Big bang measures to fight air pollution
To reduce air pollution to a safe level, China will have to drastically change its
policies on energy, auto, environment and public transport systems.
Loser # 1: Coal Our projection of coal consumption under the proposed policy package is substantially lower than current market consensus. Our new forecast looks for only 2% annual average growth of coal consumption from 2013-17, vs. our old forecast and market expectations of about 4% (Figure 48). If the long-term volume growth is reduced by more than half, and the sector’s pricing power and profit margin are also lowered due to weaker-than-expected demand, the market reaction could be a de-rating of 20% (e.g.the PE multiple contracts to 7x from 9x), according to cross-country data. We do not think it will happen in the very short term, but do believe it will come sooner than many investors’ perception.
Our coal analyst, James Kan, believes that if the coal consumption scenario under the proposed policy package indeed materializes, China will potentially become a net exporter of coal again (currently China net imports about 200mt a year). That will impact the regional coal industry as well because China’s net import of thermal coal accounts for one quarter of international seaborne thermal coal market. By 2015, thermal coal price could be lower than the current level and marginal cost producers would be pushed out of the economical supply. For H-listed thermal coal stocks, Yanzhou Coal (1171.HK) would be the biggest loser as the company’s assets are generally of high costs and thus some of Yanzhou’s mines will no longer be economical.
Beijing residents rethink life in big smoke
By Jamil Anderlini and Leslie Hook in Beijing
A winter of terrible air pollution in Beijing is likely to be followed this summer by an exodus of expatriates fleeing the Chinese capital, according to senior executives, diplomats and businesses that cater to the expat community.
But it is not just foreign residents who are contemplating leaving and it is not just a couple of months of hazardous smog that has convinced them to go.
As in other large Chinese cities such as Guangzhou and Shanghai, Beijing’s residents are mostly from other parts of the country and, as they are gradually allowed to learn more about the health effects of chronic pollution, many are having second thoughts about life in the big smoke.
At least among a more educated and wealthier segment of society, strategies for leaving Beijing have become a popular topic on Weibo, the largest of China’s Twitter-like microblog platforms.
One user on Weibo wrote: “One of my close colleagues has finally escaped Beijing. With expensive housing, expensive goods, terrible pollution and expensive healthcare, he decided to run off to a city where the pressure will be much less – London.”
Air pollution has always been bad in China’s mega-cities but in recent months in north China readings of the most harmful types of toxic smog have reached 40 times the level recommended by the World Health Organisation.
More importantly, real-time information is now available that allows anyone with a computer or smartphone to match hard data with the choking clouds they can see and smell in front of them.
After the US embassy began in 2009 collecting its own data on the fine particulate matter known as PM2.5 that is the most dangerous to human health, a public campaign eventually forced the Beijing government to do the same and hourly readings are now available online from both sources.
That access to information has transformed air pollution from a non-issue just two years ago into a source of deep public anger at a time when the damaging health effects of pollution are also becoming clear.
A World Bank study in 2007 estimated that each year China sees 400,000 premature deaths due to outdoor air pollution – a finding so explosive that the government tried to suppress it at the time. However one of the scientists who worked on that study, Pan Xiaochuan at the Peking University School of Public Health, said the true figure is probably far higher because the methodology used in the report was conservative.
Indeed, a survey released last week that looked at causes of deaths worldwide found that outdoor air pollution contributed to 1.2m premature deaths in China in 2010, accounting for almost 40 per cent of the global total. The study was conducted by a group of universities and the WHO.
“China is starting to experience the long-term health damage caused by pollution, and the past 10 years have been like a period of concentrated outbreak,” said Dr Pan, pointing to increasing rates of lung cancer and digestive diseases across the country.
Dr Pan says lack of data prevents scientists from obtaining an accurate measure of the true health impact of the air pollution that blankets eastern China.
That information vacuum is mostly due to government secrecy.
Apart from a few exceptions, most Chinese cities refuse to publicly disclose some of the most basic and important environmental information, such as pollution discharge data and records of administrative punishments handed out to polluters, according to an authoritative annual report published last week.
The Institute of Public and Environmental Affairs in Beijing and the Natural Resources Defence Council in the US have published an annual pollution transparency index covering 113 Chinese cities since 2009.
This year, about 35 per cent of the cities saw a fall in their transparency scores, an unprecedented reversal after years of improvement that organisers of the survey described as “alarming”.
They attributed the increased secrecy mainly to local protectionism and the willingness of regional governments to sacrifice the environment in a myopic and ultimately self-defeating pursuit of economic growth.
In a report published by state media last week, the Chinese government estimated the cost of environmental destruction in 2010 at a minimum of $230bn, or about 3.5 per cent of the country’s gross domestic product, based on only partial available data. That was three times the estimated losses in 2004.
“A fundamental problem with [Beijing’s] current policies is that they are inconsistent with the need to reduce pollution to politically acceptable levels within an acceptable period of time,” Deutsche Bank economist Ma Jun wrote in a detailed recent study on China’s air pollution problem.
On current trends, without a change in policy, China’s air quality will worsen by a further 70 per cent by 2025 from the current often unbearable levels, thanks to a 60 per cent projected increase in coal burning and a quadrupling in the number of cars on China’s roads, according to Deutsche Bank estimates.
But the rising anger and the growing number of expats and locals willing to give up economic opportunities in the Chinese capital and leave suggests air pollution has now become an uncomfortable political issue for China’s unelected leaders.
Given how sensitive the ruling Communist party is to anything that undermines their legitimacy, many environmental activists are now hopeful that the government will finally make environmental protection a top priority.
In an early positive sign, China’s newly installed premier, Li Keqiang, promised to do more to clean up pollution at his first public press conference as premier in mid-March.
“We will punish offenders without mercy and enforce the law with an iron fist,” he said. “It’s no good to be poor in a beautiful environment but nor is it any good to be well-off and left with the consequences of environmental degradation.”
Additional Reporting by Gwen Chen