The Greening Of China

As the economy has grown, so have waste and pollution. But there's big money in repairing the environment

By rights, the city of Xining ought to be a pretty nice place to live. A remote provincial capital of 2 million people, it's perched 2,275 meters up, right on the edge of the Qinghai-Tibet Plateau. It's flanked by the 4,000-meter-plus peaks of the Daban Mountains and sits astride the Huangshui River, coursing down from the plateau. But Xining is hardly an alpine idyll. In fact, it often looks more like an industrial nightmare. Thick smoke pouring from its 10 smelters blocks the view of the mountains, while the city's five chemical plants have long fouled the river with their waste. Outside the city, loggers have denuded the mountain slopes of their thick forests, and millions of sheep, goats, and yaks have left lush pastures rutted and barren. As if that weren't enough, the deforestation and overgrazing have rendered thousands of square kilometers of once-fertile grassland parched and unproductive.

China has won lots of praise lately for high-visibility cleanup campaigns in showcase cities such as Beijing and Shanghai. But much of the rest of the country is paying the price of rapid economic expansion. From Xining through the farmland of Hubei Province and on to the northeastern rust belt, much of China is an environmental disaster. More than half of China's main waterways have excessive levels of chemical and biological pollutants. And one recent survey found that nearly a third of China's largest cities have air that's barely fit to breathe. That has given China the world's highest rate of chronic respiratory disease, with a mortality rate five times that of the U.S. "It is very clear that, with pollution, China still faces very critical challenges," says Jostein Nygard, a China specialist at the World Bank.

This is plenty distressing for those who have to drink China's water and breathe its air, of course, but it's also quite simply bad for business. At some point, pollution is going to get in the way of China's ultrafast development. Factories -- especially high-tech ones -- need clean water to aid manufacturing, and farmers need fresh water for their fields. Workers who suffer chronic lung infections are less productive than healthy ones. Children with high levels of lead in their blood or nagging intestinal ailments can't study and learn. Inefficient factories waste precious energy and water. Deforestation and overgrazing destroy productive land, while acid rain damages crops. Economists estimate that the financial toll on China from the constant bombardment of environmental insults ranges as high as 7% of gross domestic product every year.

In short, China cannot afford to stand by and watch its environment collapse. That's why the mainland's Communist leaders have taken their cleanup effort beyond the biggest cities. The government is committed to spending $85 billion by 2005 on environmental protection across the vast nation. Of that, some $68 billion will go to major projects such as installing scrubbers on more than 50 large coal-fired power plants, building hundreds of sewage-treatment facilities, and putting emissions monitors on industry smokestacks. An additional $11 billion will fund construction of scores of hazardous-waste treatment and disposal plants in the next three years. Much of the remainder will be spent to plant trees on deforested land and to enforce new regulations.

OLYMPIC INCENTIVE

But while the cleanup campaign across China is serious, Beijing will continue to be the star. One big reason: To win its bid to host the Olympics in 2008, the capital had to promise huge improvements in air and water quality. The city plans to build new sewage-treatment plants, convert furnaces to gas, and introduce strict new limits on vehicle emissions. "It puts heavy pressure on us, but we will try our hardest to achieve our targets," says Pei Chenghu, deputy director of the Beijing Municipal Bureau of Environmental Protection, which has pledged to spend 4% of the city's gross domestic product -- some $1.5 billion annually -- on environmental protection.

All that money means lots of potential profits for companies that can help in the cleanup. Already, pollution fighting in China has become a $20 billion annual industry, and it's growing by roughly 20% a year, according to the China Association of Environmental Protection Industry, a Beijing trade group and consulting firm. Companies from around the world are rushing in to sell China smokestack scrubbers that cut emissions from power plants, build sewage-treatment and water-purification facilities, and clean up the country's gritty cement factories. "The next 5 to 10 years will be a golden era for environmental protection in China," predicts Li Baojuan, deputy director of the industry association.

One area that's seeing plenty of investment is water. In 1998, Britain's Thames Water PLC sank $23 million into China's first privately funded water-treatment project. Today, that facility provides clean water to 2 million residents of the Dachang district of Shanghai. Then last year, Thames spent $70 million to buy a 49% stake in China Water Co., which treats drinking and waste water in seven Chinese cities. "China has the potential to become one of the top countries we work in," says Kyeong Choi, China country director for Thames Water. "I don't think any serious player could afford to ignore this opportunity." Another company making a big bet on China is Veolia Water of France. Veolia has invested $242 million in a water-treatment-and-supply joint venture in Shanghai.

Another crucial part of China's cleanup is a drastic reduction in coal consumption. Most houses in the country are heated by coal, and this fuel powers most of China's industrial and energy infrastructure. The preferred substitute is clean-burning natural gas, and the switch can yield dramatic results. By yearend, Beijing is scheduled to finish refitting more than 40,000 small boilers and 10,000 large coal boilers with gas systems in the capital city's four central districts. The plan is to convert all eight districts of Beijing as well as the city's four suburban areas entirely to gas before the Olympics start in 2008. The shift has already doubled the capital's annual clear days, to 203 last year. "You wouldn't have thought Beijing had any mountains around it before," says the World Bank's Nygard.

