50 Shades of Gray Skies Over China

Pollution in China has been met with temporary shutdowns of factories to produce artificially blue skies. The pollution has nevertheless damaged the air, water, and soil reducing output of crops, livestock, fish, and food in China. At the same time the pollution has exacerbated an already existent water shortage and has reduced worker productivity with frequent illness and reduced worker lifespan by five years. High pollution industries like glass, cement, and steel manufacturing face closures and increased regulation. Industries with a cleaner focus do not face the same adversity and can better attract high skilled workers and management from both within and outside of China. Environmentally responsible businesses now have a leg up in the Chinese market, especially compared to a decade ago.

Worsening Pollution

Pollution grows on the horizon. A combination of smog, dirty water, and acidic rain slowly shape the reality of living in and doing business in China. The impacts on Chinese lifestyles came to the forefront on December 8, 2015, with the first red alert in Beijing. Officials brought the city to a halt after discovering air pollution 35 times the limit set in place by the World Health Organization. The problem extends beyond Beijing. The Wall Street Journal reported that 90% of cities in China do not meet standards for controlling pollution.

The World Bank outlined some of the main causes of the stifling pollution. Total energy consumption from pollution generating sources has increased 70% between 2000 and 2005. Coal consumption in particular increased 75% over that same timeframe. The growth of China for the previous four decades required massive scale manufacturing of cement, glass, and steel. All three are products of heavy industrial processes which by their very nature produce large quantities of pollutants.

Government Response

The downstream effects of pollution reach almost every industry in China. CNN reported on the continual drop in tourism to China for the past 3 years linked with news coverage of pollution. Local retailers also lose 20% of their business on heavy pollution days. Acid rain has destroyed 1.8% of crops annually. Pollution has disproportionately impacted heavy industrialized populations in Northern China to such a vast degree that the average life expectancy is now 5 years lower in Northern China compared to Southern China. Polluted water has exacerbated an already stressed water shortage and has decreased rural worker productivity secondary to diarrheal outbreaks. While still not quantified absolutely, the fisheries and fishermen have reported decreases in yields from water pollution run offs into the ocean.

The Chinese Government’s response to the pollution problem during the Asia Pacific Economic Cooperation Summit resulted in long stretches of blue skies over industrial areas. The solution required a shutdown of heavily polluting factories. The impact in the Hebei province alone reduced total steel output of the nation by 25%. Shutdowns of factories have reduced pollution in some cities by as much as 15% when targeted at smaller operations. Larger factories are then put under more scrutiny to reduce total pollution. This plan of action resulted in 2014 seeing the first reduction in coal usage for 14 years.

The impacts of continued industrial growth will exacerbate public health, increase water shortages, and decrease yields on key resources. The shutdown actions will only eliminate pollution at the cost of all economic activities by industries. Estimates show that the health effects alone contribute to a 6.2% reduction in GDP. Shut downs leave factories shuttered and reduce available jobs to continue economic growth in China. Neither path provides a long-term solution to the pollution problem.

Industry Solutions

A new focus on value added products and innovation could lead the way to a cleaner China. Toledo, Ohio transitioned to producing higher value products while reducing pollution in the “Glass City.” Innovation in all industries across China have produced three times better energy usage compared to 20 years ago. Reducing the amount of energy spent per Yuan of GDP. Executives and skilled laborers are already avoiding heavily polluted cities and have shown a preference for cleaner industries.

Premier Li Keqiang has pledged support for drainage pipes to combat water pollution and other public works enterprises. The Chinese Government has introduced more stringent rules which are being implemented across industries. The legislation allows local authorities more power to devise their own plans and reach their environmental targets. While the legislation does not set a specific target to limit car use or coal use, the legislation represents a step towards the future of clean industries in China.

Industries producing glass, cement, and steel face closures and increased regulation because they generate high levels of pollution. Industries with a cleaner focus can better attract skilled workers and management from both within and outside of China. Environmentally responsible businesses now have a leg up in the Chinese market, especially compared to only a few years ago.

Curtis Simmons

MD/MBA Candidate 2016