China environmental technology

U.S. DEPARTMENT OF COMMERCEInternational Trade Administration

Washington, D.C.September 2002

Library of Congress Cataloging-in-Publication Data

China environmental technologies export market plan.p. cm.

1. Pollution control equipment industryChina. 2. Pollution control equipmentindustryUnited States. 3. ImportsChina. 4. Export marketingUnited States.5. PollutionChina. 6. Market surveysChina. I. United States. International TradeAdministration.

HD9718.C62 C48 2001382.4568176--dc21

2001051470

ISBN: 0-16-051189-5

For sale by the Superintendent of Documents, U.S. Government Printing OfficeInternet: http://bookstore.gpo.govTelephone: (202) 512-1800Fax: (202) 512-2250Mail: Stop SSOP, Washington, DC 20402-0001Stock number: 003-009-00728-3

Illustration on page viii courtesy of the Central Intelligence Agency.

The full text of this report is available on the International Trade AdministrationsInternet site at www.environment.ita.doc.gov. Reprints on paper or microfiche areavailable for purchase from the National Technical Information Service, 5285 PortRoyal Road, Springfield, VA 22161; www.ntis.gov.

Federal Recycling ProgramPrinted on recycled paper.

China Export Market Plan iii

AcknowledgmentsThis report was prepared by Sinosphere, Inc., under

contract to the Office of Environmental TechnologiesIndustries of the U.S. Department of Commerce,International Trade Administration, with assistancefrom the U.S. and Foreign Commercial Service,

Beijing. Conclusions and statements expressed in thisreport are those of the contractor and do not necessari-ly represent the views or policies of the U.S.Department of Commerce or the U.S. government.

China Export Market Plan v

Contents

Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vii

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ix

1 The Market for Environmental Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

2 Economic Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

3 Legal and Policy Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

4 The Water Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

5 The Solid Waste Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

6 Air Pollution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56

7 The Environmental Services Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62

8 Resource Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

9 Finance Programs and Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70

10 Positioning U.S. Exporters in the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80

Appendices

Appendix A: Maps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95

Appendix B: China Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

Appendix C: International Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104

Appendix D: Legal and Market Consultants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108

Appendix E: Web Sites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110

Appendix F: Development Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .116

China Export Market Plan vii

ADB Asian Development Bank

BOT build-operate-transfer

CDB China Development Bank

CESTT Center for Environmentally Sound Technology Transfer

CFB circulating fluidized bed

CIDA Canadian International Development Agency

COD chemical oxygen demand

CRAES Chinese Research Academy of Environmental Sciences

CSRC China Securities Regulatory Commission

EIA environmental impact assessment

EPB environmental protection bureau (provincial and local levels)

EPU Environmental Projects Limit

ETI Environmental Technologies Industries

Ex-Im Export-Import Bank of the United States

FAS free alongside ship

FGD flue gas desulfurization

GDP gross domestic product

GEF Global Environment Facility

GTZ Deutsche Gesellschaft fr Technische Busammenarbeit (German Technical Corporation)

HSE health, safety, and environment

HTS Harmonized Tariff Schedule

IFC International Finance Corporation

IPR intellectual property rights

JEXIM Export-Import Bank of Japan

JV joint venture (enterprise)

JBIC Japan Bank for International Cooperation

MIGA Multilateral Investment Guarantee Agency

MOFTEC Ministry of Foreign Trade and Economic Cooperation

NGO non-governmental organization

NPC National Peoples Congress

Abbreviations and Acronyms

OECD Organization for Economic Cooperation and Development

OECF Overseas Economic CooperationFund of Japan

PDF project development funds

PM particulate matter

PPP public private partnership

PRC Peoples Republic of China

RMB yuan renminbi (Chinese currency)

SDPC State Development and Planning Commission

SEPA State Environmental Protection Administration

SETC State Economic and Trade Commission

SOE state-owned enterprise

TDA Trade and Development Agency

TEC total emissions control

TIPC total investment in pollution control

tpd tons per day

TSP total suspended particulate

TVIE town and village industrial enterprise

UNCHE United Nations Conference on the Human Environment

UNDP United Nations Development Program

UNEP United Nations Environment Program

UNIDO United Nations Industrial Development Organization

USAEP United StatesAsia Environmental Partnership

USAID U.S. Agency for International Development

WFOE wholly foreign-owned enterprise

WHO World Health Organization

WTO World Trade Organization

Note: Unless otherwise noted, dollar figures given are U.S. dollars.The exchange rate for the Chinese yuan, or RMB, has been calcu-lated at 8.3 to the U.S. dollar.

viii U.S. Department of Commerce, International Trade Administration

Environmental protection is currently receiving moreattention in Chinese domestic policy than ever before,and all indications are that this attention is going to con-tinue to increase. Spending on environmental protectiontopped 1 percent of Chinas gross domestic product(GDP) for the first time in 1999, and investment ratesare expected to continue rising. Similarly, citizenawareness and the demand for environmental well-being are increasing. The central government, increas-ingly cognizant of the financial and social costs of adeteriorating environment, has clearly made its protec-tion a priority.

In November 2000, the Chinese Research Academyof Environmental Sciences (CRAES) estimated thatRMB 700 billion ($85 billion) would be needed tomeet the environmental goals of the Tenth Five YearPlan (20012005). Other estimates indicate that asmuch as hundreds of billions of U.S. dollars will benecessary to address all the issues thoroughly. TheWorld Bank has estimated that 2 percent of GDP willbe needed just to bring air quality standards withinrange of those seen in the United States in the 1980s.Regardless of the estimations observed, the centralgovernment is expected to contribute only 11.4 percentof the CRAES estimate ($9.7 billion) over the next fiveyears, while 34 percent of that estimate (nearly $29 bil-lion) is expected to be sourced from provincial andlocal governments and 55 percent (over $46 billion)from business enterprises themselves.

The financial demands indicate a strong need fornon-public investment, whether it be directly fromChinese state-owned enterprises (SOEs), from thesmall but growing domestic private sector, or from avariety of foreign investment channels. Under idealmarket-oriented circumstances, such investment mightmaterialize with relative ease, but as the system cur-rently functions, it remains challenging to operate prof-itably in Chinas environmental sector. This is due inpart to the facts that pricing strata for environmentalservices such as waste and water management do notreflect the actual costs of providing those services,guarantees and security mechanisms are not well estab-lished to mitigate the risks of private investment, andlegal transparency and equitable enforcement of the

law remain lacking in many instances. The governmentappears to be aware of these conflicts and the fact thatthey must be addressed if the private sector is to play aconsiderable role in the environmental protection plan.The rate and efficacy with which these issues can andwill be addressed is uncertain.

There is already a trend toward the liberalization ofenvironmental service tariffs. Water prices are rising,and some investors report cooperation from localgovernments in setting water prices at rates that offerpotential for returns on long-term facility investments.Similar tariff liberalization may carry over towastewater treatment and, in due time, to solid wastemanagement as well. Nonetheless, the common consen-sus is that, in order to enter the market and eventuallyturn a profit, investors must have both ample financesand patience.

Because most of the government bodies and enter-prises (both SOEs and private enterprises) seeking toinvest in environmental protection work under financialconstraints, it is critical that the technologies they investin are efficient and affordable. A fundamental underly-ing indication of this market analysis is the Chinesedemand for innovative technologies that can providesignificant results at relatively low marginal costs, man-agement and clean production schemes that can assist inthe attainment of efficiencies, and innovative recyclingtechniques that can turn waste products into money-generating commodities.

Yet, before attempting to enter the Chinese market,it is important to keep in mind the eccentricities ofdoing any sort of business in China. Numerous com-plications and barriers, many of which are addressedin detail throughout this document, are encounteredby nearly all exporters and foreign investors that enterthe Chinese marketplace. Perhaps paramount amongthose is personal relations, referred to in Chinese andcolloquially among non-Chinese as guanxi.Personal relationships are often at the core of businessdealings in China. For those who lack the time,money, ability, or interest to establish such relationsand presence in China, an increasing number of serv-ice providers with extensive connections and know-how can, for a fee, provide the necessary connections,

China Export Market Plan ix

Executive Summary

networking, and guidance. Regardless of the facilitationand assistance sought, entry into the Chinese marketcan be a slow and sometimes exasperating process;those willing to spend the time and effort may find thepayoff worthwhile in the end.

For the purposes of this report, the environmentalsector is divided into the water sector, the solid wastesector, the air sector, the services sector, and resourcemanagement. All of these sectors present unique oppor-tunities and complications, which are discussed in turnin the corresponding chapters. Additionally, efforts toenter markets in any of the sectors are subject to a rela-tively standard set of conditions that apply across theenvironmental sector and in some cases to foreigninvestment in China in general; these conditions areaddressed in the remaining chapters.

