Consolidating China's Industries, One Polluter at a Time

6 MINS READOct 25, 2017 | 09:14 GMT
Air quality varies from season to season, and even from day to day. But by any measure, China's air quality has room for improvement.

The Chinese government has set ambitious goals for improving air quality in its major industrial areas. So far, its progress has been slow at best.


Enforcing more stringent environmental standards offers Beijing a way to tackle not only its air, soil and water quality problems but also the overcapacity in its heavy industries. ...

Winter is coming, and for much of China's eastern coast, that means the start of another smog season. But Beijing is trying to fight the haze, however slowly. The country's environmental movement has gained traction over the past couple of years, after initially meeting with doubt that the central government could force the many inefficient mining and manufacturing facilities to curtail their emissions. And though Beijing still has a long way to go to put its policies into practice, President Xi Jinping made clear at the recent Communist Party Congress that cleaning up the environment is a priority for his administration. Inspections and fines ramped up over the first nine months of this year, and they will continue apace into the next as Xi works to strengthen his control over China's industries, one polluter at a time.

Working With the Clampdown

Since taking power in 2012, Xi has steadily consolidated his power over China's political, economic and military affairs. Environmental regulation emerged as one of the first targets in his campaign to assert his authority. Xi made the Ministry of Environmental Protection a national agency and empowered it to dispatch inspection teams throughout the country. The ensuing crackdown on Chinese businesses has been staggering. The ministry has inspected tens of thousands of facilities in nearly a dozen provinces this year alone, and by September it had collected more than $130 million in fines. Numerous plants across a variety of sectors have shuttered their operations because of the inspections; hundreds of officials in China have faced discipline for alleged environmental violations. And now that the ministry has wrapped up its provincial checkups, it is expected to begin conducting random inspections of industrial areas late this year or early in 2018.

Whether the next rounds will yield the same success as the earlier sweeps is hard to say. Either way, though, the inspections seem to be achieving their intended effect. Companies throughout China are changing their attitude toward environmental regulation: Rather than defy the Ministry of Environmental Protection, polluters have initially and overwhelmingly complied with the inspections. Many businesses even have pre-emptively shut down or scaled back production in anticipation of the ministry's findings.

Mixed Results

Beyond the overall response to Beijing's firmer standards, the Ministry of Environmental Protection is also charting their effects through more scientific means. So far, the numbers suggest that progress is slow at best. Recent data indicates, for example, that air quality along the east coast and in 13 cities around the capital has declined over the course of this year. Air quality varies from season to season and even from day to day, and it depends on a variety of climatic and industrial factors. Local officials, moreover, have resolved a large majority of the issues the ministry reported to them this year — an accomplishment in its own right. Nevertheless, the findings bode ill for Beijing's plan to reduce the average concentration of hazardous airborne particles by more than 15 percent from their 2016 levels, and for its new goal to drastically cut air pollution by 2035.

While they have missed the mark in improving air quality, China's environmental policies have had a more pronounced effect on the market for minor metals. Beijing has targeted facilities that mine and process metals such as vanadium, neodymium, praseodymium and tungsten, along with nonferrous metals such as lead, zinc, copper, nickel and aluminum, in its environmental crackdown. And because China accounts for a significant portion of global demand for and production of these materials, its policies have yielded far-reaching consequences. Prices for several metals have spiked in recent months, and production rates for nonferrous metals have fallen 2 percent since last year. In addition, numerous industries, including chemicals, electronics and textiles, have reported disruptions in their supply chains due to the wave of environmental inspections. Industry experts say that the fallout from the inspections could cause complications in Europe and in the United States during the holiday season as well.

Killing Two Birds With One Stone

Yet despite the shortcomings and repercussions, China's environmental agenda is paying off for Beijing. One of the strategy's main objectives, in fact, has less to do with improving environmental conditions than to do with streamlining China's unwieldy and inefficient industrial sectors. Take steel manufacturing and aluminum smelting, for instance. In these industries, the least efficient producers are often guilty of the most extensive environmental violations. Enforcing its environmental standards enables Beijing to kill two birds with one stone, because the cost of revamping their facilities to comply with the new standards will probably be too great for many smaller companies to bear. Larger firms aren't immune from the sweep, either; together, Xinfa Group Co. and China Hongqiao Group Ltd. — the world's biggest aluminum producer — have had to shut down more than 3 million metric tons of production capacity per year. Assuming these facilities stay offline, their closure will help address the overcapacity problem in China's heavy industries.  

But these measures are only the start of Beijing's efforts to cut down on pollution and inefficiency. In September, the central government unveiled a new color-coded pollution classification system to evaluate the level of environmental stress across the country. Each region will receive a rating ranging from green to red (with blue, yellow and orange in between) based on its environmental conditions. Beijing will then offer green areas incentives to keep up the good work while punishing red areas by withholding approval for new projects. The initiative also lays out a variety of methods to monitor pollution levels in real time, including drone technology.

The monitoring systems, however, will be only as effective as the enforcement mechanisms Beijing devises to keep cities and businesses in line with its policies. With that in mind, the central government will levy an environmental protection tax, assessed based on an entity's pollution emissions and collected by the tax bureau, beginning in January 2018. The government will apply the same tax rate to businesses across the country regardless of size, theoretically to facilitate enforcement and collection. In practice, though, the flat tax — combined with the cost of modifying facilities in accordance with new environmental standards — will increase the financial burden on small and medium enterprises in China. The more companies that close their doors, the closer Beijing will be to consolidating its pollution-heavy industries.

Across the country, China's leaders are under mounting pressure to reduce pollution in compliance with the central government's environmental protection policies. But for Beijing, the measure of the policies' success lies not in water, air or soil quality but in the amount of control it gains over industrial production.

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