China’s Pollution Crackdown: How Severe is the expected Macro-Economic Impact?

China is undergoing an environmental paradigm shift, transitioning from the world’s top polluter to global leader in the fight against climate change. In recent months, China has dramatically strengthened the enforcement of its environmental regulations as it pursues its goal of promoting ‘ecological civilization’, and has inspected and fined countless businesses in the process.

Many areas in China suffer from severe levels of pollution, and the central government under the leadership of President Xi Jinping has initiated several crackdowns on heavily polluting industries that are non-compliant with current environmental regulations. These measures have affected business as usual in various sectors and have had rippling effects throughout the economy.

Measures taken by the government

The Ministry of Environmental Protection (MOEP) and the environmental bureau have adopted an intolerant stance against businesses flouting environmental laws over the last year, which is expected to cut air pollution levels in northern cities. Although predominantly targeting air pollution, the authorities are also stringently curbing other types of pollution, including water and soil pollution, in addition to scrutinizing waste management systems across the country.

It is important to note that although environmental laws have not been substantially altered recently, the enforcement of pre-existing laws has been tremendously increased. As enforcement of environmental laws has been historically lax in China, this sudden change in government policy has rattled the industry and made polluting businesses cautious.

In 2016, the government began conducting a series of investigations in heavy industries, and as a result, several non-compliant and illegal steel mills, coal mines, aluminum smelters, and other manufacturing units were shut down. To date, it is estimated that more than 80,000 factories have been shut down across the country by the anti-pollution drive. Other establishments caught infringing environmental regulations have been ordered to clean up their operations within a short time frame or risk closure by the inspection squad.

Penalties have been levied on around 40 percent of factories across the country as environmental inspectors have been dispatched to more than 30 regions in recent months. Inspectors have reportedly imposed hefty fines totaling over RMB 870 million (US$132.2 million) to date, and in some cases criminal liability on employers who are facing jail time for violating environmental regulations. Further, additional inspectors have been deployed to act as watchdogs and ensure that local inspectors are fulfilling their duties.

In addition, municipal authorities have filed a large number of environmental pollution cases in the past year. Beijing municipality alone has filed close to 13,000 cases against non-compliant polluters.

Rippling impact on business and economy

The sectors most severely impacted by the anti-pollution drive have been textiles, energy, heavy metals, coal and gas, mining, cement, paper, automobile, and consumer goods. The impact is also expected to shock international supply chains due to disruption in exports from China.

Inflation has spiked as firms cope with increasing costs of compliance with environmental regulations and adapt to clean energy. Increased production costs will ultimately have to be shouldered by the consumer, and the middle class will be particularly vulnerable to inflationary trends in consumer goods and electricity.

Financial and social stability has also been disrupted as more than 60,000 jobs have been lost as a result of factory shutdowns. Employers who are unable to repay debts have left their factories closed and unproductive.

In many manufacturing sectors, small-scale firms are closing down, as they are unable to compete with larger rivals due to financial incapacity to adapt to clean energy. As a result, the firms that manage to survive and adapt to the new environmental regulations and successfully switch to clean energy will significantly benefit in the medium run as they gain the market share previously held by smaller firms.

The shutting down of small and medium scale firms has also resulted in greater consolidation among surviving firms in many industries like iron and steel, resulting in a steep increase in global prices.

The business impact of the anti-pollution drive has been particularly harsh in the north as well as Beijing-Tianjin-Hebei region. It is expected that these measures may reduce GDP growth by up to two percent in the short run due to disruption in manufacturing and supply chains across industries coupled with increased costs of compliance and technological upgrading.

However, experts opine that the anti-pollution drive will have minimal macro-economic impact in the long run and, if successful, will have huge health benefits for the country’s 1.4 billion citizens. Pollution and related health and safety issues are consistently among the top concerns of Chinese people, and addressing these issues would also boost China’s international reputation as an authority in green technology and climate change leadership.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China: World’s Largest Greenhouse Emitter Suddenly Wants To Become A Climate Hawk

Anyone walking around outside in Beijing or indeed most major Chinese cities would probably laugh at the suggestion that China could be providing leadership in the global fight against greenhouse gas emission and climate change, but some are now claiming that the Chinese government is doing just that.