This market study aims to clarify three things forU.S. companies looking to invest in Chinas environ-mental protection industry:

1. The real demands for environmental protectionin China,

2. The current investment climate in the environmentalprotection industry and developing trends that mayaffect it in the near and medium-term future,

3. Methods to access the market and potentialresults that can be reasonably expected frominvestment efforts.

This report does not provide comprehensive lists ofindustries looking to buy or manufacture equipment,local governments looking to implement initiatives, ormassive infrastructure development programs that mayoffer opportunities to technology providers, as all thesetypes of information are time dependent and would beobsolete soon after printing. It does, however, indicatechannels by which investors can find this informationwhile offering insights into what the market may have tooffer as China pursues its goal of rapid modernization.

x U.S. Department of Commerce, International Trade Administration

Chinas domestic environmental technology industry,according to local government and business leaders,does not lack the ability to produce standard environ-mental protection equipment. However, the quality andinnovative character of this equipment is widely knownto be poor, and the countrys demand for reliable, afford-able, and effective environmental protection equipmentis not satisfied. Many of the potential consumers of suchequipment lack access to necessary finances. The man-agement skills and know-how needed to use the avail-able technology effectively remain substandard,severely cutting into the efficient allocation of what lit-tle funding is available.

Chinese-produced equipment that is of lesser qualitythan similar foreign-produced equipment is oftenfavored by Chinese end users, as it makes up for itsshortfalls in quality by being less expensive and domes-tically produced. In some instances, purchasers arebeginning to favor more expensive, higher-qualityexports as maintaining mediocre domestically-pro-duced equipment proves to be inefficient. Nonetheless,it is difficult for foreign technology producers exportingto China to enter the market competitively with prod-ucts that are similar in design or function to anythingalready produced in the country. The exceptions to thisrule are exporters that are able to provide equipment atsignificantly reduced prices and those that offer attrac-tive support packages. Such exporters remain few,given such factors as high import tariffs, reduced pro-duction costs in China, and various other market barri-ers. Changes associated with the accession of China tothe World Trade Organization (WTO) are having a ben-eficial impact.

Vendors looking to export equipment to China needeither to provide exceptional products brokered througha reliable local representative or to enter the market indi-rectly through multilateral projects, through other for-eign-funded investment schemes, or by targeting thedemands of foreign-invested companies operating inChina. Another option is to forgo the notion of exportingand establish a local presence in-country via a joint ven-ture (JV) or wholly foreign-owned enterprise (WFOE).Such in-country operations can reasonably expect ashare of the market demand if they offer competitively

priced goods and services. Trends indicate that Chineseend users prefer to buy equipment and parts produced byWestern-invested JVs and WFOEs due to inherent qual-ity differences. JVs and WFOEs can also maintain com-petitiveness by avoiding customs tariffs and takingadvantage of reduced production and labor costs thatexporters cannot. Changes associated with WTO acces-sion are influencing these realities and should be consid-ered when developing a market strategy. (See furtherdiscussion of the WTO later in this chapter.)

Despite the broad range of environmental legisla-tion that has been promulgated over the past decadeand will likely be promulgated in the decades to come,regulation remains weak or non-existent. Chineseenvironmental protection is not regulation driven butrather economically driven; the economy and itsforces, meanwhile, can be described as somewhat mar-ket oriented although controlled by seemingly monop-olistic behavior. Once this is understood and amarketing strategy is developed that provides an eco-nomic and profit-driven explanation for the use of aproduct, then market entry may be possible. Such amarket strategy would require indications not only thata proven technology is technically appropriate for atask but, more important, that savings can be realized,that the payback period for an investment would befavorable, and ultimately that profitability could beenhanced. More sophisticated and costly technologiesmight require creative financing, in which the vendorwould initially carry some of the cost, thus shoulder-ing some risk in proving that the technology is viable,and would later be paid back from the accrued savingsor profits according to a pre-arranged formula.

Chinas Real Demands

The domestic production of basic environmentaltechnology is not impossible for China. The followingis an assessment of the countrys more complex andadvanced needs, which can be roughly divided into fourcategories: inexpensive solutions, innovations and effi-ciency, management skills and best practice, and main-tenance and equipment servicing.

China Export Market Plan 1

Chapter 1

The Market for Environmental Technologies

According to State Environmental ProtectionAdministration (SEPA) statistics, over 70 percent ofChinas pollution problems stem from industrial pollu-tion, which is primarily generated by seven industrialsubsectors: non-metal mineral production; chemicalproduction; pulp and paper production; textiles; ferroussmelting and processing; mining; and electricity pro-duction. Nonetheless, other sources such as municipalwaste and agricultural pollution factor heavily into theequation, and the needs discussed below are generallyapplicable across the board.

Inexpensive Solutions

Available finances for environmental protection fallfar short of what is needed to address Chinas seriousenvironmental degradation. One consistent responsefrom local government leaders and enterprises duringthe research for this market plan was that needs aretremendous but money is scarce.

Foreign enterprises looking to provide marketablesolutions to Chinas environmental problems need tofind innovative solutions and to develop affordable andcost-effective methodologies backed by creative financ-

ing. Technology providers who can offer means to makesignificant environmental improvements at affordableprices find themselves warmly welcomed in China.

The potential market size, economies of scale, andthe reduced costs of producing in Chinathrougheither a JV or WFOEare keys to commercial viabili-ty for inexpensive solutions. A solid market analysis,effective and widespread marketing, and adept use ofthe advantages of in-country production are allrequired. Enterprises composed, at least in part, by for-eign technology providers are regarded as superior bymany consumers in China.

Innovations and Efficiency

SEPA Minister Xie Zhenhua has indicated thatRMB 700 billion ($85 billion) will be needed to meetthe environmental goals of the Tenth Five Year Planand, according to CRAES, about 55 percent of that isexpected to be covered by enterprises themselves.However, many business enterprises already viewenvironmental protection as a costly burden, and newgoals are met with increased disfavor. Therefore, amarket demand is developing for innovations and effi-

2 U.S. Department of Commerce, International Trade Administration

Box 1. Industries Find Efficiency Through Green Business

Sinopec Corporation and the Shanghai Baosteel Group (Baosteel), although not the only Chinese industries to do so, arefinding that smart business simultaneously generates revenues and protects the environment. Both companies havestrong internal health, safety, and environment (HSE) departments that establish and enforce standards that often exceedthose of the state. Ultimately, their efforts pay off in revenues and offer positive public relations as they enter theinternational market.

Since 1983, Sinopec has tripled its revenues while simultaneously reducing pollution. Between 1998 and 1999 indus-trial output increased 12 percent while major contaminants continued to decrease.

In 1997, Sinopec spent RMB 90 million ($10.8 million) transforming 22 production units into clean production units.The investment was recouped through reduced waste management and pollution treatment costs within one year ofoperation. Phase two, comprising another 20 units, is currently under evaluation, and phase three is already in progress.

Investment in proactive safety measures by Sinopec and its subsidiary enterprises reached RMB 1.3 billion ($157million) over the past three years. In 1998 and 1999, they collectively suffered RMB 4 million ($483,000) and RMB 8million ($967,000), respectively, in asset damages due to accidents. Between 1984 and 1997, before HSE was initiat-ed, that number averaged 20 to 30 million RMB ($2.4 to 3.6 million) per year.

Baosteel has been experimenting with recycling methodologies that use steel production waste products as a rawmaterial in the construction of concrete roads. In 1998, the steel producer manufactured 10.16 million tons of steeland generated 5.5 million tons of waste. Some 4.7 million tons of that waste was re-used for road construction, gener-ating RMB 187 million ($22.5 million), and eliminating the need to manage that waste through other means.

By standards in developed countries, Baosteels achievement may be considered commonplace. But in the developingworld, where waste management industries are far less developed, this type of waste is often simply dumped directlyinto the environment.

Both Sinopec and Baosteel have indicated that their HSE programs were originally instigated by high-level governmentand enterprise leadership decrees. In time, the decrees have led to a sincere commitment on the part of both companies.

cient management techniques that allow an enterpriseto simultaneously protect the environment and save orgenerate money, either through increasing efficiencyor reusing and recycling by-products.

Some of Chinas major industries are already puttingsuch innovations to use and are finding that waste prod-ucts previously seen as useless and troublesome to dis-pose of can be reused or recycled, and can generatefurther income. Other industries are developing moreefficient and cleaner production methods and are reduc-ing pollution levies and cleanup costs so much thatexpenditures formerly used to cover those costs cancover upgrade investment costs over a surprisingly shortperiod of time (see Box 1). As enterprises are increas-ingly burdened with the responsibility of fundingChinas environmental protectionand internalizingtheir own environmental liabilitiesthey increasinglyseek out means to make that responsibility affordableand profitable.

