that be a limiting factor? If you can't make money on this profit on this project, does it mean the people in that remote area just don't deserve to have good infrastructure?
I think on a conceptual basis, most people would say, well, they do deserve to have good infrastructure. Some people might say, "No, they should be moved somewhere else. They shouldn't be allowed to live in that remote, rural, mountainous area." And if they choose to live there, that's their own problem. Right? I think very strongly that the Chinese development approach is different from that. They're saying you can choose to live there if you want and we will connect you to roads and telecommunications and highways and then high-speed rail eventually.
So if we say we've abandoned that model where we say if you choose to live there it's your problem and instead we say wherever you choose to live with the exception of some very extreme examples we will come to you instead. And if we've committed to come to you we're going to do it even if it's not that profitable or not profitable at all. In the greater sense of things and a greater humanitarian sense, it's still worth it even if it's not on an individual financial basis.
And then when you look at the long-term economic add-ons, actually they're really difficult to calculate. If you connect some rural county with just 500,000 people to a high-speed rail or to a highway, of course, the short-term or the forecastable economic returns of collecting tolls are going to be pretty low. But long term, what do 500,000 people do now that they're connected to the nearby city in terms of broader knock-on economic benefits? Much harder to calculate, of course, but there's probably a case there to say it is worth it when you do the long-term knock-on economic benefits.
So, that's another important way to consider it. On an individual corporate level, sometimes you'll get into trouble, right? Because it all evens out on a national level, but individual companies have to build and operate these things. Individual companies have to have the cash flow to build something that isn't necessarily profitable. And so that is an operational concern, right?
If you have a specific Sichuan bridge and highway company builds up too many unprofitable assets, well, they might actually get in trouble that specific company, even if it's serving a broad humanitarian sense. And that is a concern because that affects the banking system, that affects the financing and credit systems. Then you do have to make sure you're not violating too many individual corporate, you know, good financial principles in the process of trying to embrace this broad humanitarian purpose.
And I think we're going to see some instances where they went too far. We know that a lot of local government funded vehicles are in some real severe financial trouble. They'll have to restructure. They'll have to try to get out of those holes they've dug themselves into in pursuit of what might be a very noble goal but what in the short term is probably creating some considerable stress on local municipal finances.
Keith 00:54:10
So how do they square that circle? I mean I suppose if you're a government that for example Sichuan where you have you have actually very extensive network of bridges right for example you don't need to you can build one or two unprofitable ones if net net you still make it out but I'm sure there are governments that don't have that kind of luxury or privilege. In that case should it be reasonable to expect for example the central the central government to build them out?
David Fishman 00:54:40
Well, if the central government reviews their mission and finds it was noble and they made a couple of dubious financial decisions but overall it was, you know, in pursuit of a better purpose. Yeah, maybe they get a bailout. I don't know. I'm not an expert on the topic of specific local or municipal finance for these investment vehicles. I do know some of them are in trouble.
Broadly, I mean, all the provinces have some economic strengths somewhere, right? Western Sichuan, I doubt you could build any infrastructure out there that's profitable, but it's okay because eastern Sichuan has Chengdu and, you know, is fairly well-developed and is fairly wealthy. So probably the activities of those funding, of those local funding investment vehicles in eastern China could cross-subsidise their activities, their unprofitable activities in western China, in western Sichuan.
And the case is also true for places like Guizhou or Yunnan where you're most likely to see lower population densities, difficult terrain, and infrastructure investment that's bound to be unprofitable on a pure P&L basis. But so do they have some assets that are good enough? Are they operating in a more utilitarian or humanitarian sense that at least lets the functions continue even if they're not making money hand over fist. I think in most cases it will be the case that they are.
There will be some real stinkers in there where it turns out they weren't and hopefully they get reorganised or they do financial restructuring or something like that. A state bailout or a provincial bailout pretty possible.
Keith 00:56:19
I think that you know there's a lot of talk about you know China went on this massive infrastructure investment and they're building roads to nowhere or cities that abandoned things like that in Singapore back then when we started such industrial park there was a similar criticism but our the view back then was just that over time people fill up the space but I want to hear your take.
David Fishman 00:56:46
China's first famous ghost city was Pudong in Shanghai. Early 90s they're building this massive residential and financial district east side of the Huangpu River. Who would want to live there? What a ridiculous thing to do. And now Pudong has a population of 5 million. It's the largest district in China. And yeah, it's just urban planning.
Now sometimes you misjudge the demand. Sometimes you misjudge the future trajectory of what's going to happen in your province or in your city or you build a housing complex and it turns out the location is bad. Nobody wants to live there. But for the most part these urban planned these planned cities these planned expansions have filled up over time. And so if you happen to catch them at an early phase of their development, yeah, they're going to look real empty.
Just very recently I went to probably the most well-known Chinese ghost city. It was just last week I was in Ordos in Inner Mongolia and about late 2000s Ordos decided to develop a new district and at first it was a desert and nobody wanted to live there. There was no reason to live there. It was inconvenient and it was empty. And then they moved the municipal government there and then the city's best middle school moved there and then the people started moving in and today there are 130,000 people living in Kangbashi district of Ordos City.
