After years of focusing solely on industrial development and economic growth, China has begun prioritising environmental protection to avoid pollution-related social unrest. As a broker contact succinctly put it, “People are getting sick of walking around in the set of Blade Runner”.
In the past, the only accurate (or honest) source of air quality data came from the equipment located on top of the US embassy in Beijing. But things are changing. Environmental policy has been tightened, aggressive targets have been set and most importantly, by putting the environment on a more equal footing with regional economic development, local officials are becoming more motivated and able to enforce environmental compliance.
However, air quality in China remains very poor. A problem which is exacerbated further in the winter (mid-Nov to mid-March), with more coal being burned for heating compounded by the seasonally still weather conditions. To avoid further ‘airpocalypse’, China has curtailed production from a range of heavy industries (e.g. aluminium, steel, cement) during the winter in Beijing, Tianjin and 26 surrounding areas; its so-called ‘2+26 Plan’:
Source – UBS EvidenceLab, World Air Quality Index project, UBS are actually tracking air pollution in China as a leading economic indicator
But since China remains the largest single market for most industrial and energy commodities, its shutting down of domestic industries is having multiple sustainability-related investment consequences.
Which are? Well, not least a trend favouring high-quality versus low-quality commodity feedstock. The former requires less energy for processing and therefore results in less pollution. China’s crackdown is (currently) seasonal, but there are also long-term (sustainability-related) structural drivers which favours this trend (See: When’s a commodity not a commodity?).
And for those ‘dirty’ industries that want to continue to operate, greater enforcement and monitoring is forcing Chinese producers to improve their pollution controls. Therefore higher expenditure for them but also demand for end-of-pipe clean-up technologies (also underpinned by China’s new emission trading scheme).
Finally, underpinning China’s move away from coal, there is the structural shift in favour of renewables, gas, nuclear and EVs, and the associated demand boost for ‘green’ commodities.
History shows that economic development (unfortunately) often brings environmental deterioration, which in turn prompts policy-induced measures to protect the environment as wealth increases. There’s no reason why this can’t happen in China as well as it seeks to shift its economy away from dirty basic industries. The real test of the current plans will come in the December to February period, when China tends to be hit by its most toxic smog episodes.