Management Skills and Best Practices

Although China is capable of manufacturing a greatdeal of the basic equipment for environmental protec-tion, there remains a considerable gap in terms of man-agement and know-how when putting that technologyto use. There is a demand for consulting and manage-ment training that improves equipment performanceand overall environmental performance. Many industri-alists and officials contacted during the research for thisdocument expressed a need for training on sound man-agement practices and operations.

Additionally, there is a widespread lack of under-standing regarding best practices. In some cases, this isdue simply to the fact that enterprises are not aware ofor do not seek out information regarding such practices.In other cases, a perception perists that environmentalprotection is necessarily costly and that therefore enter-prises must become financially sound before they canbecome environmentally sound. In either case, it isapparent that information on best practice needs to bewidely disseminated, with simultaneous considerationof the innovations and efficiencies discussed above.

Based on these findings, it appears that any initiativesin this area require coordination between individual ven-dors, industry associations, and the U.S. government.

Maintenance and Equipment Servicing

Another breakdown in the industryone that heavi-ly influences the efficiency of environmental protection

expenditures and equipmentis poor operation andmaintenance. This may be due to perceptions thatequipment maintenance and servicing is merely anotherburdensome cost, or it may be due simply to a lack ofawareness. Regardless, potentially strong marketdemand awaits investors who can successfully illustrateto enterprises that relatively small expenditures onmaintenance can result in long-term efficiencies andrevenues. Furthermore, technologies that require littlemaintenance or are self-maintaining (which are heavilymarketed by Israeli industries in China) undoubtedlyhave additional competitive advantages.

The Issues

The three primary environmental priorities in Chinaare water quality, air quality, and waste management.They will be the primary focus of environmental pro-tection during the Tenth Five Year Plan and will there-fore be the primary focus of this market survey.However, issues such as land degradation, ecologicaland biodiversity preservation, and other standard envi-ronmental concerns are getting attention and offer mar-ket potential.

Each of these issues is introduced below. For marketanalysis and discussion of market potential by sector,see the appropriate corresponding chapters.

Water

Statistics from 1991 to 1998 indicate improvementsin river water quality in some limited areas but illustratean overall trend suggesting significant deterioration as awhole. Forty percent of the countrys river water isranked as poor by domestic standards. Additionally, anestimated 25 percent of all Chinese lakes are affected byeutrophication, almost all of the coastal seas are moder-ately to highly polluted, and it is now being said that lit-tle or no groundwater in the country remainsunpolluted.

Water sources in 50 percent of the major cities andtowns cannot meet drinking water standards. Ten per-cent of urban and 80 percent of industrial wastewaterreceives some treatment, but most of that treatment isinadequate. Most Chinese cities and towns lack munic-ipal wastewater treatment facilities, and many towns donot even have proper drainage systems.

Additionally, parts of the country are dramaticallyshort of water. In some areas, water availability is aslow as 355 cubic meters per head (the international def-inition of water scarcity is 1,000 cubic meters per head).


In 2000, Beijing endured what many called its worstdrought in decades.

The vast majority of water in China is biologicallyand chemically unsound, primarily as a result of

industrial wastewater discharge, municipal wastewater discharge, and non-point pollution (generated by agricultural

practices, livestock production, and so forth).

Air

Of the three ambient air quality parameters consis-tently monitored in Chinasulfur dioxide (SO2), nitro-gen oxides, and total suspended particulatesonlynitrogen oxides have increased concentration in medi-um and large Chinese cities in the past few years.However, all three pollutants remain formidable con-cerns for Chinas environment, and numerous other pol-lutants remain unmonitored.

Ambient air quality in many large urban areas hasshown optimistic trends, but air quality in more than500 major Chinese cities remains below World HealthOrganization (WHO) standards. Small cities have seenlittle or no improvement. Every Chinese city, large orsmall, faces serious total suspended particulate prob-lems that pose significant threats to public health. Theimpact of acid rain has stabilized since the mid-1990s,but its influence is still widespread and destructive,affecting approximately 40 percent of Chinas land-mass. Indoor air pollution resulting from fuel combus-tion is on the decline as briquettes and gaseous fuelsreplace raw coal for cooking and space heating.Nonetheless, it still poses a severe health risk, particu-larly for poorer, rural populations.

In keeping with the Montral Protocol, China wasable to freeze increases in the production and con-sumption of ozone-depleting substances in 1999.However, the country still faces the task of completelyphasing out such substances by 2010, a goal that maybe difficult to achieve.

Coal consumption is far and away the most domi-nant source of air pollution in China, spanning thegamut from large- and small-scale industrial andcommercial sources to residential space- and water-heating operations.

Motor vehicle emissions, in line with the increaseof automobiles in most larger cities, are expected tocontinue rising over at least the next 10 years.

Non-combustion-related airborne particles resultingfrom construction and land degradation (e.g., deser-tification) are on the rise.

Waste

Over 200 of more than 650 cities surveyed in Chinaare surrounded by hills of waste. As of August 1999,more than 6 billion tons of municipal refuse had accumu-lated and claimed 5.4 billion square feet of land in China.Between 600 million and 750 million tons of industrialsolid waste was generated in 1999, and statistics on thegeneration of hazardous waste vary from 5 to 30 milliontons annually. Hazardous wastes are often incinerated anddisposed of improperly and are frequently mixed withnon-hazardous waste in landfills and dumps.

There is much discussion now of sustainable devel-opment through an integrated approach to waste man-agement, including minimization of the production ofwaste materials and maximization of waste recyclingand reuse. Composting, incineration, and landfilling allhave roles in the management apparatus, each with itsown host of pros and cons. Nonetheless, waste manage-ment remains a subpriority for Chinese planners, as airand water concerns take center stage.

Only 5 percent of household waste and 17 percentof industrial waste receive any treatment.

An adequate hazardous waste management systemdoes not yet exist.

Market-based tools that would allow profitabilityand thereby generate private investment have notbeen successfully established.

Resource Management

About 20 percent of Chinas agricultural land hasbeen lost to soil erosion and economic developmentover the last decade. Desertification in northern Chinais estimated at 70,000 square kilometers and is increas-ing by about 2,100 square kilometers per year.Salinization, reduction of pastureland, and loss of arableland are considerable, and the effects of widespreaddeforestation are having a strong impact. Land degrada-tion is arguably the most critical rural environmentalproblem in China today.

Financing and Expenditures

China spent just under $10 billion on environmentalprotection in 1999, reaching 1 percent of GDP for thefirst time and accounting for an increase of 15 percentover expenditures in 1998. Certain localities, such asBeijing, Shanghai, Xiamen, and Dalian, are claimingexpenditures in the range of 3 percent of local GDP.There has been considerable discussion about raising


national expenditures over the next few years to theneighborhood of 1.3 percent to 1.5 percent of GDP; how-ever, it is uncertain how soon that goal can be reached,what it will include, and to what extent it would bereflected in opportunities for various types of vendors.

In a year 2000 report, CRAES indicated that 11.4percent of the $84 billion that will be spent during theTenth Five Year Plan is expected to come from the cen-tral government, 34 percent is expected to come fromprovincial and local governments, and 55 percent frombusiness enterprises themselves. A smaller amount ($4billion) will be sought from foreign governments andinternational finance institutions. Whether or not busi-ness enterprises will be able to cover their 55 percent ofthe bill remains to be seen and is dependent upon loca-tion. In fact, the goals of the Ninth Five Year Planplaced a similar burden on enterprises, which was notfulfilled in most parts of the country.

Nonetheless, enterprises in and around cities likeBeijing, Shanghai, Shenzhen, and other relatively afflu-ent coastal areas are quite up to the task. Last year inBeijing, over 55 percent of the spending on pollutioncontrol came from enterprises. However, increasingnumbers of enterprises in much of Chinas antiquatedrust bowl are in dire straits simply to pay out wages andkeep operations running, making the possibility ofupgrading pollution control a long-term goal for manyof them.

Chapter 9 of this document provides further in-depth discussion of environmental protection financ-ing in China.

Visualizing the Market

The Role of Policy and Enforcement

Although demand in Chinas environmental industryremains predominantly driven by financing throughofficial assistance programs or through enterprise inter-ests in efficiency, policy pressures are becomingincreasingly influential. As Chinas environmental poli-cies become more comprehensive and detailed, marketniches will become more defined. Investors looking forkey market-entry points need to keep a close watch onthe development of policy and, of equal importance, onpolicy enforcement trends.

