Environmental Technologies Industries
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Market Plans

China Environmental Export Market Plan
Chapter 1 - The Market for Environmental Technologies
Chapter 1 - The Market for Environmental Technologies

China's domestic environmental technology industry, according to local government and business leaders, does not lack the ability to produce standard environmental protection equipment. However, the quality and innovative character of this equipment is widely known to be poor, and the country's demand for reliable, affordable, and effective environmental protection equipment is not satisfied. Many of the potential consumers of such equipment lack access to necessary finances. The management skills and know-how needed to use the available technology effectively remain substandard, severely cutting into the efficient allocation of what little funding is available.

Chinese-produced equipment that is of lesser quality than similar foreign-produced equipment is often favored by Chinese end users, as it makes up for its shortfalls in quality by being less expensive and domestically produced. In some instances, purchasers are beginning to favor more expensive, higher-quality exports as maintaining mediocre domestically-produced equipment proves to be inefficient. Nonetheless, it is difficult for foreign technology producers exporting to China to enter the market competitively with products that are similar in design or function to anything already produced in the country. The exceptions to this rule are exporters that are able to provide equipment at significantly reduced prices and those that offer attractive support packages. Such exporters remain few, given such factors as high import tariffs, reduced production costs in China, and various other market barriers. Changes associated with the accession of China to the World Trade Organization (WTO) are having a beneficial impact.

Vendors looking to export equipment to China need either to provide exceptional products brokered through a reliable local representative or to enter the market indirectly through multilateral projects, through other foreign-funded investment schemes, or by targeting the demands of foreign-invested companies operating in China. Another option is to forgo the notion of exporting and establish a local presence in-country via a joint venture (JV) or wholly foreign-owned enterprise (WFOE). Such in-country operations can reasonably expect a share of the market demand if they offer competitively priced goods and services. Trends indicate that Chinese end users prefer to buy equipment and parts produced by Western-invested JVs and WFOEs due to inherent quality differences. JVs and WFOEs can also maintain competitiveness by avoiding customs tariffs and taking advantage of reduced production and labor costs that exporters cannot. Changes associated with WTO accession are influencing these realities and should be considered when developing a market strategy. (See further discussion of the WTO later in this chapter.)

Despite the broad range of environmental legislation that has been promulgated over the past decade and will likely be promulgated in the decades to come, regulation remains weak or nonexistent. Chinese environmental protection is not regulation driven but rather economically driven; the economy and its forces, meanwhile, can be described as somewhat market oriented although controlled by seemingly monopolistic behavior. Once this is understood and a marketing strategy is developed that provides an economic and profit-driven explanation for the use of a product, then market entry may be possible. Such a market strategy would require indications not only that a proven technology is technically appropriate for a task but, more important, that savings can be realized, that the payback period for an investment would be favorable, and ultimately that profitability could be enhanced. More sophisticated and costly technologies might require creative financing, in which the vendor would initially carry some of the cost, thus shouldering some risk in proving that the technology is viable, and would later be paid back from the accrued savings or profits according to a prearranged formula.

China's Real Demands

The domestic production of basic environmental technology is not impossible for China. The following is an assessment of the country's more complex and advanced needs, which can be roughly divided into four categories: inexpensive solutions, innovations and efficiency, management skills and best practice, and maintenance and equipment servicing.

According to State Environmental Protection Administration (SEPA) statistics, over 70 percent of China's pollution problems stem from industrial pollution, which is primarily generated by seven industrial subsectors: nonmetal mineral production; chemical production; pulp and paper production; textiles; ferrous smelting and processing; mining; and electricity production. Nonetheless, other sources such as municipal waste and agricultural pollution factor heavily into the equation, and the needs discussed below are generally applicable across the board.

Inexpensive Solutions

Available finances for environmental protection fall far short of what is needed to address China's serious environmental degradation. One consistent response from local government leaders and enterprises during the research for this market plan was that needs are tremendous but money is scarce.

Foreign enterprises looking to provide marketable solutions to China's environmental problems need to find innovative solutions and to develop affordable and cost-effective methodologies backed by creative financing. Technology providers who can offer means to make significant environmental improvements at affordable prices find themselves warmly welcomed in China.

