A Financial Revolution 

April 10, 2006
Is My Hand In Front of My Face? China's Pollution Problem
Air pollution has been a major problem for China for many years. A decade ago the problem was people burning coal in their homes. Today, in most large cities the residents use electricity instead of coal and they use it not only for cooking and heating, but to power their TV, stereo, PC, appliances, and more. As a result, the coal burning has simply shifted to from millions of households to large power plants. In addition, the number of vehicles on city streets doubles every few years.

The result of this explosion in energy demand is obvious to anyone who visits Beijing, Shanghai, Guangzhou, Hong Kong, or Xi'an - pollution! Today's pollution in Beijing reached an index value of 500 (it was probably higher, but the index doesn't go beyond 500.) At that level, concentrations of pollution are more than four times the levels established by the World Health Organization.

In addition to the obvious health effects, the pollution is a significant drag on the Chinese economy. World Bank reports estimate that 8% of GDP is lost every year because of pollution. This is due to damage to productivity (worker illnesses and death), buildings and crops, and a number of other effects. It is also affecting the appeal of Chinese cities for foreign investors.

The Financial Times had an article last week announcing that Hong Kong's ranking as a desirable place for foreigner's to live fell sharply because of pollution. That means companies are deciding not to invest in Hong Kong because their HQ employees don't want to work there. Looking at the picture above of today's air quality at Tiananmen Square in Beijing, it isn't hard to see why people might think twice before moving their family to a "smoke-filled room".

The Chinese government is stepping up efforts to address the pollution problem. Especially as 2008 and the Olympic games in Beijing come closer. However, the task is Herculean and the Chinese national environment agency is small (it numbers less than 300 employees for the entire country.) But the State Council declared that the 11th Five-Year Plan will place great emphasis on reducing pollution (the goal is 10%) and increasing energy efficiency (the goal is 20%).

The problem doesn't only affect China. Pollution from China (and India) travels to the US and, in some places, has a significant impact on air quality. More than 40% of mercury pollution in the US comes from China. It is in the US's interest to promote cleaner, greener growth. And while the opportunity is huge for US companies that produce pollution control devices and energy efficient technologies, many companies have only a minor presence or stay out all together due to concerns over intellectual property.

Pollution will continue to be a major drag on the Chinese economy for years to come. I am, however, optimistic that public desires, both domestically and internationally, for a higher quality of life will force government and industry to work toward better air quality. I only hope it comes soon.

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