However, unlike some countries in which policy isconsistently and efficiently upheld through transparentand equitable enforcement, Chinese environmental pol-icy can vary in its influence on market demand due tolapses in enforcement. Enforcement of policies is beingstepped up, particularly in some of the more developedregions, and environmental policies are beginning tocarry more weight.


There are currently several barriers to enforcement,which include conflicts of interest between environ-mental and development goals, a breakdown in the ruleof law, lack of capacity on the part of local enforcementagencies, and weaknesses in monitoring systems. Theprevalence of these and other barriers varies tremen-dously from region to region and should be consideredin determining where to locate an operation or where tomarket products.

At the same time, however, it is not unheard of forlocal governments or other entities to respond to man-dates and deadlines by paying cash to import requiredequipment such as compressed natural gas bus engines orair monitoring equipment. Such circumstances providelucrative, albeit inconsistent, market opportunities, and,much like the market demand created by multilateral anduntied bilateral assistance programs, these circumstancescreate a market environment quite unlike that in the U.S.

It is also advisable to monitor government policiespertaining to priority projects and goals and to considerincentives and preferential policies to encourage invest-ment in that regard. However, before taking advantageof such policies, investors should critically review thecircumstances. In some instances, whether the incen-tives and preferential treatment will make up for the dif-ficulties and costs that could be faced is questionable(see Box 2).

In sum, it is not so much the regulatory pressures asthe economic efficiencies and the availability of assis-tance funding that currently create market opportunitiesfor foreign vendors. For now, most exporters will likelyfind market demand by offering efficiency solutions thateither save money or generate revenues, or by exploitingthe opportunities generated by multilateral and untiedbilateral assistance programs. (See Chapter 10 for furtherdiscussion of positioning U.S. exporters in the market.)

Market-Based Incentives

Market-based incentives, or the setting of resourceand service tariffs (such as those for water and wastemanagement) at a level that legitimately represents thecost or value of those resources and services, is an ideathat is only just beginning to gain a foothold in China.The Chinese government is reluctant to institute drastictariff changes for fear that rapidly increasing the costsof resources and services, which have thus far been cov-ered by the state, could stir social unrest. Yet the gov-ernment appears well aware of the need to begin aprocess of instituting these tools, and potential investorswould do well to watch closely, as changes could beinstituted rather quickly.

Water is the first natural resource to have been affect-ed by market-based incentives, with tariffs rising sever-al times in 2000 alone. In December 2000, the YellowRiver Water Commission raised irrigation water pricesby 100 percent, hoping to encourage water conserva-tion. Household water tariffs, although still quite low,are on the rise in some parts of the country, therebyintroducing the idea that consumers will have to beginpaying for the resources and services they use. As tariffsincrease, consumers (particularly industries with highwater consumption rates) will likely start looking forways to reduce their costs.

Tariff liberalization trends are not altogether clear,but wastewater management is already being broughtinto the fold, and solid waste management will probablybe affected in the near future. Additionally, there hasbeen some experimentation with emissions trading as amarket tool to influence air pollution management, anidea that the government is examining, and that mayinstigate increasing demand for monitoring devices andair pollution control technology. However, progresshere is currently limited by the small number of partic-ipating enterprises and the lack of a free market forservices such as electricity, in which individual enter-prises are directly concerned with their own financialbottom lines.

The WTO and the Environmental Industry

The U.S.-China bilateral trade agreement that led upto Chinas accession to the World Trade Organizationdirectly addressed the environmental sector only brieflyand vaguely. In particular, it addressed Chinas commit-ments to environmental services, which include sewageservices, solid waste disposal services, cleaning servic-es for exhaust gases, noise abatement services, natureand landscape protection services, and other environ-mental protection services. However, environmentalmonitoring and pollution source inspection were notincluded. Additionally, foreign service suppliers couldprovide environmental consultation services via cross-border delivery, without establishing a presence inChina; other service suppliers could operate in Chinathrough joint venture operations. Because the exacteffects of the WTOs General Agreement on Trade inServices (GATS) on the sector are in fact quite vague,service providers are advised to consult a WTO special-ist when considering the possibilities.

In addition to its effects on trade in services, WTOaccession is resulting in significant tariff reductions onmachinery and other imports. Overall, average tariffs


will be reduced to 10 percent within five to sevenyears of accession. For specific details on the agree-ment and tariff schedules or to inquire about tariffrates for a particular item, contact the U.S. Departmentof Commerce for a copy of the agreement, or obtain acopy of the Regulations on Import and Export Tariffsof the Peoples Republic of China, available for RMB240 from the Publishing House of the GeneralCustoms Administration, No. 6 JianguomenneiAvenue, Beijing 100730, China, +86 (10) 6519-5616,6519-5615.

Although the agreement contains very little that isdirectly associated with the environmental sector,

WTO accession is generating significant, indirectimpacts on the industry. Many of the changes thatbenefit industries across the board, such as the disman-tling of non-tariff barriers, the discouraging of importsubstitution policies, and (ideally) increased trans-parency, benefit the environmental industry.

Agreements on distribution services are also benefit-ing environmental industry players, and agreements oncommission agent services, wholesaling, retailing, andfranchising may all be central to the plans of exportersdeveloping a presence in the country. Foreign servicesuppliers are now allowed to provide all subordinateservices, including after-sales services. Once again,


Box 2. Investing in the West: Hype Versus Reality

The 10 western provinces of Shaanxi, Sichuan, Guizhou, Yunnan, Gansu, Ningxia, Inner Mongolia, Qinghai, Xinjiang, andTibet are the focus of Chinas western development plan. The region covers 57 percent of the countrys landmass, is home to23 percent of the population, and claims over half of all the countrys verified natural resources. Yet 90 percent of the countryspoorest people live in the region, registering a per capita GDP of only 60 percent of the national average. Much of the regionis mountainous, and agricultural land is of poor quality. Infrastructure and transportation capacities are lacking, as are educa-tion and a supply of qualified industrial managers and administrators. Direct investment is scant, the region is disconnected frominternational and even domestic markets, the environment is deteriorating, and the poverty-stricken population, without theproper resources and know-how, continues to stress the local ecosystem. Additionally, the potential for social unrest resultingfrom inequitable development across the country is something the government can no longer ignore.

The development plans intended focuses are infrastructure development; the fostering of industries that maximize localcomparative advantage; capacity building for science, technology, and education; a vastly improved investment climate; andenvironmental protection. Official support for the initiative has been overwhelming, with many emphasizing that developmentin the region is long overdue. Promises of increased direct investment, preferential tax rates, eased restrictions on foreign invest-ment, simple solutions to complicated foreign exchange issues, and other incentives to draw both foreign and domestic invest-ment to the region have been made.

However, beneath the rhetoric run concerns that foreign investors must consider:

The plan is extremely long-term, with an anticipated timeline of 20 to 30 years or more.

The majority of proposed projects are large-scale, long-term infrastructure development projects, which are notorious inChina. A Ministry of Finance survey of recently completed large-scale infrastructure projects found that, on average, suchprojects went 85 percent over budget and were 23 months behind schedule.

The region lacks a secure legal climate and high-quality human resources. Local officials blindly gather and promote proj-ects with little regard for long-term, efficient planning. Such circumstances traditionally breed corruption and shortcuts inChina, resulting in misallocated funds and final products of poor quality.

Official media reports indicate that total investment in the region increased 17.9 percent in 2000, constituting billions ofrenminbi. However, only a percentage of this money has actually been transferred or invested; the remainder is accountedfor as signed proposals or contracts. Whether these funds will materialize as actual investment remains to be seen.

Many projects are billed as environmental or ecological projects, in keeping with the plans environmental focus.However, prospects for environmental protection are not guaranteed. Although a proclaimed propensity toward environ-mental protection may offer opportunities for related industries, the phrase environmental protection is not well under-stood. Barriers and resistance to true environmental protection measures still exist.

In some estimations, the development plan is more a political campaign for social stability than an economically viablecampaign for growth, as central planners continue to realize the need to narrow Chinas development gap.

Many foreign investors have investigated business prospects in Chinas western regions, but as a result of some or all of theabove factors, most have left empty handed. The prognosis is not that Chinas west will never yield quality opportunities, butinvestors should consider how much progressive change is required before venturing in.

details in regard to these agreements are complex, and aWTO specialist should be consulted by serviceproviders that are considering the possibilities.