The potential market size, economies of scale, and the reduced costs of producing in China - through either a JV or WFOE - are keys to commercial viability for inexpensive solutions. A solid market analysis, effective and widespread marketing, and adept use of the advantages of in-country production are all required. Enterprises composed, at least in part, by foreign technology providers are regarded as superior by many consumers in China.

Innovations and Efficiency

SEPA Minister Xie Zhenhua has indicated that RMB 700 billion ($85 billion) will be needed to meet the environmental goals of the Tenth Five Year Plan and, according to CRAES, about 55 percent of that is expected to be covered by enterprises themselves. However, many business enterprises already view environmental protection as a costly burden, and new goals are met with increased disfavor. Therefore, a market demand is developing for innovations and efficient management techniques that allow an enterprise to simultaneously protect the environment and save or generate money, either through increasing efficiency or reusing and recycling by-products.

Some of China's major industries are already putting such innovations to use and are finding that waste products previously seen as useless and troublesome to dispose of can be reused or recycled, and can generate further income. Other industries are developing more efficient and cleaner production methods and are reducing pollution levies and cleanup costs so much that expenditures formerly used to cover those costs can cover upgrade investment costs over a surprisingly short period of time (see Box 1). As enterprises are increasingly burdened with the responsibility of funding China's environmental protection - and internalizing their own environmental liabilities - they increasingly seek out means to make that responsibility affordable and profitable.

Box 1. Industries Find Efficiency Through Green Business

Sinopec Corporation and the Shanghai Baosteel Group (Baosteel), although not the only Chinese industries to do so, are finding that smart business simultaneously generates revenues and protects the environment. Both companies have strong internal health, safety, and environment (HSE) departments that establish and enforce standards that often exceed those of the state. Ultimately, their efforts pay off in revenues and offer positive public relations as they enter the international market.
  • Since 1983, Sinopec has tripled its revenues while simultaneously reducing pollution. Between 1998 and 1999 industrial output increased 12 percent while major contaminants continued to decrease.
  • In 1997, Sinopec spent RMB 90 million ($10.8 million) transforming 22 production units into clean production units. The investment was recouped through reduced waste management and pollution treatment costs within one year of operation. Phase two, comprising another 20 units, is currently under evaluation, and phase three is already in progress.
  • Investment in proactive safety measures by Sinopec and its subsidiary enterprises reached RMB 1.3 billion ($157 million) over the past three years. In 1998 and 1999, they collectively suffered RMB 4 million ($483,000) and RMB 8 million ($967,000), respectively, in asset damages due to accidents. Between 1984 and 1997, before HSE was initiated, that number averaged 20 to 30 million RMB ($2.4 to 3.6 million) per year.
  • Baosteel has been experimenting with recycling methodologies that use steel production waste products as a raw material in the construction of concrete roads. In 1998, the steel producer manufactured 10.16 million tons of steel and generated 5.5 million tons of waste. Some 4.7 million tons of that waste was re-used for road construction, generating RMB 187 million ($22.5 million), and eliminating the need to manage that waste through other means.
  • By standards in developed countries, Baosteel's achievement may considered common place. But in the developing world, where waste management industries are far less developed, this type of waste is often simply dumped directly into the environment.
  • Both Sinopec and Baosteel have indicated that their HSE programs were originally instigated by high-level government and enterprise leadership decrees. In time, the decrees have led to a sincere commitment on the part of both companies.

Management Skills and Best Practices

Although China is capable of manufacturing a great deal of the basic equipment for environmental protection, there remains a considerable gap in terms of management and know-how when putting that technology to use. There is a demand for consulting and management training that improves equipment performance and overall environmental performance. Many industrialists and officials contacted during the research for this document expressed a need for training on sound management practices and operations.

Additionally, there is a widespread lack of understanding regarding best practices. In some cases, this is due simply to the fact that enterprises are not aware of or do not seek out information regarding such practices. In other cases, a perception persists that environmental protection is necessarily costly and that therefore enterprises must become financially sound before they can become environmentally sound. In either case, it is apparent that information on best practice needs to be widely disseminated, with simultaneous consideration of the innovations and efficiencies discussed above.

