Beijing Looks to Markets to Fix Pollution; Leaders Take Aim at Cheap Use of Resources That Has Led to Environment Problems

Beijing Looks to Markets to Fix Pollution

Leaders Take Aim at Cheap Use of Resources That Has Led to Environment Problems


Updated Nov. 20, 2013 5:00 p.m. ET

BEIJING—China’s leaders are taking aim at the cheap use of resources that has let its industries boom but has choked its air and tainted its soil, looking to markets to play a larger role in commodity prices as a way to fix pollution. The strategy change, endorsed as part of a wide-ranging policy blueprint at a Communist Party meeting that concluded last week, promises to grant markets a “decisive role” in allocating resources, while more harshly penalizing polluters.The shift underscores top-level concerns that environmental problems are threatening economic prosperity and social stability and that it is time to tackle a central feature of the growth-at-all-costs model pursued for years: the subsidized and inefficient use of resources that environmental scholars and the government now say has contributed to a severely degraded environment.

“It’s really fueled by the fact that [China] can’t possibly carry on like this,” said Changhua Wu, China director at the Climate Group, an environmental advocacy group.

The new approach fits with broader promises by President Xi Jinping and Premier Li Keqiang to weaken the hand of government and boost competition in the state-dominated economy as a way to build efficiency and cut waste.

Questions remain about how comprehensive the shift will be. Policy changes, if carried out, are expected to spell gradually rising prices for resources ranging from natural gas to water. Higher taxes and other tools are likely to be used to try to wean the economy off coal, which is abundant and makes up the majority of China’s energy use.

To make sure local governments get the message, the government signaled it is rethinking how it evaluates officials’ performance by giving environmental policies heavier weight when considering promotions.

There is no timetable for pushing through the changes, and the political will of Chinese leaders is likely to be tested by vested interests—state-owned enterprises that want to protect their bottom lines and local governments that rely on state companies for revenues. It also remains to be seen how big a role is played by cleaner fuels.

“One of the main features of this new government is reducing the role of government” and giving more room for free markets, said Wang Tao, an expert on energy and climate issues at the Carnegie-Tsinghua Center for Global Policy in Beijing. “From what they write, I think they have a good sense of what is happening and how to fix it.”

Freeing up markets as a way to rein in resource use may reflect evolving thinking inside the party. Strictly controlling many commodity prices served as a way to keep prices low for Chinese consumers and ward off inflation the party fears could cause social unrest.

Even after China’s economic planning body raised the country’s wholesale natural-gas price by about 15% in June to an average of 1.95 yuan (32 cents) a cubic meter, prices of imported liquefied natural gas remained far more expensive. As a result, the state-controlled energy sector continues to cover the shortfall between the imported and wholesale prices even as it increases the supply of natural gas.

The worsening pollution that resulted from rapid economic growth began in recent years to grate on affluent, educated Chinese, who having joined the middle class were turning to quality-of-life issues. Dismal air quality in many places bred resentment toward state industries that long served as the backbone of growth.

“The challenge is how to balance environment with social concerns with political concerns with economic concerns. They should all be balanced,” said Tao Hu, an expert on China’s environment at the World Resources Institute.

Beyond using markets to price resources, the blueprint also calls for local leaders to face an audit of natural resources when departing from their posts, according to the party’s development blueprint.

The relative weakness of the Ministry of Environmental Protection and its local bureaus across China has hampered efforts to reduce pollution, according to scholars and officials. It remains unclear whether the ministry’s enforcement powers will be strengthened.

The party blueprint called for expanding resource taxes, which many expect would include shifting how China taxes coal, from a volume-based tax to a value-based one. That would boost revenues, which, experts said, could then be used to subsidize cleaner energy sources.

Sharply limiting coal consumption is likely to prove difficult. Coal remains China’s most plentiful energy resource. While market reforms could help development of cleaner-burning domestic natural-gas reserves, production in significant quantities remains years away.

Imported gas is an expensive alternative to domestic coal; nuclear development has slowed in the two years since Japan’s Fukushima nuclear accident; and renewable energy such as wind power struggles with grid connectivity and other issues.

State media appear to be preparing the country for higher prices. China Central Television’s evening news broadcast Tuesday cheered leaders’ decision to reform pricing structures to more accurately reflect what it described as “resource scarcity and ecological costs.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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