In consideration of the role state-owned enterprisesplay in Chinas economy, governmental influence onthe decisions of SOEs regarding the purchase and saleof goods and services has been addressed by the bilat-eral agreement as well. Under the agreement, decisionsby state-owned and state-invested enterprises are basedon commercial considerations, and the enterprises ofother WTO members have equal opportunity to com-pete for contracts with such enterprises. Although Chinahas chosen not to sign the Government ProcurementAgreement, all procurements for commercial and non-governmental purposes by state-owned and state-invested enterprises are considered non-governmentalprocurement. Additionally, the receipt of benefits,investment approvals, and so forth, are no longer con-tingent upon technology transfers encouraged orimposed by the government. Under the bilateral agree-ment, technology transfers and similar issues are decid-ed upon solely by the involved parties, withoutinterference by the state.

Yet another significant and influential aspect of WTOentry is the effect it is having on other Chinese indus-tries, which in turn affects market opportunities forenvironmental technology providers. According to theWorld Bank, as WTO accession slowly opens Chinesemarkets, China is shifting its industrial base to indus-tries in which it benefits from comparative advantages(labor-intensive sectors as opposed to land-intensivesectors). Following are some of the industries thatthe World Bank expects to be affected by WTO acces-

sion, and the opportunities they may offer to environ-mental exporters:

Textiles. Chinas production of processed cottonproducts, including the dyeing of such products, isrising, resulting in increased industrial water con-sumption and wastewater generation. Water conser-vation, recycling and reuse methodologies, andwastewater treatment are important.

Livestock Production. As Chinas agriculturalproduct markets (particularly non-rice grain productmarkets) open to less expensive international com-petitors, many farmers are switching productionfocus. Livestock production is increasing, which iscausing, among other things, an increase in live-stock wastes. If improperly handled, such wasteswill pose serious water pollution threats. Waterpollution control and efficient waste managementtechniques with potential for reusing such wastesare important.

Increased Production of Leather and FurProducts. Increased livestock production is benefit-ing livestock producers by increasing income, but itis also causing increased water consumption andwater pollution.

Foreign technology providers have reported diffi-culties in managing the wastes of some leathertreatment facilities in China, as leather treatmentprocesses have a great deal of impact and someChinese facilities are primitive. Foreign technologyproviders have indicated that they lack the technolo-gy or know-how to manage pollution in such facili-


Box 3. Town and Village Industrial Enterprise: The Little Big Polluters

Town and village industrial enterprises (TVIEs), which are economically significant small private and collectively owned enter-prises, are slipping through the enforcement web of Chinas environmental protection. Very few, if any, of these facilities areup to state standards.

Unlike SOEs, TVIEs are weakly linked to the government, and pressures upon them to meet environmental standards arequite low. This may be a result of practical and logistical problems associated with enforcement of protection policies, or it mayreflect the significant economic performance of the sector, which some are reluctant to restrain.

Pollution statistics relevant to TVIEs are far from complete. Nevertheless, there are strong indications that TVIE pollutionis a significant contributor to total pollution discharges and that emissions target rates for the sector are in fact increasing. Year2000 chemical oxygen demand targets for TVIEs increased 36 percent over 1995, while those targets remained generallyunchanged for SOEs. The Ninth Five Year Plan target levels for TVIE SO2 emissions were nearly 50 percent higher than theactual 1995 levels, while the target levels for SOEs were reduced.

The United Nations Industrial Development Organization (UNIDO), with funding from the Global Environmental Facility,has initiated a program to bring energy-efficient technologies to TVIEs by strengthening capacity to govern the clean develop-ment of TVIEs and by stimulating demand for clean technologies through regulatory and market reforms, as well as the devel-opment of financing mechanisms. Exporters that offer goods potentially of benefit to TVIEs, but that have avoided the marketdue to TVIE financial constraints or market instability resulting from sporadic government cleanup campaigns, may find theUNIDO program instrumental in facilitating market entry.

ties because these types of facilities weretransferred out of their countries before controltechnology was developed.

Water conservation methodologies and water pollu-tion control are important, as are cleaner leather pro-duction techniques.

Increased Fruit and Vegetable Production andProcessing. As a result of decreased grain produc-tion, there is an increase in the production of fruitsand vegetables, causing an aggregate increase in theuse of water and pesticides. Water conservationmethodologies and irrigation techniques particularto fruit and vegetable production, improved pesti-cides, and the dissemination of sustainable agricul-ture and non-point pollution control methodologiesare important.

Restructuring of Forestry and of Pulp and PaperProduction. Massive restructuring in the forestrysector is phasing out small-scale pulp and paperproduction facilities. The development of new andmore efficient production facilities offers opportuni-ties for investment in cleaner production, waterconservation, and water pollution control. Further-more, researchers at the World Bank have indicatedthat the paper industry, with its relatively highchemical-oxygen-demand (COD) discharges andlow abatement costs, may be the most cost-effectivetarget for reducing organic water pollution.

Generally speaking, WTO accession is increasingcompetition, spurring local industries to improve tech-nology, management, and general know-how.Efficiencies that both affect and are affected by envi-ronmental performance are increasingly important, par-ticularly as awareness of eco-efficiency principlesbecomes more widespread. Additionally, increasedscrutiny by international communities with an eye onenvironmental protection is strengthening Chineseindustries commitment to environmental protectionand increasing their demand for environmental tech-nologies as they seek to become competitive players ininternational markets.

A number of WTO-associated Web sites are listedamong the resources for further reading at the end ofthis chapter.

Structural Trends of Pollution Control Investment

The structure of total investment in pollution control(TIPC) has changed over time in regard to the threemain categories receiving that investment: urban infra-

structure construction, renovation and redevelopment ofexisting enterprises, and new projects (see Figure 1.2).

Investment in urban infrastructure has seen both themost overall growth and the largest increase in percent-age of total investment. Investment in this sector was$1.8 billion during the Seventh Five Year Plan andreached $15.6 billion in the first four years of the NinthFive Year Plan. In 1999, investment in this sectoraccounted for 58 percent of TIPC, while it accountedfor only about one-third of TIPC during the seventhFive Year Plan.

Investment in renovation and redevelopment ofexisting enterprises has remained relatively constantsince the seventh Five Year Plan but has declined as anoverall percentage of TIPC. Investment in this sector asa proportion of TIPC fell from 41.2 percent during theseventh Five Year Plan to 16.9 percent and 18.5 percent,respectively, in 1998 and 1999.

Investment in new projects has increased consistent-ly from year to year but has fluctuated in terms of TIPCpercentage. It accounted for 26.6 percent of TIPC dur-ing the seventh Five Year Plan, rose by less than 1.5 per-cent in the eighth Five Year Plan, dipped to 19.7 percentin 1998, and rose to 23.3 percent in 1999. Overall, theshare of investment in new projects has declined slight-ly since the seventh Five Year Plan.

Understanding China

Definitions of environmental protection vary fromplace to place, and China is no exception. In fact,because it lists initiatives such as urban beautification(i.e., fixing sidewalks and painting buildings) as envi-ronmental protection, Chinas definition may be oneof the broader examples known in the world.Therefore, it is important for investors to keep defini-tion variances in mind, as they may positively or nega-tively affect things such as tax brackets, incentives, andmarket demand.

On a similar note, it is necessary for investors tounderstand the Chinese market and adapt themselvesand their products to it rather than try to impose achange to create a more favorable investment climatefor themselves. The Chinese environmental protectionmarket is increasingly open to the technology, skills,and know-how of the foreign sector, but tolerance islimited for investors who insist on doing things theirway, without considering the situation, needs, anddesires of the Chinese. Thus, techniques and technolo-gies that have proven successful elsewhere may not beappropriate in China. Investors should keep this in mindwhen establishing market-entry strategies and should


work hard to adapt themselves to the particulardemands of the country.

It must also be noted that the Chinese do not takekindly to being used as a testing ground for unprovenenvironmental schemes, particularly when they areexpected to provide the funding. If newly innovated,untested, but relatively promising technology or man-agement schemes are presented to China, complete withfunding, there is some possibility that the Chinese willallow a pilot project to be developed in the country.However, schemes that are considered suspect orrequire financing from the Chinese government will notbe looked upon favorably.

Finally, many Chinese industries still view environ-mental protection as a significant financial burden. Withpolicy changes and stepped-up enforcement poised toincrease that burden, many industries may see environ-mental protection as more of a threat than a boon. For

that reason it is critical to offer, whenever possible,technologies and innovations that can turn environmen-tal protection into a profitable endeavor. In marketingtechnologies or consulting on management methodolo-gies, it is vitally important to clearly and convincinglystress efficiency, recycling, and the fact that environ-mental protection need not incur long-term costs butcan in fact be profitable if instituted properly.

