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A tough road to green transition of China’s economics

01 August 2011
A tough road to green transition of China’s economics

By Changhua Wu, Greater China Director, The Climate Group.

The Chinese word for “crisis” wei ji, is composed of danger (wei) and opportunity (ji).

The green transition of economy that China is exploring, to a large extent, is the inevitable choice stimulated by “danger”.

30 years of reform and economic boom, at the expense of resources, environment and cheap labour, provokes deep-thought and reflection.

While thinking about opportunities when in danger, the transition at the economic and industrial level is the only option for China’s development in the 21st century.

The “danger” becomes even more urgent in the second decade of the 21st Century.

On one hand, consumption of resources and energy, whether in terms of quantity or from increasing external dependence, has made enormous pressure on China itself and the world. On the other hand, the development of China made a contribution to the world by freeing millions of people from poverty; what’s more, the huge market and strong demand of China had tremendous positive impacts on the world’s economy, especially those major trading partners, in such a recession period. 

If this huge economic motor keeps going, it will need a steady flow of resources and energy.

Nowadays, resource and energy security has become a serious risk factor, threatening to delay or stop this motor. Related to the low efficiency of recourse and energy use is the emission of pollutants. They are polluting air, water, soil, through the food chain, breathing, drinking water and some other channels, endangering human health and safety. Therefore, in this vast land of China, there forms a prominent contradiction between pursuit of high economic growth and consumption of resources, energy and environment.

It seems very difficult to slow down the motor. Despite the state’s decision to increase the GDP growth rate to 7% during China's Twelfth Five-Year Plan, the actual growth rate exceeds 9% before the third quarter of this year.

Investment-led economic growth is still hard to reverse. Although the state has begun to focus on the domestic market and domestic consumption, China's current consumption only accounts for 35 per cent of GDP, lower than two-thirds of developed countries. Meanwhile, investment in China accounts for nearly 50 per cent of GDP; however in a typical emerging economy, the investment usually accounts for only 30%. 

Therefore, many economists predict there will be a hard landing of China's economy. They believe that China's development model is not sustainable.  A prominent question is: how feasible would the green transition be under the constraints of environment, energy and resource and against the background of extreme unreasonable economic structure?

To put it in another way, is it possible to achieve the expected green transition within a certain time? 

Several key issues at present should be paid attention to. First, over-investment in infrastructure, traditional industries and technologies has resulted in a huge waste of resources and energy, as well as deteriorating environment. The Development and Reform Commission recently announced the risk assessment of local energy conservation, which is not optimistic. At the beginning of the Twelfth Five-Year Plan, there was not any relief on pressure on energy; on the contrary, the pressure is growing.  According to environmental quality report of the first half year issued by the Ministry of Environmental Protection, the air quality of many cities, including Beijing is becoming worse and worse and water pollution, soil pollution is increasing. 

At the same time, a large number of projects, for example the 4 trillion bailout into the "Railway, Highway and Airport" project, have spawned non-performing loans of banks due to low marginal benefit and cash return.

Despite recently the state came to say: Even if the real estate declines in value of 50%, the affordability of China’s Banks to bad debts will still be within a healthy range. However, if we combine real estate, railways, airports and highways… Can we guarantee the banks’ affordability? 

Second, over-investment has begun to cause a huge debt crisis in public sectors and local governments. The current liability of the Ministry of Railways has amounted to nearly 2 trillion and the direct or indirect liabilities of local governments is 10.7 trillion. These become a major risk for economic growth.

I remember not too long ago, there was media coverage about the collapse of financial system of many local governments in the US. They declared bankruptcy and were unable to continue normal operation. In Chinese system, that seems unlikely to happen. But when some problems of infrastructure projects appear, the local government would accumulate debts because of certain implied warranties. According to statistics, the debts of public sectors and local governments combined have accounted for 80% of GDP – the risk can be imagined. 

Throughout the country, how many local governments are struggling to explore a way out? One possible way is to use “green” and “low carbon” to stimulate a new round of investment boom.

Before the introduction of The Twelfth Five-year Plan, there has been a strong wave of proposed new strategic industries: new energy, new materials, high-end manufacturing, etc. With grand plans, a large number of "100 billion" level industry parks have been planned, becoming new signposts and new targets to attract investments.  However, with the debt of local governments rising, lack of core technologies and tightening state's macroeconomic policy, it is difficult for green transition to achieve the intended speed and scale and obtain quick adjustment of economic and industrial structure. 

This is really an obscure "mystery."  Policy - technology - capital - market, can we explore out the way that everyone is looking forward to, in face of such challenging realities?

We cannot find the answers due to lack of knowledge and technology.

We want a solution! 

Back to Changhua Wu's Blog 

Translated by Ge Xin. 

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