China’s challenge — the pursuit of ecological civilisation

According to some, infrastructure in China is now so well developed that it is perhaps the Asian economy that has the least need for infrastructure investment. However, it cannot afford to slow down, not least because of the noxious state of its environment.

  • By GlobalCapital
  • 30 Nov 2015
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In comparison to India, much of China’s infrastructure is space-age. “Overall, China has done very well in building up its infrastructure over the past decade,” says Paul Procee, lead urban specialist at the World Bank in Beijing. “It has done especially well in developing much of the massive transportation infrastructure it needs to keep people moving, such as highways, high speed rail networks and airports. You read mind-boggling numbers that China has used more cement in building its infrastructure over the last five years than the US has in the last 100.”

In areas like airports, there are no signs of this frenetic activity slowing down. According to research published by the CAPA Centre for Aviation, at the start of 2015 there were 51 airport projects in China worth close to $60bn. The largest of these, which was given the go-ahead at the end of 2014, is Beijing’s new, $13.1bn four-runway airport at Daxing.

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One result of the Chinese investment boom of the last decade, says Gavin Munro, head of Asia Pacific infrastructure finance at Société Générale in Hong Kong, is that the country’s infrastructure is now so well developed that it is perhaps the Asian economy that has the least need for infrastructure investment. “If you look at transportation infrastructure, for example, some of China’s regional airports now probably have enough capacity for the next 50 years,” he says. “In Indonesia, by comparison, the whole system is log-jammed and congestion is chronic. Anecdotally, it is sometimes cheaper for Indonesian companies to fly products in from China than ship them from islands elsewhere in Indonesia because the ports are so congested.”

While China’s transportation system may now be the envy of emerging and developed economies across the world, this is no reason to suppose that the country can afford to slow down its infrastructure investment programme, for several reasons. One of these is that against the backdrop of well documented slowing growth, infrastructure investment is one option open to the Chinese government as an economic stimulant. According to research published by HSBC, issuing Rmb3tr-Rmb5tr of long term bonds to jump-start infrastructure projects in China could translate into a 2%-4% impact on GDP, assuming the investment is spread over two years.

The far more significant, long term reason why China cannot afford to ease up on its infrastructure investment programme is the noxious state of its environment. According to the World Bank, China faces some of the world’s most formidable environmental challenges due to the energy and resource-intensive pattern of its growth in recent years, coupled with its binding natural resources constraints. China has 22% of the world’s population, but only 6.4% of its land area, 7.2% of its farmland and 5.8% of its annual water resources. The grim consequence for China and for the planet, says the World Bank, is that “the value of environmental depletion and degradation (i.e environmental externalities) in China’s economy are among the highest of any country. Given the magnitude of China’s environmental impacts, global environmental problems cannot be solved without China’s engagement.”

The impact of urbanisation

Like in India, much of China’s investment requirement for green or sustainable infrastructure over the coming two decades will be driven by an unprecedented wave of urbanisation. 

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According to a recent World Bank report, China’s cities are growing at a rate and scale never seen before in human history. At the last count, this internal migration had seen 380m people relocating from rural to urban areas over the last two decades. By 2025, more than 200m others are expected to have made the same journey. 

To put this movement of people into stark perspective, the World Bank estimates that the equivalent of the population of cities such as Hamburg or Vienna is now relocating every month.

At the World Bank in Beijing, Procee says that the key difference between Chinese urbanisation and the trend in other developing economies is that in China the process has been carefully planned and managed as a component of economic strategy. “The process of modernisation and urbanisation dates back to the 1980s, when Deng Xiaoping’s government started to move from being an agricultural to an industrial-based economy,” says Procee. “This process is now accelerating as China moves from an economic model based on heavy industry to an innovation-led economy driven by rising productivity and higher consumption. Cities are seen as the places where this will happen more quickly and efficiently than anywhere else.”

Procee says that by creating a more mobile and productive workforce, this dynamic will have what he describes as “humongous benefits for China’s economy”. The impact on the environment, however, may be less positive, given the pressure it will exert on roads, urban railways and other civic services.

As the World Bank’s report warns, “while urbanisation will drive growth and raise living standards, it also brings tremendous environmental and service delivery challenges. Smaller cities in particular are struggling to keep pace with demand, especially for sewerage and waste disposal services.”

