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China Struggles With Environmental Concerns and Economic Needs

10 MINS READApr 22, 2014 | 11:30 GMT
China's Pollution Problem
Buildings are shrouded in smog Jan. 14 in Changsha, Hunan province. Beijing is trying to balance environmental laws with a need for ongoing industrial activity.
(ChinaFotoPress/ChinaFotoPress via Getty Images)
Summary

China's central authorities are working to enhance the powers of the country's top environmental regulators. However, Beijing's need to accelerate environmental protection efforts will conflict with the need to sustain industrial activity and employment amid China's gradual, uncertain economic rebalancing and restructuring.

In recent years, the Chinese government has put in place some of the world's toughest emissions standards for airborne pollutants such as sulfur dioxide. Beijing has also drafted plans to limit coal use in key urban areas and to curb wasteful production in heavy polluting industries. These actions have accompanied pledges by the country's leaders to shift China from a political-economic model that prioritizes rapid growth over the environment, among other things, to one that places more emphasis on environmental protection, quality of life and domestic consumption.
 
So far, however, the government has not equipped environmental regulators with the legal powers and human resources necessary to effectively enforce these measures. Chinese Minister of Environmental Protection Zhou Shengxian has said that his is one of the weakest bureaucratic departments in the world. Perhaps Zhou overstates the case, but in recent years the ministry's piecemeal approach to regulating air pollution — a reflection of its limited capabilities and jurisdiction — has been no match for local governments and well-connected industries that need to maintain high levels of industrial activity for the sake of employment and revenues. 
 
Similar institutional and structural economic constraints have hampered the government's ability to enforce environmental regulations on several other fronts as well, including water pollution and water resource depletion — both acute problems that overlap closely with public anxiety over air pollution in China's northern industrial heartlands. However, the tables could soon begin to turn in Beijing's struggle to curb the worst environmental effects of China's industrial development, with important implications for businesses and investors in traditional domestic pillar industries such as coal and steel.
 
Since taking power in early 2013, Chinese President Xi Jinping's administration has outlined a set of measures that, implemented in tandem, could alleviate some of the conflicts of interest that have hobbled Beijing's efforts to enforce environmental regulations. These measures include documenting and publicizing the national air quality index much more comprehensively — for example, many Chinese airports now display pollution levels in passengers' destination cities — and enacting stricter laws on industrial air and water pollution emissions. The administration also outlined a panoply of market-oriented taxes and pricing reforms designed to encourage conservation of resources such as coal and water while giving local governments more stable sources of fiscal revenue. These measures could reduce local governments' reliance on the development-related fees that accompany continuous, rapid growth. Finally, Beijing has begun making efforts to boost the profile, legal jurisdiction and, most important, enforcement and punitive capabilities of the Ministry of Environmental Protection.
Chinese PM2.5 Targets
These are all measures that either remain under discussion or have entered only the earliest stages of implementation. Time will tell whether the new administration has the political capital and will to enforce them in the face of likely opposition from nearly every part of China's political and economic arena. But taken together, the measures represent the Communist Party leadership's most comprehensive effort yet to address the structural factors and imbalances behind China's environmental degradation. This, combined with Xi's ongoing anti-corruption campaign and attendant power consolidation drive, suggests that central authorities' ability to make good on their long-standing environmental pledges may soon improve.

Law and Punitive Order

Arguably the weakest link in China's battle against pollution has been the Ministry of Environmental Protection, which is responsible for enforcing air, water, soil and other environmental regulations approved by the central government. The ministry's weakness — a combination of manpower constraints, a vague legal mandate and a limited ability to punish — has virtually guaranteed that many of China's most ambitious environmental laws remain largely unenforced. A stronger Ministry of Environmental Protection — one capable of enforcing painful punitive measures on enterprises that run afoul of Beijing's laws — is only one aspect of environmental regulation. The punitive measures must be combined with incentives such as tax reforms if they are to be politically viable, and the costs of violating regulations need to exceed the costs of compliance.
 
This could explain Beijing's announcement in mid-April that it will pass new measures in 2014 to substantially enhance the Ministry of Environmental Protection's powers to ensure compliance with environmental regulations, particularly by giving it more power to levy fines on businesses that break the law. The National Development and Reform Commission, China's top economic planning body, has yet to detail the specific new powers the ministry will wield. However, it appears highly probable that the law will replace the current maximum fine system, under which enterprises are often authorized to continue polluting after they pay a one-time fee to local governments. The costs of full compliance typically far outpace the cost of this fine.

Arguably the weakest link in China's battle against pollution has been the Ministry of Environmental Protection.

Lifting the maximum fine system will be critical to the ministry's ability to force businesses such as coal-fired power plants to actually use the sulfur dioxide scrubbers with which they have been equipped. There have been a few high-profile examples of plants getting punished for not using their scrubbers, but anecdotal reports — and the persistently hazardous air across much of Northern China's key coal basins — suggest that collusion persists among local governments and industrial players to sidestep scrubber use requirements.
 
It remains to be seen whether the ministry will receive the manpower it sorely needs to effectively monitor enterprises and enforce penalties. However, with the central government hinting at its desire to enshrine environmental protection in the nation's constitution by amending China's original 1989 Environmental Protection Law — a move that likely portends more concrete measures down the road — such resources could be forthcoming.
 