Based on these findings, it appears that any initiatives in this area require coordination between individual vendors, industry associations, and the U.S. government.

Maintenance and Equipment Servicing

Another breakdown in the industry - one that heavily influences the efficiency of environmental protection expenditures and equipment - is poor operation and maintenance. This may be due to perceptions that equipment maintenance and servicing is merely another burdensome cost, or it may be due simply to a lack of awareness. Regardless, potentially strong market demand awaits investors who can successfully illustrate to enterprises that relatively small expenditures on maintenance can result in long-term efficiencies and revenues. Furthermore, technologies that require little maintenance or are self-maintaining (which are heavily marketed by Israeli industries in China) undoubtedly have additional competitive advantages.

The Issues

The three primary environmental priorities in China are water quality, air quality, and waste management. They will be the primary focus of environmental protection during the Tenth Five Year Plan and will therefore be the primary focus of this market survey. However, issues such as land degradation, ecological and biodiversity preservation, and other standard environmental concerns are getting attention and offer market potential.

Each of these issues is introduced below. For market analysis and discussion of market potential by sector, see the appropriate corresponding chapters.


Statistics from 1991 to 1998 indicate improvements in river water quality in some limited areas but illustrate an overall trend suggesting significant deterioration as a whole. Forty percent of the country's river water is ranked as poor by domestic standards. Additionally, an estimated 25 percent of all Chinese lakes are affected by eutrophication, almost all of the coastal seas are moderately to highly polluted, and it is now being said that little or no groundwater in the country remains unpolluted.

Water sources in 50 percent of the major cities and towns cannot meet drinking water standards. Ten percent of urban and 80 percent of industrial wastewater receives some treatment, but most of that treatment is inadequate. Most Chinese cities and towns lack municipal wastewater treatment facilities, and many towns do not even have proper drainage systems.

Additionally, parts of the country are dramatically short of water. In some areas, water availability is as low as 355 cubic meters per head (the international definition of water scarcity is 1,000 cubic meters per head).

In 2000, Beijing endured what many called its worst drought in decades. The vast majority of water in China is biologically and chemically unsound, primarily as a result of:

Of the three ambient air quality parameters consistently monitored in China - sulfur dioxide (SO2), nitrogen oxides, and total suspended particulates - only nitrogen oxides have increased concentration in medium and large Chinese cities in the past few years. However, all three pollutants remain formidable concerns for China's environment, and numerous other pollutants remain unmonitored.

Ambient air quality in many large urban areas has shown optimistic trends, but air quality in more than 500 major Chinese cities remains below World Health Organization (WHO) standards. Small cities have seen little or no improvement. Every Chinese city, large or small, faces serious total suspended particulate problems that pose significant threats to public health. The impact of acid rain has stabilized since the mid-1990s, but its influence is still widespread and destructive, affecting approximately 40 percent of China's landmass. Indoor air pollution resulting from fuel combustion is on the decline as briquettes and gaseous fuels replace raw coal for cooking and space heating. Nonetheless, it still poses a severe health risk, particularly for poorer, rural populations.

In keeping with the Montreal Protocol, China was able to freeze increases in the production and consumption of ozone-depleting substances in 1999. However, the country still faces the task of completely phasing out such substances by 2010, a goal that may be difficult to achieve.

Over 200 of more than 650 cities surveyed in China are surrounded by hills of waste. As of August 1999, more than 6 billion tons of municipal refuse had accumulated and claimed 5.4 billion square feet of land in China. Between 600 million and 750 million tons of industrial solid waste was generated in 1999, and statistics on the generation of hazardous waste vary from 5 to 30 million tons annually. Hazardous wastes are often incinerated and disposed of improperly and are frequently mixed with non-hazardous waste in landfills and dumps.