To this day Ordos is still saddled with this name of the ghost city. It's so unfair to Ordos because they just had a planned city district and the people slowly moved in and now you know there's lots of people there. It's still it's very big. It was built to be really really grand. And it's a very car-centric city. So, you don't see a lot of people walking around in the streets. You just see cars driving from homes to shopping centres. It's kind of like the US suburbs. But you don't see a lot of people walking around. So, it still does feel a little bit empty, but there's a lot of people living there. It was just urban planning.
Most of the time these bets on future development and growth and expansion play out to the success of the people doing the planning. And it just takes time. There are times when it doesn't play out and for every time every two or three times you have a successful Ordos or a Pudong or you know some I've been to some other places too but you also see places that don't pan out. Some property development and a mountain that was a little bit too far away and maybe they discovered there was like a garbage dump nearby or something like that and then nobody wants to buy property and it just goes abandoned. It becomes a total write-off. Those do happen. I think they're the minority though.
Keith 00:59:27
What are the kind of abstractable lessons that you could learn from China's development model?
David Fishman 00:59:33
I mean we in the last quarter of the 20th century internationally what was in vogue from a development economics perspective was very different from what China ended up doing. Right? That was the period of time that was really ruled by the kind of neoliberal economic development paradigm that says you must do certain things. You must not do other things. You should have open capital release capital controls. You must control your spending. You must reduce spending on infrastructure. You must balance the national budget. Things like that.
And China thought about it. China considered it as it started its reforms in the 80s. It really closely considered some of those prevailing economic theories at the time and eventually chose to mostly go a different direction. Throughout the last 15 years or so of the 20th century and then very aggressively so into the 21st century, China said, "No, we think still that state-led interventionism, nurturing of infant industry, infrastructure spending, maintaining certain tariff walls. These are the ways that we want to develop in again continuously contravention of what were the prevailing theories at the time of good governance, good institutions and proper neoliberal economic development."
We're in a little bit of a the world, not just China, the world is coming to a little bit of the post-neoliberal era now. And so the pressure on China is off a little bit to behave in a certain way. You still get people that say China did the wrong things. They weren't supposed to. They were cheating. They were breaking the rules. Whatever. Okay.
By and large, China didn't reinvent this economic system. This was a system of nurturing infant industries and building infrastructure and putting up tariff walls until you don't need them anymore that other countries used over history too in their development phases. So from that perspective, China didn't reinvent anything, but it did pursue it in an era where it was not in vogue to do so. Maybe it was in vogue after World War II until about you know the 70s or early 80s, but then it went out of vogue and then China carried on with very close to that development model. Of course interlocked with the specific features of China's political and social governance model which is you know socialism and Chinese characteristics which does have a meaning right.
But that is the lesson I hope is taken away here is that China bucked the trend for a long period of time when the prevailing rule was to do something else and now as the rest of the world is easing a little bit back from that model in this moment in time China's development model looks by contrast to have been at least the winner of the last 30 or 40 years and so I do hope that while individual lessons are learned you know broadly taking all the lessons can never work for anybody but other developing countries of the world I do hope they're paying close attention and pulling on the most relevant and replicable policies and actions for their own use.
Keith 01:02:48
Another question was that I just want to write on your point which is the playbook for developing countries. I wanted to ask from your view what are some of the things that can be replicated?
David Fishman 01:02:58
Singapore is a very wealthy country and incidentally Singapore still has I believe even to this day very high manufacturing per capita although Singapore is known as a services hub Singapore actually still has manufacturing as well and is very strong on a per capita manufacturing basis. So I would imagine that Singapore is almost kind of an ideal end state for many large Chinese cities.
But for developing countries, you know, yeah, clearly China found a niche in manufacturing. It found several niches that was a good combination of its state-led industrial policy and its huge pool of inexpensive labour. You got to start out with education, of course. So for your developing countries they need to be investing in education so that then they have a workforce a talented workforce especially engineers who are able to go into manufacturing.
I think it's true. I think I've read and I think it's true that no country has ever gotten rich on services. That countries transition into services after they are fairly wealthy. But that in the initial stages, any country that went from a developing country state to a moderately wealthy state did so by making things or by being blessed with natural resources underneath its soil. And in many cases the natural resources under its soil actually end up having negative consequences elsewhere in their economic development. But that essentially all of our rich countries got there through making things.
And so if you were a developing country then you need to make things. And if you need to make things then you need people who can make things. You need engineers. You need educated engineers. And so that seems to be the playbook the playbook that I would advocate for. That's the playbook that China went through.
Keith 01:04:55
Last question. What's one piece of advice you give to a fresh graduate entering the working world?
David Fishman 01:05:00
Specialise. We are going into a world where large language models are going to take a lot of the fun and a lot of the competitiveness out of being somebody who knows a little bit about a lot of things because everybody will be able to know a little bit about a lot of things when it comes to using AIs for research. And so the only way to stay competitive will be to become hyper hyper specialised. I think focusing on one thing and getting so good at it that you're always at kind of the cutting edge of it will enable you to stay ahead of the AIs hopefully for the duration of your career.
Keith 01:05:37
With that David, thank you for coming on.
David Fishman 01:05:40
Thank you for having me.
Keith 01:05:43
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