The advance of China’s ‘green’ agenda has been swift, making environmental issues now a key aspect of most policies.

A new Environmental Protection Law passed in 2015 requires more disclosure, enhanced enforcement, tougher penalties and greater public involvement. An ecological master plan published the following year covers water allocation and pricing, laid out consumption limits for energy-intensive industry and discussed capping carbon emissions.

The five-year plan approved in 2016 set targets for caps. And the 2017 party congress put sustainable development firmly on top of China’s agenda.

Business investment will partly offset growth impact of environmental inspections

The result is more regulation and inspections plus some production cuts, especially over winter. However, there is some concern about the effect on industrial output and the impact of increased environmental protection on growth.

We estimate that inspections slowed industrial production by 2.6 percentage points over the 14 months to September 2017, implying a 1.04 point reduction in China’s real GDP growth.

The winter production caps – part of the Beijing-Tianjin-Hebei region anti-air-pollution plan – have a larger, if more temporary, impact, probably trimming 0.2 points off GDP growth in the final quarter of 2017 and 0.1 points in the first three months of 2018. This is already factored into our forecasts.

There are positive offsets, though. Environment-related equipment spending is one of the fastest-growing areas of investment – up 16.7 per cent over a year – and equivalent to roughly a 0.3 percentage point contribution to GDP growth that offsets at least a third of the estimated drag from environment-related inspections.

Further enforcement of environment regulations should spur even more upgrading. Corporate spending on pollution treatment is also one of the fastest-growing areas of investment.

Over the medium term, reducing pollution-related diseases will make human capital more productive. Air pollution is calculated by the Rand Corporation to have reduced China’s GDP by 6.5 per cent every year from 2000 to 2010.

And China’s two-part approach to greening its growth – protect and then clean – will drive growth by putting pressure on highly polluting sectors to become more efficient, benefitting equipment suppliers and new energy sources.

China is emerging as the world’s renewable-energy powerhouse, with almost 30 per cent of global installed renewable capacity. It already has around two-thirds of global solar-production capacity.

Road vehicles cause up to a third of air pollution in major cities. China has been working to make fuel and vehicles more efficient, with varying success. But we think a shift from traditional petrol and diesel engines represents a substantial growth opportunity: the target is to have five million new-energy vehicles on the road by 2025. Providing infrastructure such as charging stations and battery capacity presents further investment opportunities.

Nationally, there is a goal to improve the number of ‘good air days’ to 80 per cent by 2020 and targets for water pollution and consumption plus soil pollution and its effect on food safety.

   

China is rapidly becoming a global leader in the green financial system that will help it reach these targets. Its two-step – protect, then clean – approach will result in winners and losers, but history shows that ‘green’ and ‘growth’ are compatible.

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