Although China has already transformed the rest of the world through its commercial clout, in the long term the biggest impact it will make on the globe is via its commitment to preventing man made climate change. While many are already lauding China’s new status as a climate hawk pointing to a government ready to put words into policy and practice, others are more sceptical highlighting its huge carbon emissions and suggesting Beijing just looks good in comparison to the Trump administration and its retreat from the 2015 Paris Agreement.

China’s ability to move to a low carbon economy will be a key part of the fight against man made climate change, fail to reduce carbon emissions rapidly and it will help ensure the world shoots beyond the maximum 2 centigrade temperature increase recommended by scientists and thus endure catastrophic climate breakdown, but succeed in rapidly and dramatically reducing the release of greenhouse gases and the worst effects of climate disaster could yet be averted.

The bad news is of course that China’s industrialisation has meant it has already claimed the mantle of world’s largest green house emitter, not a strong position with which to claim global environmental leadership upon. Of course much of this is down to the fact that it has the world’s largest population and when emissions are measured per capita the picture is less damning, that said China is an energy intensive economy where there is widespread use of outdated factory equipment and inefficient vehicles.

China is also a heavy user of coal, the worst offender in terms of emissions in the fossil fuel hall of infamy. Heavy coal use has created a series of cities which suffer from toxic smogs and polluted waterways, the result is a public health disaster which is killing 1.6 million Chinese people a year through air pollution.

But change is in air, the Chinese government’s latest five year economic plan has policies now being enacted which promise to reverse these trends. Local governments and cities are also pushing change through designing more sustainable cities and investing in public transport. What perhaps is most striking is the speed in which China has come to dominate clean energy industries, five of the top 10 wind turbine manufacturers are Chinese and five out of 6 solar panel producers are Chinese. Crucial of course to these firm’s success was government backing in the form of subsidies, so much so that that it has led other governments to accuse them of unfair trade practices.

Whatever others might think this has allowed China to rapidly build up domestic capacity in renewables and begin exporting overseas. Now the Chinese National Energy Authority has announced it will spend US$ 360 billion on renewables through to 2020. This could turn the tide against fossil fuels and demonstrate how a major developing energy market can be successfully transformed to a lower carbon density profile.

Chinese investment in renewables overseas is also beginning to make an impact – with around US$ 32 billion invested in 2016 a figure the government has promised will jump further, solar and wind projects are now appearing along the Belt and Road initiative as well developed countries and South America. That said China also continues to invest in fossil fuel plants like coal fired power stations in Pakistan.

Beijing is launching the world’s biggest emissions trading scheme this November, this will follow on from seven pilot schemes and eventually it will create a trading system across the whole country involving around 10,000 firms in key sectors like steel, power, petrochemicals and aviation. By issuing permits on how much carbon can emitted annually and by putting a price on these emissions, and then allowing companies to trade them the scheme will create strong incentives for firms to become more carbon efficient. If the scheme is enacted in the right way companies will invest in energy saving buildings and equipment to save money.

China also has a fast emerging green bonds market, the country issued US$ 36 billion (40% of the global market) in 2016 from virtually nothing in 2015, the funds issued through the bonds should be used for environmentally friendly investments, but there are doubts that all the funds are being used in the right way as reporting standards are hazy and transparency is not the Chinese financial markets strong point.

If these initiatives and policies continue China could truly lead the way in preventing climate breakdown, but there is also a danger the reform process may run out of steam and the drive to become a lower carbon economy could become unstuck. Rapid change is possible – China has shown that in the last 30 years as it moved from a rural backwater to global industrial giant, now it must repeat the challenge and become a low carbon economy.

 

Merlin Linehan has worked in development finance within Eastern Europe and Asia, and spends much of his time investigating the risks and opportunities that are created from the ongoing expansion of Chinese businesses that invest overseas in emerging markets.

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Why China Can’t Fix Its Environment Simply By Adjusting Targets

While democracies usually struggle to get anything decided and done, autocracies seem unencumbered. As Samuel Huntington famously declared, “The one thing that communist governments can do is govern; they do provide effective authority.”

Hence, it’s logical to assume that in China, as soon as the authoritarian leadership sets its mind on certain goals, the goals will be met in due time. Beijing needs only to change the targets it assigns to local officials throughout the country. Once targets change, so will the priorities and actions of the local governments, right?

Wrong. Even in a top-down command system, things are in fact not so simple.