Many upgrades that could initiate efficiency andprofitability require heavy doses of capital investment.Much of Chinas industrial sector lacks that capital, andmany of the businesses propped up by the SOE sup-porting apparatus have barely enough to get by, nevermind invest. Thus, it is necessary to consider these fac-tors at all points of strategy development and to keep inmind that some enterprises, in some regions, are farmore likely to accept and benefit from eco-efficiencystrategies than others.


Selected References and Web Sites

References

Policy and Regulation Department, General CustomsAdministration. Customs Import and Export Tariffs ofthe Peoples Republic of China. Beijing: PublishingHouse of Economic Management, 2001. (Available forRMB 220 from the Publishing House of EconomicManagement, tel. +86 (10) 6519-4173.)

State Environmental Protection Administration.China Environment Yearbook. Beijing: ChinaEnvironment Yearbook Publishing House, 1999.

Wang Jinnan, Wu Shunze and Luo Hong. IntegratingEconomic Development and Environmental Protectionin China During the Tenth Five Year Plan Period.CRAES: November 2000.

U.S. and Foreign Commercial Service, Beijing.Environmental Project Approval and Financing inChina: A Perspective for U.S. Companies. Beijing: U.S.and Foreign Commercial Service, November 2000.

Web Sites

BuyUSA: www.buyusa.com

Central Intelligence Agency: www.cia.gov/cia/di/products/china_economy

ChinaOnline: www.chinaonline.com

Far Eastern Economic Review: www.feer.com

National Bureau of Asian Research.NBR Publications: www.nbr.org/publications

South China Morning Post: www.scmp.com

U.S.-China Business Council: www.uschina.org

U.S.-China Business Council: China and the WTO:www.uschina.org/public/wto

U.S. Department of Commerce:www.doc.com, www.usatrade.gov

U.S. Department of Commerce,International Trade Administration, Office of Environmental Technologies Industries:www.environment.ita.doc.gov

U.S. Embassy, Beijing: www.usembassy-china.org.cn

U.S. Embassy, Beijing,Country Commercial Guide: China:www.usatrade.gov

The World Bank Group in China Web site:www.worldbank.org.cn/English/home.asp


Box 4. Environment and Social Stability Face Off Across the CountryAs 2000 drew to a close, goals set by the Ninth Five Year Plan to bring all polluting industries in the country into compli-ance with state pollution standards by years end had companies scrambling to clean up and governments closingdown operations.

The SEPA and other related departments intensified inspection processes during the period; proud claims of high compli-ance rates were heard, as were troubling stories of closing enterprises and distraught laborers. The tricky balancing act of shut-ting down heavy industrial polluters and preventing unemployment from skyrocketing further out of control was underway.

Enterprise closure is a stiff threat used to pressure polluters into compliance, and under new air and water laws, it will like-ly continue to play a strong role. But some enterprises, particularly the antiquated industrial behemoths of Chinas fabled rustbelt, simply cannot cover the costs of upgrading and protecting. Closures, on the other hand, bring the burden of unemploy-ment and potential social unrest. As an insurance policy, most closures have taken place in dispersed smaller enterprises ratherthan in large operations.

Meanwhile, despite initial successes in pollution reduction among those industries still in operation, inconsistent monitor-ing and enforcement strategies may, in the long term, undermine what has been accomplished. Intermittent and poorly execut-ed inspections in many parts of the country may not be sufficient to prevent enterprises from lapsing back into old habits afterthe pressures of the campaign subside.

The economically more dynamic eastern and southern regions of the country have been most successful in bringing aboutcompliance that is likely to hold, particularly through improved production processes and the development of cleaner tech-nologies. Those regions heavily burdened with decrepit industrial facilities, however, are left balancing concerns of environ-ment and social stability.


Chinas economy has seen consistent growth since DengXiaopings policy of economic reform and openingbegan in 1978. For much of the 1980s and early 1990s,the nation enjoyed double-digit rates of GDP growth.That growth began to slow, however, in 1992, andremained in decline as a result of inflation, fallout fromthe Asian financial crises, sluggish domestic demand,

rising unemployment, and eventually deflation (seeFigure 2.1). In early 2001, the economy began to showpreliminary signs of picking up, with GDP growth near-ing 8 percent (the official target for 2000 was 7 percent),consumer prices slowly rising, and exports gainingstrength as the rest of Asia began shedding the influenceof the Asian financial crises.

Chapter 2

Economic Overview


Economic predictions for the coming years rangefrom moderate to cautiously optimistic. Most predic-tions call for annual GDP growth of 7-plus percent overthe next two to three years. Recent increases in domes-tic demand are viewed as potentially sustainable andmay be a sign that the countrys deflationary spiral hascome to an end. Consumer spending on such substantialitems as residential property rose an estimated 40 per-cent in 2000 and will likely continue to increase.Nonetheless, domestic demand remains sluggish andcontinues to present a macroeconomic concern.

The most promising indicator that GDP growth willbe sustained at over 7 percent is the current fiscal poli-cy. Much of Chinas growth over the past several yearshas been heavily influenced by large amounts of gov-ernment spending, and it is clear that this spending willcontinue. Since 1998, the country has issued RMB 360billion ($43.5 billion) in government bonds to fund fis-cal-stimulus spending on infrastructure development. Aprobability model developed by the State InformationCenter indicates that GDP growth for the year 1999would have been 4.3 percent instead of 7.0 percent ifthe bonds had not been issued and the funds allocated asthey were.

Bonds funded 46 percent of government spending in1998, whereas in 1993 they accounted for 3.8 percent ofexpenditure. Approximately 15 percent of 2001 govern-ment expenditure was earmarked for interest payments.The countrys debt burden is currently considered sus-tainable; however, it is unclear how long this deficitspending will continue.

The Financial Burden

The assessment of Chinas finance and debt structureis somewhat different, however, if financial sectorreforms, SOE reforms, pension reforms, and agricultur-al reforms are taken into account. The World Bank sin-gles out these four sector reforms as the major financialburdens on Chinas economy, each of which requirescreative macroeconomic management on the part ofpolicy-makers. According to the World Bank, the onetemporary reprieve is Chinas exceptionally large stock-pile of personal savings, which equals around 40 per-cent of GDP. WTO entry is gradually opening thedomestic banking sector up to foreign banks, whichmay draw some assets away from the state.

Chinas banks are burdened with tremendousamounts of non-performing loans paid out to SOEs thatare based more on political interests than on commer-

cial viability. According to the Peoples Bank of China,approximately 20 percent of outstanding loans in thebiggest state-owned banks are non-performing, 75 per-cent of which can likely be recovered. Outsider esti-mates of non-performing loans vary (2540 percentnon-performing, with only about 15 percent recover-able, is not unreasonable), but the widespread consen-sus is that the Peoples Bank of Chinas estimate issignificantly understated. In sum, non-performing loansare estimated at $180360 billion, or 1836 percent of1999s GDP.

Recently, the central government instituted a debt-to-equity swap system by which banks were relieved of apercentage of their bad loans. Asset management com-panies have been established to acquire percentages ofselected SOEs debts and turn them into equity. Thesecompanies, which become part owners of any SOEs forwhom they have acquired debt, are expected to restruc-ture the enterprises, and make them profitable. Thus far,the scheme has done little more than relieve the banksand some SOEs of a degree of the strain resulting fromthe debt burden. Significant changes in managementpolicy are necessary if reduced burdens are to improvefinancial management (on the part of the banks) as wellas enterprise management, production efficiency, andprofitability (on the part of the SOEs). So far there hasbeen little sign of such changes.

Significant downsizing is also underway in the state-owned sector. Under a strategy of grasping the largeand letting go of the small, the government is workingto turn some of the larger SOEs around, hoping they willdevelop into self-sufficient, profit-oriented, giant inter-national corporations. At the same time, many of thesmaller SOEs have been left to the devices of local gov-ernments, resulting in significant closures and layoffs.

SOE reform and low profitability in the sector haveled to the functional disintegration of the SOE-basedsocial security system, resulting in a growing implicitpension debt. Loss-making SOEs are no longer able tofund workers housing, health care, education, and pen-sions, all of which are responsibilities that traditionallyrested with SOEs and work units. Some of these funds,which are estimated at $240 billion, will need to mate-rialize. The same holds true for money needed to sup-port the countrys rapidly aging population.

Finally, the agricultural sector, historically the coun-trys primary economic sector, is now viewed as theeconomys weak link. Farmers incomes have risenslowly in comparison with incomes in other sectors andaccession to the WTO may have negative effects thatlead to even poorer overall performance.