But for now, there isn't enough affordable gas to come even close to meeting China's needs. That's why PetroChina Co. is negotiating with international oil giants Royal Dutch/Shell Group, ExxonMobil, and Russia's Gazprom to develop gas fields jointly in China's west. If the companies can reach a deal, the foreigners will join PetroChina in building and operating a 4,200-kilometer pipeline to deliver the gas from the Xinjiang region to Shanghai by 2005.

Plenty of corporations are already profiting from China's big cleanup. Energy-hungry fertilizer plants are licensing Shell technology for turning coal into gas. Indiana-based Cummins Inc. has invested $140 million in factories making low-emission diesel engines for bulldozers, excavators, and buses. And Cummins imports engines fueled by natural gas for mainland bus fleets. Now the company is looking into manufacturing the engines in China as well. Nearly a dozen cities in China have bought machines that monitor auto emissions from Mustang Dynamometer of Twinsburg, Ohio. "Companies are becoming more and more conscious of the importance of the environmental protection industry in China," says Huang Jianghua, Mustang's chief representative in the country.

The government is also doing its part, even in far-flung places such as Xining. There, officials in 2002 launched a project they call "blue sky, clean water, quiet environment." The city has so far spent $31 million to convert 357 boilers used in heating apartment and office buildings from coal to natural gas. And two years ago, the city invested $20 million in a wastewater treatment plant, so that the Huangshui is now running cleaner.

The continuing restructuring of China's economy doesn't hurt, either. In the past six years, more than 70,000 state enterprises -- including hyperpolluting chemical plants, steelmakers, and cement producers -- have been shuttered. To replace them, China is encouraging light industry startups in such areas as electronics and telecommunications.

To keep automobile fumes in check, scores of emissions-testing centers have been set up across Beijing and in other large cities. By next summer, cars in the capital will be required to meet the tough emissions standards in place in the European Union. And since 1999, Beijing has deployed more than 1,900 buses running on compressed natural gas, the largest such fleet in the world. By 2008, the city hopes to have 18,000 electric and natural gas-powered buses on the streets.

New laws and regulations are helping, too. "There has been an enormous amount of environmental legislation passed in China," says Husayn A. Anwar, managing director of Sinosphere Corp., a Beijing environmental consultancy. Leaded gasoline is now banned in Beijing, Shanghai, Guangzhou, and Chengdu. A clean production law will soon require polluting companies to report on their emissions and recycle some products. The new measure will also grant preferential loans and tax exemptions to clean producers. And a law requiring that all infrastructure projects include an assessment of environmental impact came into effect on Sept. 1.

WEAK ENVIRONMENTAL COPS

All those laws, though, won't do anything if they can't be enforced. The ministries of Construction, Land & Resources and Agriculture regularly overrule the less-powerful State Environmental Protection Administration when projects are slowed by land use and emissions regulations. Even though the laws outline sweeping goals for the cleanup of air and water, penalties for polluters often amount to slaps on the wrist. Furthermore, laws are often vaguely worded and difficult to implement. "Even the enforcement agencies often aren't sure how to apply legislation," says Anwar.

There's a bigger problem related to the growing chasm between rich and poor China. Factories facing burdensome regulations in wealthy regions often pick up and move to poorer areas, where authorities are more concerned about jobs and tax revenues than they are about the environment. For example, faced with stiff new local antipollution laws, paper and chemical plants in the rich coastal province of Jiangsu have shifted their manufacturing to landlocked Jiangxi in recent years. "It's one thing to have regulations, but another to enforce them," says Bruce Murray, the Asian Development Bank's representative in China.

Worse, for every step forward, China often seems to be taking two steps back. Even as pollution in big state-controlled factories is beginning to be addressed, smaller, less easily regulated private enterprises are causing environmental headaches. That includes everything from unregulated coal mines spread across the Mainland, to paper mills and dye plants along the flood-prone Huai River in Anhui Province. In addition, China's farmers are using ever more pesticides and fertilizers on their fields. The runoff from these toxins -- as well as untreated sewage -- too often leaches into drinking water.

And as consumers get richer, they pollute more. There is more auto traffic and car exhaust, more trash from the purchase of consumer goods, more sewage from rapidly growing cities. As a result, there has been an explosion of toxic waste from the factories proliferating in the Pearl River Delta and elsewhere.

But, as in much of the rest of the world, the rise in living standards is also leading to calls among members of the new middle class for greater attention to the environment. Newspapers are writing about the problem more often, and independent environmental groups are springing up. As Beijing's leaders try to balance the needs of development with the imperative to clean up, it may well be the citizens who lead the way.

By Dexter Roberts in Xining

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