Beijing’s ambitious environmental targets

Undoubtedly, China seems to have emerged as a key global leader in fighting climate change. After President Trump announced his decision to withdraw from the Paris Agreement, Premier Li Keqiang reiterated that “China will stand by its responsibilities on climate change.”

The top Chinese leadership is serious about tackling climate change. The latest Five-Year Plan, which guides social and economic development from 2016 and 2020, places environmental stewardship at the center-stage. The plan has set many ambitious targets, including reduction of carbon intensity (carbon dioxide emissions per unit of GDP) by 15% and energy intensity by 20% by 2020, improvement of air quality in hundreds of cities, and more.

Will these targets get implemented? This is where local and bureaucratic politics comes in, even in an ostensibly centralized state like China.

Adjust targets—a simple fix?

In the Chinese political system, local officials are evaluated according to targets set by the next higher level of government. Each target is assigned points, adding up to a total of 100. Local leaders’ career prospects and bonuses are tied to their ability to meet annual targets.

Traditionally, economic targets were given the top priority and concretely measured in terms of GDP and revenue growth. Not surprisingly, economic targets accounted for the majority of points for evaluation. Hence, they were dubbed “hard targets.” By contrast, lesser social goals like forest conservation were “soft targets.” This design of targets largely explains local officials’ single-minded pursuit of rapid growth, even at huge social costs.

If Beijing wants local officials to pay more attention to climate change mitigation, it seems logical that it should decrease the weight of growth targets and elevate that of environmental targets. As Stephen Green, head of China research at Standard Chartered Bank stated, “China’s pollution problem can be solved only if measurable environmental targets are prioritized.” This opinion is widely echoed in academic literature as well. One study concluded that “explicitly rewarding cadres with promotions for improving environmental conditions” is the way to go.

Why adjusting targets won’t work

These policy recommendations would make complete sense if local officials were only given a small number of targets. In this scenario, adding environmental targets would tip the scales and force them to reevaluate their priorities.

The problem, however, is that China’s officials today are over-loaded with numerous targets. In my book, How China Escaped the Poverty Trap, I provide a detailed comparison of targets assigned in the 1990s and 2009. This comparison shows a stark pattern of “mission creep.”

For instance, in 1989, township leaders were only assigned six targets, with economic targets taking up the lion’s share of evaluation points, all packed into one page. By 2009, the list of targets has ballooned to five pages (see figure below, from pp. 118-122 of my book). Environmental targets were included, but so were targets on education, hygiene, public order, birth control, petitions, party-building, and you-name-it. Altogether, there were 112 detailed targets. Further, there was an additional list of 27 “penalty” items that do not add points but failure to meet them will result in penalties.

Environment-related targets were assigned 3 points. Higher-level governments could marginally increase their weight, but they cannot dramatically raise it, say to 30 points. Bear in mind that there are 111 other targets for which points must be assigned, and economic goals must continue fetch the highest priority. Even if the number of points on environmental targets were increased, local officials must still attend to numerous other tasks, despite limited resources and time.

Moreover, it is nearly impossible to fairly assign credit and blame for environmental targets such as air quality, which is now a mandatory target in many cities. Unlike industrial output, air quality is affected by spillovers from surrounding locations, which local officials cannot directly control.

Worse, when over-pressured by targets that cannot feasibly all be met, local officials may resort to extreme, deceptive measures. Recently, officials from a district-level environmental protection bureau in Shanxi province were indicted for tampering with devices that measured air quality. Some cities imposed periodic blackouts in order to meet targets on reducing energy consumption.

More research on targets

Classic theories of public administration are not universal. They’re almost exclusively focused on capitalist democracies. In democracies, accountability is primarily achieved through elections. Politicians who fail to meet their constituents’ goals may be voted out of office.

In China’s authoritarian system, there are no elections. Instead, targets provide the accountability mechanism; they signal what the goals of appointed officials should be. But when there are many targets and every target is important, the system loses its signaling function.

Targets are as politically fundamental to autocracies as elections are to democracies. Yet our understanding of how targets are designed and function in practice is only a small fraction of our abundant research on elections.

Beijing’s policy wand is powerful. But making new policies will not magically fix China’s environment. Both students of public administration and climate change must look into the practical challenges of implementing the central government’s goals in China.

 

Yuen Yuen Ang is Assistant Professor of Political Science at the University of Michigan.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.