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 Announces Import Ban On Foreign Waste To Combat Pollution

China will ban the import of 24 types of waste by the end of the year as part of a campaign against “foreign garbage”.

The ban was announced by five government agencies in July and will go into effect on December 31, 2017. It affects several classes of waste including waste plastic, glass, slag, waste wool, ash, cotton, yarn, and unsorted paper.

The ban has already affected both overseas exporters of waste and China-based purchasers of waste, as well as companies who purchase raw materials made from reprocessed waste.

Many developed countries depend on Chinese demand to handle their excess waste, which Chinese recyclers purchase, sort, process, and subsequently re-sell. As a result of the ban, prices of materials like paper and plastic have skyrocketed, driving up costs for businesses reliant on cheap recycled goods.

Waste imports in China

China’s industrial boom helped spur the growth of its immense recycling industry, as recyclers provided manufacturers with cheap materials to produce their goods. The appetite for raw materials from the manufacturing sector led China to become the world’s largest importer of foreign waste.

Last year, China imported over US$18 billion worth of waste, mostly coming from developed countries such as the US and Japan. It imported 7.3 million metric tons of waste plastics alone, representing 56 percent of the world total, valued at US$3.7 billion.

According to the Wall Street Journal, in 2016 over two-thirds of the US’ waste paper exports and over 40 percent of its discarded plastic exports were sent to China, while paper and plastic scrap exports to China were worth over US$2.2 billion. The EU27 is similarly dependent on China to take its waste, as it sends 87 percent of its recycled plastic directly or indirectly to China.

Chinese recyclers reprocess waste to make a wide range of usable materials for re-selling, such as cardboard and yarn. Businesses – both domestic and overseas – purchase these goods at an affordable rate, and are also able to market their use of recycled materials.

However, while businesses tend to tout their environmentalism by using such materials, the recycling process itself can be highly polluting within China.

The country’s recycling industry is highly decentralized and poorly regulated. Workers in the industry rarely take safety precautions – or even have access to proper equipment and supplies – to handle waste that is often contaminated with hazardous substances. Further, recyclers often discard unrecyclable waste into landfills or bodies of water, or simply have it incinerated.

Such practices are highly polluting and create health hazards for the local population.

As China seeks to address its myriad environmental challenges, including air pollution and water contamination, it is banning the import of waste that can cause environmental issues at home.

In a notification to the World Trade Organization, China’s Ministry of Environmental Protection stated, “We found that large amounts of dirty wastes or even hazardous wastes are mixed in the solid waste that can be used as raw materials. This polluted the environment seriously.”

It continued, “To protect China’s environmental interests and people’s health, we urgently adjust the imported solid waste list, and forbid the import of solid wastes that are highly polluted.”

Consequences of the ban

The ban on imported waste will have far-reaching effects, both within China and abroad.

In the short-term, prices of recycled goods have plummeted as collectors desperately seek new buyers, while waste inventories are immobile and piling up. For example, Hong Kong’s waste paper collection points have reportedly become overloaded since the ban was announced, while cargo ships loaded with paper meant for recycling have been stuck in port with no destination.

In the long-term, manufacturers in China will face higher costs for materials as they buy from other sources. Many manufacturers may have to make up for the shortfall in plastics, for instance, by purchasing from petrochemical companies.

Meanwhile, waste collectors may have to store their waste until they can find new markets. Developed countries that are used to exporting their waste now face a more pressing need to develop technology that makes waste sorting more efficient and reduces contamination levels.

The ban is not China’s first attempt to regulate the industry. In 2011, the Ministry of Environmental Protection issued regulations on the import of foreign waste, but its implementation was questionable. Most notably, Operation Green Fence, which environmental authorities launched in 2013, sought to curb imports of low quality waste.

China has instituted the latest ban in tandem with an inspection campaign within the industry. Through the first two weeks of the campaign, from July 1 to July 14, regulators inspected 888 plastic recycling factories. Of those, 590 violated certain rules, 383 had their production suspended, and 53 were shut down.

Chinese President Xi Jinping recently announced his goals for China to become a leader in pursuing “ecological civilization”. As China continues to modernize its industrial processes and combat its vast environmental problems, more stringent regulation of polluters – and possibly additional bans on waste imports – is likely.

The complete list of products included in China’s waste import ban is as follows:

 

Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.

 

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