China is undergoing an environmental paradigm shift, transitioning from the world’s top polluter to global leader in the fight against climate change. In recent months, China has dramatically strengthened the enforcement of its environmental regulations as it pursues its goal of promoting ‘ecological civilization’, and has inspected and fined countless businesses in the process.
Many areas in China suffer from severe levels of pollution, and the central government under the leadership of President Xi Jinping has initiated several crackdowns on heavily polluting industries that are non-compliant with current environmental regulations. These measures have affected business as usual in various sectors and have had rippling effects throughout the economy.
Measures taken by the government
The Ministry of Environmental Protection (MOEP) and the environmental bureau have adopted an intolerant stance against businesses flouting environmental laws over the last year, which is expected to cut air pollution levels in northern cities. Although predominantly targeting air pollution, the authorities are also stringently curbing other types of pollution, including water and soil pollution, in addition to scrutinizing waste management systems across the country.
It is important to note that although environmental laws have not been substantially altered recently, the enforcement of pre-existing laws has been tremendously increased. As enforcement of environmental laws has been historically lax in China, this sudden change in government policy has rattled the industry and made polluting businesses cautious.
In 2016, the government began conducting a series of investigations in heavy industries, and as a result, several non-compliant and illegal steel mills, coal mines, aluminum smelters, and other manufacturing units were shut down. To date, it is estimated that more than 80,000 factories have been shut down across the country by the anti-pollution drive. Other establishments caught infringing environmental regulations have been ordered to clean up their operations within a short time frame or risk closure by the inspection squad.
Penalties have been levied on around 40 percent of factories across the country as environmental inspectors have been dispatched to more than 30 regions in recent months. Inspectors have reportedly imposed hefty fines totaling over RMB 870 million (US$132.2 million) to date, and in some cases criminal liability on employers who are facing jail time for violating environmental regulations. Further, additional inspectors have been deployed to act as watchdogs and ensure that local inspectors are fulfilling their duties.
In addition, municipal authorities have filed a large number of environmental pollution cases in the past year. Beijing municipality alone has filed close to 13,000 cases against non-compliant polluters.
Rippling impact on business and economy
The sectors most severely impacted by the anti-pollution drive have been textiles, energy, heavy metals, coal and gas, mining, cement, paper, automobile, and consumer goods. The impact is also expected to shock international supply chains due to disruption in exports from China.
Inflation has spiked as firms cope with increasing costs of compliance with environmental regulations and adapt to clean energy. Increased production costs will ultimately have to be shouldered by the consumer, and the middle class will be particularly vulnerable to inflationary trends in consumer goods and electricity.
Financial and social stability has also been disrupted as more than 60,000 jobs have been lost as a result of factory shutdowns. Employers who are unable to repay debts have left their factories closed and unproductive.
In many manufacturing sectors, small-scale firms are closing down, as they are unable to compete with larger rivals due to financial incapacity to adapt to clean energy. As a result, the firms that manage to survive and adapt to the new environmental regulations and successfully switch to clean energy will significantly benefit in the medium run as they gain the market share previously held by smaller firms.
The shutting down of small and medium scale firms has also resulted in greater consolidation among surviving firms in many industries like iron and steel, resulting in a steep increase in global prices.
The business impact of the anti-pollution drive has been particularly harsh in the north as well as Beijing-Tianjin-Hebei region. It is expected that these measures may reduce GDP growth by up to two percent in the short run due to disruption in manufacturing and supply chains across industries coupled with increased costs of compliance and technological upgrading.
However, experts opine that the anti-pollution drive will have minimal macro-economic impact in the long run and, if successful, will have huge health benefits for the country’s 1.4 billion citizens. Pollution and related health and safety issues are consistently among the top concerns of Chinese people, and addressing these issues would also boost China’s international reputation as an authority in green technology and climate change leadership.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.