Through China’s Smog, Darkly; Beijing talks pollution control but not the political reform required

Through China’s Smog, Darkly

Beijing talks pollution control but not the political reform required.

Updated March 3, 2014 6:26 p.m. ET

Chinese supremo Xi Jinping last week strolled through a popular Beijing neighborhood during the latest “airpocalypse,” as filthy grayish-yellow haze smothered the city’s streets. The Chinese leader mingled with locals, posed for cameras and conspicuously wore no face mask to hide from the smog. The message, per state-run Xinhua’s headline: “Breathing together, sharing the fate.”

Mr. Xi’s gambit comes amid a broad government effort to head off rising popular discontent caused by choking air, unsafe water and toxic rice. The problem is that Beijing has no plans to alter China’s main driver of environmental ruin: unaccountable, one-party government.

It’s not hard to see why Chinese citizens are up in arms about pollution. In northern China, where steel production and other heavy industry are centered, air pollution reduces average life expectancy by five-and-a-half years, according to estimates from the U.S. National Academy of Sciences. Beijing’s air is “barely suitable” for human beings, China’s state-backed Shanghai Academy of Social Sciences warned last month. In Harbin, 650 miles northeast, smog recently cut visibility to fewer than 10 meters, causing some public buses to get lost along their routes.

State researchers estimate that up to 20% of China’s arable land may also be contaminated with heavy metals, partly a result of farmers trying to meet central-planning mandates by overusing chemical fertilizers. Officials in Guangzhou last year found 44% of rice samples contaminated with cadmium, a fertilizer and heavy-industry byproduct that can cause cancer, kidney failure and crippling bone pain.

Such environmental degradation isn’t an accident, or even a natural consequence of rapid economic growth. Rather, it arises from China’s politics.

For starters, Beijing’s government-directed economic policies mute the incentives for good environmental behavior that act on companies in market economies. In a free market, pollution is an economic “externality” that companies must figure into the cost of doing business. In China, pollution is part of a political transaction.

Companies have less incentive to reduce waste because they often pay subsidized low prices for inputs such as raw materials and capital. They also know they will face few penalties for environmental infractions but bigger headaches for missing economic targets. This is the pattern that so degraded the environment in the Soviet Union and East Germany.

Then there is the lack of rule of law. Citizens who believe they’ve been injured by pollution have an uphill battle seeking redress in court from the polluter, especially if that polluter happens to be a large company with ties to local or national government.

Meanwhile, in a political system afraid of the citizenry, activists who highlight pollution can run afoul of authorities’ efforts to censor the Internet, especially social media. Beijing’s censors tried to scrub references to the Shanghai Academic of Social Sciences report on air pollution last month, part of a history of suppressing unfavorable environmental news that continues with the “state secrets” label slapped on a government survey of soil pollution completed more than a year ago. As for giving ordinary citizens any real say in crafting environmental laws and regulations, good luck.

So pardon Chinese who are suspicious of Beijing’s environmental action plans. Authorities have introduced a monthly “Environmental Law Enforcement Week,” while the central government says it will spend $275 billion to limit air pollution over five years, promising reductions of 15%-25% in Beijing and two other industrial centers. Local officials will supposedly have incentives to balance economic growth with environmental protection, including a special fund for cities and regions making “significant progress” against air pollution. That fund will be $1.65 billion in an $8 trillion economy.

We’re skeptical that any of this will clear China’s air given the political incentives to keep polluting. China may need to tolerate some pollution today against the need for rapid growth, but it’s increasingly clear that citizens are unhappy with where leaders in Beijing are drawing the line. Until China develops more democratic and market accountability, Mr. Xi may want to don a mask the next time he walks in public.

 

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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