Still, the National Development and Reform Commission has a well-known preference for outlining broad policy directions rather than detailing specific laws. Furthermore, industrial and ministerial lobbies will predictably seek to bend the drafting process to their interests. Considering these obstacles, new provisions governing the Ministry of Environmental Protection enacted in 2014 and 2015 will almost certainly not eradicate the ministry's limitations and shortcomings. Beijing understands that strict, instantaneous nationwide compliance with the emissions targets it has set likely would bankrupt hundreds, if not thousands, of small and medium-sized businesses (and some large state-owned firms, too) in strategically significant industries. These industries, not coincidentally, are heavily concentrated in Hebei province, which abuts the capital city. The relationship between Beijing municipality and Hebei, along with nearby Tianjin municipality, in many ways exemplifies the immense challenges China's leaders face in enforcing environmental regulations.

The Capital and Its Periphery: A Case Study

For the past three decades, Hebei province has played the unenviable but strategically critical role of supply depot to Beijing, Tianjin and other parts of China. Hebei has supplied these areas with resources including water, agricultural goods, coal, electricity, steel, low-end labor and various heavy industrial goods. In regional clusters such as the Yangtze and Pearl River deltas, centrally located cities sparked the economies of surrounding metropolitan areas by integrating them into regional manufacturing supply chains. The relationship between Hebei and the two northern municipalities, however, has been far less mutually beneficial.
 
Hebei's economy has grown rapidly in recent years due to skyrocketing demand for the raw materials and low-end industrial goods, such as raw steel, that the province produces in abundance. However, the cost of this growth has been the extreme deterioration of the province's natural environment and steep declines in reserves of resources such as coal and water. Freshwater depletion and air pollution are serious issues across northern China, but nowhere are the risks as acute or immediate as in Hebei. 
 
Unlike Foshan and other satellite cities that manufacture and process parts for assembly lines in Dongguan and Shenzhen, and which have gradually moved up the value-added chain, Hebei has been stuck supplying resource-intensive goods to its wealthier neighbors. Over the years, this peculiarly unequal and extractive dynamic has widened the human and physical infrastructural gulf between Hebei and the municipalities that it supplies.
 
Hebei also has missed out on the gains in living standards and quality of life seen in Beijing and Tianjin. Its per capita gross domestic product is roughly half that of its neighbors. Decades of policies designed to ensure adequate supplies of raw materials and resources for Beijing, Tianjin and other Bohai Rim metropolises have made Hebei one of the world's greatest industrial giants. It is also one of the most polluted places on earth, home to seven of China's 10 most polluted cities. The pollution in Hebei is so bad, and the social and political risks of continued spillover into Beijing and Tianjin so great, that it has prompted Xi to call for the creation of a Hebei-Beijing-Tianjin regional economic zone (known as Jing-Jin-Ji in Chinese) largely meant to move Hebei's economy up the value-added chain and address the region's air pollution problems.
 
The desire to improve the air quality in Hebei, and thus Beijing and Tianjin, goes hand in hand with the objective of bridging the economic and infrastructural gaps between Hebei on the one hand and Beijing and Tianjin on the other. Pollution is the most salient symptom of these imbalances, the physical legacy of a policy that has left localities across Hebei overly reliant on primary and secondary industry — heavy industry alone accounts for 47.1 percent of provincial gross domestic product, most of which comes from mining and processing ferrous metals — and that in recent years has encouraged Beijing and Tianjin to export their heaviest polluting industries to Hebei. Reversing these imbalances will require more than building new roads and bridges in Hebei. It will require reversing the flow of fiscal resources enough to enable localities in Hebei to attract the investment and human capital necessary to support less energy- and resource-intensive industries.
 
This is Beijing's goal. In recent months the central government has made fairly bold moves toward raising Hebei's profile and political status. Most notably, it has broached the idea in recent weeks of shifting some administrative functions from Beijing to Baoding, a city roughly 140 kilometers (87 miles) southwest of the Hebei-Beijing border. After decades of obscurity, Baoding looks poised to re-enter the Chinese policy limelight, potentially bringing the rest of Hebei province with it. In Beijing's eyes, transferring administrative functions (and, by extension, human and financial resources) from the capital to Baoding could be the first step toward building a more organically integrated Jing-Jin-Ji region — one that transforms the Hebei hinterland from a resource supply depot to a manufacturing base that supplies coastal consumers.

It is hard to imagine that Beijing can manage the consolidation and restructuring of industries like steel, and the transfer of the millions of Hebei residents currently engaged in these industries to new manufacturing and services-based jobs, without first triggering significant economic dislocation and unemployment.

But this remains a very distant and highly uncertain prospect that will require intensive industrial restructuring within Hebei. It is hard to imagine that Beijing can manage the consolidation and restructuring of industries like steel, and the transfer of the millions of Hebei residents currently engaged in these industries to new manufacturing and services-based jobs, without first triggering significant economic dislocation and unemployment. Beyond this, planners will struggle to convince the municipalities that moving Hebei up the value-added chain will benefit them — a tough sell considering how tremendously Beijing and Tianjin have benefited from Hebei's policy-induced underdevelopment and their privileged access to its resources.
 
A stronger Ministry of Environmental Protection with the resources to better enforce regulations could be a powerful force for the central leadership's efforts to stem growing public anxiety over air pollution, especially in China's wealthiest and most politically significant coastal cities. But in the case of the Beijing, Tianjin and the Hebei region — arguably the center of China's war on pollution — the ministry's mandate will clash with the much more gradual but similarly politically sensitive process of rebalancing and structuring the Hebei economy. As always, the need to maintain near-universal employment will constrain Beijing's efforts at reform.

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