Structural Changes

It is the assessment of the World Bank that China isundergoing four types of structural change. Any one ofthese changes could result in a significant reallocationof resources or income distribution, affecting the econ-omy as a whole. However, all four changes are occur-ring simultaneously:

A shift from a command economy to a market econ-omy, which began after Chinas opening up in 1978and is marked by progressively deregulated pricesand resource allocation decisions as well asdecreased state activity in the economy. The sharesof retail, agricultural, and capital/industrial goodssold at prices fixed by the state fell from 97 percentto 5 percent, 94 percent to 23 percent, and 100 per-cent to 12 percent, respectively, between 1978 and1999; the public sectors share of total fixed invest-ment fell from 82 percent in 1980 to 53 percent in1999; and direct investment funding from the gov-ernment budget fell from 30 percent to 6 percentover the same period of time.

A shift from an agricultural-based economy to aneconomy predominantly based on manufacturingand services. Between 1980 and 1999, agriculturespercentage of total output declined from 30 percentto 18 percent, and the share of the work force in theagricultural sector fell from 69 percent to 47 per-cent. During the 1990s, jobs in the agricultural sec-tor decreased by about 3.4 million per year, whilejobs in the services sector increased by 8 millionper year.

A demographic profile shift from high fertility andlow longevity to low fertility and high longevity.The population growth rate has slowed from 1.9percent per year in 1980 to 0.88 percent in 1999.Life expectancy rose from 67 years of age in 1980to 69.5 years of age in 1997. The populations shareof children (14 years of age and below) has fallenfrom 35.5 percent in 1980 to an estimated 24.9 per-cent in 2000, while the aged population (65 years ofage and above) rose from 4.7 percent in 1980 to anestimated 6.7 percent in 2000.

A shift from a relatively closed to a relatively openeconomy. External trade in China is now conductedthrough over 200,000 direct import-export enterpris-es, as opposed to the 1016 state trading firms thatonce controlled all import and export activities.Non-tariff trade barriers have fallen to an estimatedtariff-equivalent level of 9.3 percent, affecting 33percent of imports. The average weighted tariff ratefor the economy is an estimated 18 percent.

Approximately three-quarters of imports receivevery low tariffs or none at all.

Other Factors of Influence

Other factors that influence the overall performanceof the nations economy should also be recognized:

Despite the fact that most of the countrys massiveSOEs are loss making, they are the beneficiaries ofmost commercial lending and capital accountinvestment. Large amounts of financial resourcesare being used to keep SOEs afloat. In some partsof the country, much of those resources are used toprovide employees with only the most basic ofnecessities, such as housing and food, leaving littlemoney for investments in production upgrades andthe development of efficient production methods.Many SOEs are likely to remain unviable for theforeseeable future.

Non-state firms account for over two-thirds of thenations industrial output and an estimated one-quarter to one-half of GDP, yet access to both bankloans and public equity markets is dominated bySOEs. Even under the best of circumstances over 80percent of private-firm financing is self-generated.The government is aware of the important role thatprivate enterprises will play in the future develop-ment of the countrys economy, and institutionalchanges, although likely to be slow, are anticipated.

A tremendous development gap exists between thecoastal regions and the western part of the country,as well as within isolated pockets of the east.

Per capita GDP in Guizhou Province, one of thecountrys poorest, is only 8 percent of that inShanghai, the countrys richest city. With 16 millionpeople, Shanghai accounts for little more than 1percent of the countrys population but accounts for5 percent of its industrial output.

Guangdong Province accounts for 10 percent ofnational GDP and 40 percent of foreign trade, yet itcomprises only 5.8 percent of the countrys popula-tion. The Pearl River Delta area, which accounts for25 percent of Guangdongs provincial population,receives 80 percent of the provinces foreign directinvestment and accounts for 90 percent of its exports.

The western region of China, which is the focus ofthe newly unveiled Great Western DevelopmentPlan, accounts for 57 percent of the countrys land-mass, 23 percent of the population, and more thanhalf of all verified natural resources, yet it contains90 percent of the countrys poorest people, with per


capita GDP in the region registering at only 60 per-cent of the national average.

The country remains rife with corruption andunscrupulous enterprise management. News cover-age of disciplinary action taken against corrupt offi-cials is seen almost daily in the local media. Suchcorruption affects the national economy and localeconomies and creates tremendous sticking pointsfor both foreign and domestic investors. Randomaudits of 159 companies by the Ministry of Financein 1999 revealed that 157 companies had falselyreported their profit figures, 147 had falsified theirasset accounts, and 155 had falsified their equityaccounts. Each category was both over- and under-stated to cumulative amounts of $177 million to$299 million. Some enterprises kept duplicaterecords and provided different accountingstatements to different authorities.

Economic Development andEnvironmental Investment

Pollution Control Investment

According to CRAES, the leading SEPA think tank,national economic development and environmentalinvestment in China have been closely related over thepast 15 years. As GDP grew, so did rates of total invest-ment in pollution control. In fact, TIPCs percentage oftotal GDP increased even as the GDP growth rateslowed (see Figure 2.2). Investment during the eighthFive Year Plan was 2.7 times that in the seventh FiveYear Plan, and Ninth Five Year Plan expenditureexceeded that of the eighth. Environmental invest-ments average percentage of GDP rose from 0.6 per-cent in the seventh Five Year Plan to 0.77 percent in theeighth. By the end of the Ninth Five Year Plan, invest-ment reached 1 percent of GDP.


TIPC as a percentage of total national investment infixed assets also showed overall growth. TIPC aver-aged 2.41 percent of total national investment in fixedassets during the seventh Five Year Plan, peaked in1991 at 3.09 percent, dipped in the mid-1990s, andtrended upward after 1995 to reach 2.76 percent in1999 (see Figure 2.3).

Remarks attributed to Xie Zhenhua, the minister ofSEPA, indicate that environmental investmentreached 1 percent of GDP in 2000, and is expected toreach 1.31.5 percent over the next five years.Official forecasts are calling for RMB 700 billion($84.6 billion) in environmental investment over thecourse of the Tenth Five Year Plan. In some majorcoastal cities such as Beijing, Shanghai, Dalian,Qingdao, and Xiamen, environmental spending hasreached as high as 3 percent of GDP. However, itshould be noted that the definition of environmentalprotection is quite broad and inconsistent in China. Itmay include urban beautification and other activitiesnot normally categorized as environmental protectionelsewhere. Thus, figures for annual environmentalspending cited in various Chinese publications may

vary as much as 15 percent depending on the sourcesof data and methods of calculation.

Macroeconomic Perceptions and Finance Tools

The steady development of Chinas economy hasincreased investor confidence in macroeconomic stabili-ty, opening up potential for the use of financial tools suchas stocks and bonds. Although both stock and bond mar-kets in China have a considerable way to go before theycan be considered comprehensively developed, they arefacilitating some degree of environmental investment.

State Development and Planning Commission(SDPC) reports indicate that a significant portion of the$43.5 billion in government bonds used for fiscal-stim-ulus spending on infrastructure development since 1998has been directed toward environmental protection andthe management of natural resources. The investmentshave reportedly increased daily wastewater treatmentcapacity by more than 8 million tons and solid wastetreatment capacity by 31,000 tons. Centralized heating,flood control, forest management, and capacities toextract and use natural gas also reportedly benefited.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Over 30 environmentally related companies are cur-rently listed on Chinas stock exchange, with reported-ly high degrees of success. Stock markets in Chinahave become a tool for gaining quick infusions offinancing from small-scale Chinese investors, particu-larly personal investors. However, the relatively under-developed and somewhat dubious nature of thecountrys stock markets prevents them from beingmore readily exploited for the purposes of environ-mental financing. (Chinas stock markets are discussedfurther later in this chapter.)

There is discussion within government think tanksregarding the development of bond markets, publiclytraded investment funds, and other financial tools to befocused on environmental sector investment. The effec-tive use of these tools would greatly reduce the financialburden currently shouldered by government budgets.However, a more developed and better regulated finan-cial sector is required before such tools can reasonablybe expected to perform in this capacity. Experts havesuggested that the necessary climate for such tools willnot develop during the Tenth Five Year Plan, and per-haps not even during the 11th. (See Chapter 9 for a dis-cussion of finance programs and resources.)

Institutional Changes, Decision-Making,and Efficiency

Chinas gradual shift from a command and controleconomy to a market economy has caused a slowdecentralization of decision-making power. The respon-sibilities of different stakeholders within the financialdecision-making process (such as banks, local govern-ments, and enterprise managers) are being increasinglyclarified. Liability for performance outcome, and there-fore financial and enterprise efficiency, is on the rise.