This process is creating opportunities for investors in modern, sustainable infrastructure. The World Bank estimates that China’s cities will need to spend some $5.3tr on infrastructure over the next 15 years. But it adds that by developing more efficient, denser cities, China will be able to save $1.4tr on infrastructure spending — which is about 15% of GDP in 2014. 

In the water sector, meanwhile, where China faces the dual menace of shortages and pollution, Moody’s estimates the country will need to invest some Rmb4tr-Rmb5tr, which will also create substantial investment opportunities. “Given the massive investment needs, Moody’s expects the government to launch further policy reforms to encourage private capital investment,” the agency says in a recent update. “As the industry is highly fragmented in China, the growth opportunities will result in intensifying competition and industry consolidation.”

The ecological cost of China’s economic boom

While urbanisation is one reason why China will need to invest heavily in sustainable infrastructure over the next decade, a more general driver is the legacy of the boom that has metamorphosed China economically as well as socially and environmentally. 

Sean Kidney, CEO of the Climate Bonds Initiative (CBI), says that lifting one billion people out of poverty probably ranks as the achievement of the millennium in terms of its socioeconomic impact, both within China and elsewhere. But he adds the significant rider that this economic transformation has come at a very high ecological cost. 

High indeed. The United Nations Environmental Programme (UNEP) reports that air pollution alone in China is estimated to lead to more than a million premature deaths. According to a recent report published by the Task Force on establishing a Green Financial System in China, meanwhile, around 82% of the Chinese population depend on shallow wells and rivers for their drinking water, but 75% of these sources are already polluted. Other studies, according to the same report, have found that 19.4% of arable land in China is also heavily polluted.

In financial terms, the cost of this ecological damage is considerable. In 2003, China asked the World Bank to estimate the annual cost of environmental aid and water pollution, factoring in the impact of its damage to human health. The Bank’s findings were that it amounted to an eye-watering $100bn a year, or about 5.8% of GDP at the time. A more recent study, conducted by the Asian Development Bank and Tsinghua University in 2012, calculated that economic losses resulting from illness related to air pollution in China amount to 1.2% of national GDP. 

China’s response to its environmental challenge

The good news is that China has taken giant strides in recent years towards tackling its environmental shortcomings. During the 11th five year plan (2006-2010), it achieved a 19.1% decline in energy intensity per unit of GDP, according to UNEP, only narrowly missing its ultra-ambitious target of 20%. Over the same period, the amount of energy required to produce a tonne of cement fell by 41%, offsetting some of the environmental impact of China’s great construction boom. 

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In 2009, meanwhile, China pledged that by 2002 it would lower carbon dioxide emissions per unit of GDP by 40% to 45% from the levels posted in 2009. It also promised to increase the share of non-fossil fuels in primary energy consumption to about 15%, lift the country’s forested area by 40m hectares, and to increase its forest stock volume by 1.3bn cubic metres compared with the 2005 levels.

China is backing its commitment to what it describes as “ecological civilisation” with substantial public and private sector investment. Take the example of its commitment to renewables in general and wind power in particular, the scale of which is hard to overstate, with China having recently pledged to build 1GW of capacity of clean energy every week between now and 2030. “In only five years,” said UNEP’s 2013 report, “China has gone from being a minor player in the wind power sector into the world’s largest market.” The Global Wind Energy Council forecasts that China’s investment in wind turbines will lead to an increase in installed capacity from a projected 143GW in 2016 to 217GW by 2020 and 414GW by 2030. 

Impressive progress has also been made in other renewable energy sources. According to the government’s Intended Nationally Determined Contributions (INDC) announced in the run-up to the COP21 talks in Paris, China’s installed capacity of hydro power is now 300GW, which is more than 2.5 times as much as in 2005. In nuclear power, it is 19.88GW, or 2.9 times the 2005 level, and in solar power it is now just over 28GW, or 400 times the 2005 total — dwarfing even the 90-fold increase over the same period in installed capacity of on-grid wind power.

Alongside its ambitious plans for scaling up its development of wind power, China aims to increase installed capacity of solar power to 100GW by 2020 and to “proactively develop geothermal, bio-energy and maritime energy”. 

These are impressive objectives. “The scale of Chinese investment in renewable energy is dwarfing the rest of the world,” says Kidney at the CBI. “The switch in investment from fossil fuels to renewables has been unbelievable.”

