Economic impact of China’s environmental strategy

It’s been four years since China revised its environmental protection law—for the first time since 1989—to combat environmental degradation and hold governments and companies to higher standards.

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And the results are encouraging, says Nicholas McConway, senior portfolio manager on the Asian equity team at Amundi Asset Management in London, England, with air quality improving and companies investing more responsibly.

The country is pushing more sustainable growth and reducing its environmental impact, says McConway, whose firm manages the Renaissance China Plus Fund.

For China’s Communist Party, this involves “maintaining people’s living standards, not just in terms of economic and monetary [policy], but also in terms of the environment that these people have to live in,” which has been plagued by severe pollution due to improper controls, he said.

Under the current environmental strategy, the government is trying to be more efficient with energy consumption, McConway said.

“Total energy consumption will potentially grow in absolute terms by over 40% in the next 15 to 20 years,” he said. “China will have to be a lot smarter about how they generate the electricity they use, and also about what they use that energy on.”

The country also needs to produce more energy that’s mixed with renewables, such as wind, solar and hydro, he added.

Effect on the economy, businesses

China’s growth is expected to continue to decline: its GDP advanced 6.7% in Q2 2018, in line with consensus but down from 6.8% in the previous quarter and compared to an average of more than 9% between 1989 and 2018.

Factors such as the U.S. tariff battle are weighing on China as well as government initiatives to help stabilize economic growth and deal with financial risk.

The implications of the environmental strategy are two-fold, McConway said.

“It clearly involves a better environment for the Chinese people, and this has been very evident in the past two years,” he said. The strategy includes phasing out extra energy production, including coal.

That’s led to large price increases due to a bottleneck in energy supply. “That bottleneck has led to far better pricing for the commodities affected [as demand rises], which has led to an increase in the returns of those industries,” McConway said.

Under previous regulations, companies with higher margins and returns “would invest capital aggressively to take advantage of [those returns], and ramp up their [production] volume. In their minds, that made more money. The problem, however, was this led to serial oversupply and very deep downswings,” he said.

Now, however, “the ability of these companies to invest in a silly way is a lot more difficult,” leading to more investment in cleaner technology for the future.

The environmental strategy is putting pressure on industries such as steel, cement, glass and chemicals, as they cut back on output to adhere to tighter regulation, McConway said.

Companies benefiting from China’s environmental focus include downstream gas distribution companies, which “are enjoying much higher volume growth and reasonably stable margins,” McConway said, and equipment suppliers to the wind and solar industries, “as these companies are enjoying stronger demand.”

Also read: What’s behind consumption trends in China

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