Beijing’s Smog Ain’t Going Nowhere

Mar 3, 2014

Beijing’s Smog Ain’t Going Nowhere

Last week was another one of those weeks in Beijing: all anyone could talk about was the smog. A brief respite after rainfall Wednesday night served only to underline just how bad things have been: the American embassy’s air quality index was back into “unhealthy” territory by Friday morning, where it remained for much of the weekend.

China’s top leaders can hardly be thrilled. For one thing, they have to live here too—President Xi Jinping braved the haze to stroll through one of Beijing’s most popular tourist spots last week. And after all the effort China threw into putting Beijing on display for the 2008 Olympics, the pollution has dealt a heavy blow to the city’s public relations.

Perhaps most crucially, China’s leaders are fearful of social unrest. Three decades of rapidly rising living standards have helped to keep Chinese society reasonably “harmonious,” as the Communist Party wants it to be. But the toxic air in Beijing makes for an angry, cynical middle class.

With all of those considerations in mind, it’s tempting to conclude that China’s supposedly “can-do” government will find a way to clean up the capital’s air. Yet, according to a depressing assessment published Thursday by Beijing-based research house Gavekal Dragonomics, the problem will be very hard to fix.

Despite Beijing’s choked roads, vehicles are responsible for only a minority of the pollution – perhaps as little as 4%, according to one study by the China Academy of Social Sciences, a government think tank.

The real culprit is heavy industry. In the Beijing and the surrounding area, 58% of PM2.5 (minute particles that are the most dangerous for human health) comes from coal combustion in the power, steel, cement and brick industries, Dragonomics said, citing a Greenpeace study.

Producing close to half the world’s steel and well over half of its cement, China is an industrial colossus. With the steelmaking industry centered in Hebei province, just outside of Beijing, the capital happens to sit at the center of one of the biggest concentrations of industrial activity on earth.

Hebei’s capital, Shijiazhuang, frequently tops lists of the country’s most polluted cities. The head of the city’s environment bureau resigned last week, according to a local newspaper (in Chinese), after less than a year in the job (also in Chinese).

The province has been tasked with closing 15 million tons’ worth of steelmaking capacity per year amid a glut of excess capacity that has driven the sector’s profits into the dust. But so far it is having trouble meeting its goals, with new steel mills being added at the rate of 30 million tons per year.

Meeting the central government’s stated pollution targets will require a 10% reduction in nationwide coal consumption over the next four years, Dragonomics estimates. That seems unlikely, given that consumption rose 2.5% in 2013, a year when air pollution attracted unprecedented attention and the government made a strong commitment to shifting China’s economy away from its reliance on heavy industry.

Cutting coal consumption would require a big expansion of other energy sources, like natural gas, nuclear power and renewables. While coal has fallen to account 65% of China’s energy mix last year from 71% in 2006, that isn’t fast enough to make for a cut in absolute terms.

“The direction is good but the speed of change is not nearly fast enough,” as Dragonomics puts it.

Even with a new gas pipeline from Myanmar and an upgrade to one from Turkmenistan, coal use is unlikely to decline by more than 3% over the next four years, the firm estimates. That would only lead to a modest reduction in pollution levels.

 

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 (www.heroinnovator.com), 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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