Kidney also welcomes much of China’s investment in its transportation systems. Granted, he says, that many of the provinces and cities have channelled investment into poorly thought-through highways that have exacerbated rather than eased China’s traffic congestion. But he echoes others when he applauds the job China has done in building the world’s largest high speed railway network. 

Aside from being a super-efficient way of moving people across its 16,000 kilometres of track, China’s ultra-modern high-speed rail network is gentle on the planet. “It is a critical low-carbon investment which takes cars off the roads and aeroplanes out of the sky,” says Kidney. That is an important initiative, given that the global aviation industry already accounts for about 3.5% of the total human contribution to climate change, according to Heathrow Airport. The Intergovernmental Panel on Climate Change has estimated that at current rates of growth, this will rise to between 5% and 15% by 2050.

Anecdotal evidence suggests that the Chinese population is already breathing easier — literally — as a result of the measures taking to address emissions over recent years. The World Bank’s Procee, a Dutchman who grew up in Brazil and has lived in Beijing for the last 5-1/2 years, says that some of the most lurid stories about urban pollution in China are outdated, or apocryphal, or both. Accounts of housewives hanging white T-shirts out to dry in the morning, and finding them jet-black by evening are, he says, a misrepresentation. “In Beijing, we don’t see the black soot we used to get, now that all the city’s coal-fired plants have been shut down,” he says. “In the time I’ve been here, I have seen a considerable improvement in terms of air quality. It’s true that there are some days when we have concentrations of fine particles of 300ppm [parts per million]. But that is down on the levels of five years ago.”

Perhaps. But as Procee says, some cities still have hazardous measurements, with Shenyan recently recording 1,500ppm. The urban average is perilously close to levels deemed to be unsafe, and it is generally recognised that China still has a huge problem with its air quality as well as with water pollution and scarcity, which Procee says will be the country’s biggest long term ecological threat.

New environmental targets

This is why China recognises that the progress it has made to date on mitigating greenhouse gas emissions represents little more than the tip of the iceberg. A clear recognition of this was made when President Xi recently announced tougher, revised targets requiring China’s emissions to peak by 2030 at the latest, and for the non-fossil fuel share of the country’s energy mix to rise to 20% by the same year. China has also announced that it will cap its coal use by 2020.

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These targets were also specified in China’s INDC statement released in June. This insisted that “China attaches great importance to addressing climate change, making it a significant national strategy for its social and economic development and promoting green and low-carbon development as an important component of the ecological civilisation process.” It added that “new industrialisation, urbanisation… agricultural modernisation and greenisation will be promoted in a co-ordinated manner. Resource conservation and environmental protection have become the cardinal national policy, placing mitigation and adaptation on equal footing, promoting innovation in science and technology and putting in place the necessary management and regulatory mechanisms and systems.”

Among the recent pledges made by the National Development and Reform Commission (NDRC) is a commitment to the launch of China’s national emission trading system in 2017, covering key industry sectors such as iron and steel, power generation, chemicals, construction materials, paper-making and non-ferrous metals. “China commits to promote low-carbon buildings and transportation, with the share of green buildings reaching 50% in newly built buildings in cities and towns by 2020 and the share of public transport in motorised travel reaching 30% in big and medium-sized cities by 2020,” adds the NDRC. “It will finalise next-stage fuel efficiency standards for heavy-duty vehicles in 2016 and implement them in 2019.”

Many believe that by establishing targets for attacking the ravages of climate change that would have been unimaginable a decade or so, China has manoeuvred itself into a leadership position in advance of COP21. At the historic US-China Climate Summit in Beijing in November 2014, the governments of the two superpowers paved the way for this by announcing that they would work together “to make sure international climate change negotiations… reach agreement as scheduled at the Paris Conference in 2015.” The US-Chinese accord was hailed by environmental groups such as Ceres, which describes itself as a non-profit organisation advocating for sustainability leadership, as a “game-changer” in the global battle against global warming.

When Premier Xi met US President Obama in Washington in September, they reaffirmed their “shared conviction that climate change is one of the greatest threats facing humanity and that their two countries have a critical role to play in addressing it”.

At the same time, the China-US Joint Presidential Statement on Climate Change reaffirmed China’s commitment to promoting “green power dispatch, giving priority, in distribution and dispatching, to renewable power generation and fossil fuel power generation of higher efficiency and lower emission levels.”    

  • By GlobalCapital
  • 30 Nov 2015

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