Particularly among such high-profile and economi-cally important SOEs as Sinopec and Baosteel (see Box1), as well as among SOEs in some of the more eco-nomically and environmentally developed regions of thecountry, industrial efficiency and financial bottom linesare becoming more and more important. Reportedly,industries with progressively oriented management andthe commercial potential for successful reform are beinggiven increased flexibility to make investment and man-agement decisions with decreased interference by thecentral government. Efforts to increase operational effi-ciency through cleaner production, improved manage-ment, and improved equipment maintenance are alreadybeing seen and are expected to increase.

Privately-owned enterprises, which by their verynature are more entrepreneurial and competitive than

their state-owned counterparts, have a stronger vestedinterest in efficiency than even the most successful andpersonally responsible SOEs. The non-state sector is onthe rise and is expected to grow significantly in the nearterm. Financial and investment tools remain out ofreach for most private enterprises, making efficiencythat much more important. (For a detailed analysis ofChinas private sector, see the International FinanceCorporations Chinas Emerging Private Enterprises,available online at www.ifc.org/publications.)

Environmental Prospects for theState-Owned Sector

Unlike those SOEs with potential for commercialsuccess, discussed in the previous section, many of thecountrys SOEs are caught in a downward spiral of poorviability and tremendous burden. Efforts to downsizeand close large numbers of those SOEs that show littleor no hope of reform and future profitability have beenunderway for some time; however, mass layoffs andseverance of numerous benefits such as health care andhousing carry significant social impact. Thus, smallerSOEs are being dissolved while many of the larger onesare being kept afloat not so much in hopes of turningthem around but simply to prevent mass numbers ofpeople from becoming disenfranchised.

Many SOEs, particularly those in Chinas northeast-ern rust belt, rank as some of Chinas worst polluters.Some facilities in the area date as far back as theJapanese occupation of the 1930s and 1940s, and haveefficiency capacities to match. Appropriate upgradescould benefit both the efficiency and the environmentalperformance of these enterprises significantly, andsome degree of return would likely be seen relativelyquickly. However, the required initial capital isextremely difficult to secure, and many such enterpris-es would face considerable difficulties in paying backloans from both public funds and commercial lenderseven if they were to begin seeing improved financialoutcomes as a result of increased efficiency.

Institutional Changes and FinancialLiberalizations

Changes in Chinas economic and financial institu-tions are occurring rapidly and may have a tremendousimpact upon the future development of the economy.No matter how committed the government is to envi-ronmental protection in China, there is little hope forsuccess without the economic capacity to address the


issues. What follows is a discussion of several influen-tial factors in Chinas macroeconomy, the continueddevelopment of which will affect both environmentalprotection and the environmental industry.

WTO Accession, Trade, and Investment

Chinas central planners are acutely aware of theeffects WTO accession is having on the domestic econ-omy, the pressures placed on Chinese enterprises, andthus the need to reform certain regulatory and institu-tional systems to increase efficiency in economicdevelopment. Already a number of changes are beingseen, and they will increase and intensify in the comingyears, partially as a result of regulations imposed uponthe country by the WTO itself and partially as a resultof the pressures imposed upon domestic enterprises bythe presence of highly competitive foreign enterprisesoperating in China with fewer restrictions thanever before.

Some of these changes may benefit foreign enter-prises by leveling the playing field and breaking downbarriers established to protect less-competitive domes-tic enterprises. Others, however, benefit domestic enter-prises as much as foreign ones. Ultimately, thegovernment expects WTO membership to rationalizethe countrys international trading apparatus and fosterhighly competitive Chinese enterprises.

The most significant changes anticipated within adecade of accession will be

increased regulatory transparency, further development and rationalization of the

financial sector, intensified SOE reform, and growth and development of the private sector.

Regulatory Transparency

The Ministry of Foreign Trade and EconomicCooperation (MOFTEC) has established a new agencyspecifically intended to clarify all rules and regulationsassociated with WTO entry and foreign trade laws andregulations. All foreign trade activities are governed byformally published laws and regulations. Any internallaws and regulations that have not been formally pub-lished will be void. The MOFTEC has made clear itsintentions to overhaul regulations to bring them morein line with international standards and has mandatedthat any measures formulated and implemented bylocal authorities must be consistent with national lawsand reported to MOFTEC. All foreign business laws

and regulations are available to the public, and drafts ofcertain laws are available for review and consultationin the formulation phase. Generally, this is in keepingwith the commitments China made leading up to WTOaccession. WTO entry is catalyzing transparency oflaws and regulations as well as the development of arules-based system, thus ensuring some level of pre-dictability and gradually improving the climate for for-eign trade and investment.

Other issues of regulatory transparency could remaintroublesome in China for some time to come, though.As a rule, the country keeps information on what it clas-sifies as state secrets and matters of national securityunder tight wraps. The law defines these in a vague andbroad manner. Foreign investors in environmentalindustries have reported serious problems with suchissues in the past. Initiatives have been stalled and insome cases terminated for infractions of laws that havenot been made available to the public. It is also notunheard of for such laws to be used as an excuse to stallan initiative even though the true issue of contention isentirely unrelated.

Development and Rationalization of theFinancial Sector

The Tenth Five Year Plan calls for a dramatic over-haul of the entire Chinese financial sector. Again, as aresult of WTO accession, Chinese administrations areattempting to bring domestic financial institutions up tointernational standards. The central bankPeoplesBank of Chinaand the China Securities RegulatoryCommission (CSRC) are raising standards in both thebanking system and the securities markets, to ensure theviability of the financial sector and increase internation-al investor confidence. Several key components, such asan efficient and reliable credit rating system, are stilllacking entirely. Other components are in need of fur-ther development and strengthening.

Banks. In November 2000, the National Bureau ofStatistics reported that risks borne by the four statecommercial banks had increased by 65 percent over thepast eight years, resulting in a drop in their capital ade-quacy ratios to an average of 5.51 percent in 1999 (theinternationally accepted critical rate of adequacy is 8percent). Based on an unpublished internal rating index,risk assessments in the financial sector as a whole haverisen by nearly 12 percent since 1991.

Administratively, political interference in commer-cial banking operations remains a stumbling block, andthe independent and efficient promulgation of regula-



tions is lacking. Meanwhile, competition within thebanking sector is on the rise, placing increased per-formance pressures on the commercial banks. Twoyears after WTO accession, foreign banks will beallowed to make local currency loans to Chinese com-panies. Five years after accession, they will have unlim-ited access to the consumer market.

There is adequate awareness within the pertinentadministrations regarding the concerns and threats thebanking system faces. Administrative changes areunderway, but some analysts question how efficientlyreforms can be carried out. The Peoples Bank of Chinais developing an index system to detect and evaluatefinancial risks. It will monitor operations within thebanks, security markets, and other fundamental macro-economic indicators.

Stock Markets. Chinas stock markets are somewhatchaotic, thriving more on rumor and manipulation thanon market-oriented standards. Regulations and qualifi-cations for listing in the markets are strict, keepingmany companies off the boards. Meanwhile, the stockexchange is partially used to fund ailing SOEs throughpublic offerings, and investors often buy in believingthat the government will not allow a listed SOE to gobankrupt. The Zhengzhou Baiwen Company nearlyproved them wrong in late 2000 when speculation arosethat the massive retailer would be allowed to go under,but instead the SOE was bailed out once again, onlyenforcing the belief. Regulators reportedly feared thatallowing Baiwen to go bankrupt would decimateinvestor confidence and possibly drain financial supportfrom the 1,000-plus listed companies. In April 2001,Chinas first delisting finally occurred, marking thedemise of the Shanghai Narcissus Electric ApplianceCompany. The event was accompanied by warnings ofpossible future delistings of similarly troubled enter-prises, as well as widespread accolades for a sound steptoward the modernization of the Chinese economy.

Prior to the Narcissus event, government-supportedinvestor confidence led Chinas A-shares market to rankas the worlds second best performing market in termsof growth in 2000. There is much indication thatchanges will arise, making future stock market growthmore quality based in coming years. If faithfully imple-mented, the initiatives listed below should increasecompetition, creating stronger links between stockprices and profits and thereby shifting capital to thestronger companies:

The CSRC has pledged to reduce interference in thesetting of stock prices, slowly allowing marketforces to determine rates of growth in order to

reduce market price distortions and strengthen themarket as a whole.

Disclosure rules for listed companies are tightening,increasing transparency. Increased transparencylimits the likelihood of accruing massive amountsof bad debt in the market, as has occurred inthe banks.

Various market tools such as mutual funds are cur-rently under developm

China environmental technology

Documents

market surveyschina

international contacts

export marketingunited

china contacts98appendix

air pollution

finance programs

appendix d

recycled paper