The Dirty Secret of China's Economy

Posted on: Monday, 19 June 2006, 12:00 CDT

The 2008 Beijing Olympics is being billed as one of those glorious defining moments in history that will signal China's arrival as an economic power. But what if the global media pack and the millions of tourists who descend on China two years from now take away a less-than-flattering impression of the Middle Kingdom?

Yes, China is a remarkable growth story. But it is also fast becoming an ecological wasteland, home to world-class smog, acid rain, polluted rivers and lakes, and deforestation. Environmental problems play a role in the death of some 300,000 Chinese people each year, according to World Bank estimates.

China's torrid growth statisticsthe mainland clocked 10%-plus growth in the first quarteralso mask the huge economic costs of this evolving environmental crisis. On June 5, China's State Environmental Protection Administration [SEPA] issued a report that the mainland's pollution scourge costs the country roughly $200 billion a year, or some 10% in gross domestic product, from lost work productivity, health problems, and government outlays. That is a staggering admission.

DEEP IMPACT China, of course, isn't the first high-speed developing economy to grapple with the tradeoffs between prosperity that lifts millions out of poverty and environmental damage that degrades living standards [see BusinessWeek.com, 2/27/06, "Is Beijing Greedy for Oil?"]. Think of Japan in the 1960s. What's different is China's outsized impact on the global environment.

China's economy is only about one-fifth the size of the U.S, but is already the second biggest emitter of carbon dioxide in the world, second only to the U.S. China's emissions jumped 33% during a 10-year period ended in 2002, according to the latest World Bank figures. A miasma of dirty air from China is spreading across East Asia and even reaching the West Coast of the U.S.

There is no denying that Chinese President Hu Jintao's government takes the problem seriously. Not only is it bad for the mainland's international image, but it could be an explosive political issue later in the decade if left unresolved.

RENEGADE POLLUTERS Pan Yue, vice-minister of SEPA, predicted last summer at an environmental conference in Beijing that "the pollution load of China will quadruple by 2020" if nothing is done. Some 20% of the population lives in "severely polluted" areas, according to SEPA estimates, and 70% of the country's rivers and lakes are in grim shape, figures the World Bank.

Changing all this will require a tremendous amount of political focus by Beijing. It will need to crack down on environmental renegades inside Chinese industry, encourage a move from high-sulfur coal as the mainland's primary energy source, and push to secure the most environmentally friendly technologies from abroad [see BusinessWeek.com, 8/22/05, "A Big Dirty Growth Engine"].

The "policy elite has realized that China, with its huge scale of economic development and emissions, cannot consume energy and pollute the earth the way traditional economies have done in the past," says Wenran Jiang, director of the China Institute at the University of Alberta, Canada, who made a presentation on climate change in early June to Chinese and World Bank officials.

PRESSURE TO COMPLY The good news is that some effective measures can be taken without huge outlays of government spending. Last November, for instance, China agreed to expand a promising pilot program, dubbed GreenWatch, started in 1998, from 22 cities to nationwide by 2010. The program is designed to expose the worst industrial polluters by publicly disclosing once-confidential information on factory emissions, and by ranking companies on their environmental performance.

The idea is that public pressure on the laggards will yield improvement. Some sort of pressure is desperately needed in China, where 60% of companies violate mainland emission rules, according to data compiled by World Bank senior environmental economist Hua Wang, who wrote a recent paper on the program. Similar approaches launched in the mid-1990s by the Philippines and Indonesia improved corporate emission law compliance by 50% and 24%, respectively, Hua points out.

Relocating heavy industries like steel away from population centers is another option. In early 2005, for instance, the government ordered Beijing-based steelmaker Shougang Group to wind down its iron and smelting operation in the capital by 2007 and transfer the facilities out of the city. Shougang plants, mainly fueled by coal, belch out 18,000 tons of dust and contaminants a year.

PLAN FOR NUCLEAR While China can't do much about its ravenous energy demand, it could do a far better job of shifting to cleaner technologies and using its power more efficiently. China consumes more than three times the world energy average to produce one dollar of gross domestic product4.7 times the average for the U.S., 7.7 times the average for Germany, and 11.5 times the average for Japan [see BusinessWeek.com, 4/11/05, "China's Wasteful Ways"].

Beijing has mapped out a plan that calls for hiking reliance on natural gas from 3% to 10% by 2020. Plants fired by gas burn fuel twice as efficiently as turbines fired by coal, which now accounts for two-thirds of China's fuel. The plan also calls for building 30 new nuclear reactors. Cummins (CMI) imports and makes diesel engines for mainland buses that are 30% more efficient than gas engines.

Royal Dutch Shell Group (RD) is licensing technology to fertilizer plants that converts coal into synthetic gas, which burns more efficiently. General Electric (GE) is making a killing selling gas turbines. And both GE and Veolia, of France, are marketing technologies that will harness the methane gas produced from decomposing garbage and sewage, as well as the huge amounts of gas that escape from China's coal mines.

PROFIT OR PRIDE? That said, there are some inside the Chinese government who think the country should get rich first and leave the environmental clean-up for another day. Skeptics wonder whether post-Olympics Beijing will lose interest. "The world will either benefit from a responsible rising China or it will suffer from a China that continues to pursue profits at the expense of the climate and environment," says the University of Alberta's Jiang. It will also make a critical difference to the lives of millions of ordinary Chinese citizens.

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