There is much discussion now of sustainable development through an integrated approach to waste management, including minimization of the production of waste materials and maximization of waste recycling and reuse. Composting, incineration, and landfilling all have roles in the management apparatus, each with its own host of pros and cons. Nonetheless, waste management remains a subpriority for Chinese planners, as air and water concerns take center stage.
Resource Management

About 20 percent of China's agricultural land has been lost to soil erosion and economic development over the last decade. Decertification in northern China is estimated at 70,000 square kilometers and is increasing by about 2,100 square kilometers per year. Salinization, reduction of pastureland, and loss of arable land are considerable, and the effects of widespread deforestation are having a strong impact. Land degradation is arguably the most critical rural environmental problem in China today.

Financing and Expenditures

China spent just under $10 billion on environmental protection in 1999, reaching 1 percent of GDP for the first time and accounting for an increase of 15 percent over expenditures in 1998. Certain localities, such as Beijing, Shanghai, Xiamen, and Dalian, are claiming expenditures in the range of 3 percent of local GDP. There has been considerable discussion about raising national expenditures over the next few years to the neighborhood of 1.3 percent to 1.5 percent of GDP; however, it is uncertain how soon that goal can be reached, what it will include, and to what extent it would be reflected in opportunities for various types of vendors.

In a year 2000 report, CRAES indicated that 11.4 percent of the $84 billion that will be spent during the Tenth Five Year Plan is expected to come from the central government, 34 percent is expected to come from provincial and local governments, and 55 percent from business enterprises themselves. A smaller amount ($4 billion) will be sought from foreign governments and international finance institutions. Whether or not business enterprises will be able to cover their 55 percent of the bill remains to be seen and is dependent upon location. In fact, the goals of the Ninth Five Year Plan placed a similar burden on enterprises, which was not fulfilled in most parts of the country.

Nonetheless, enterprises in and around cities like Beijing, Shanghai, Shenzhen, and other relatively affluent coastal areas are quite up to the task. Last year in Beijing, over 55 percent of the spending on pollution control came from enterprises. However, increasing numbers of enterprises in much of China's antiquated rust bowl are in dire straits simply to pay out wages and keep operations running, making the possibility of upgrading pollution control a long-term goal for many of them.

Chapter 9 of this document provides further indepth discussion of environmental protection financing in China.
Figure 1.1 Anticipated Investment in Environmental Protection in China, 2001-2005
(billions of U.S. dollars)

Visualizing the Market

The Role of Policy and Enforcement

Although demand in China's environmental industry remains predominantly driven by financing through official assistance programs or through enterprise interests in efficiency, policy pressures are becoming increasingly influential. As China's environmental policies become more comprehensive and detailed, market niches will become more defined. Investors looking for key market-entry points need to keep a close watch on the development of policy and, of equal importance, on policy enforcement trends.

However, unlike some countries in which policy is consistently and efficiently upheld through transparent and equitable enforcement, Chinese environmental policy can vary in its influence on market demand due to lapses in enforcement. Enforcement of policies is being stepped up, particularly in some of the more developed regions, and environmental policies are beginning to carry more weight.

There are currently several barriers to enforcement, which include conflicts of interest between environmental and development goals, a breakdown in the rule of law, lack of capacity on the part of local enforcement agencies, and weaknesses in monitoring systems. The prevalence of these and other barriers varies tremendously from region to region and should be considered in determining where to locate an operation or where to market products.

At the same time, however, it is not unheard of for local governments or other entities to respond to mandates and deadlines by paying cash to import required equipment such as compressed natural gas bus engines or air monitoring equipment. Such circumstances provide lucrative, albeit inconsistent, market opportunities, and, much like the market demand created by multilateral and untied bilateral assistance programs, these circumstances create a market environment quite unlike that in the U.S.

It is also advisable to monitor government policies pertaining to priority projects and goals and to consider incentives and preferential policies to encourage investment in that regard. However, before taking advantage of such policies, investors should critically review the circumstances. In some instances, whether the incentives and preferential treatment will make up for the difficulties and costs that could be faced is questionable (see Box 2).

In sum, it is not so much the regulatory pressures as the economic efficiencies and the availability of assistance funding that currently create market opportunities for foreign vendors. For now, most exporters will likely find market demand by offering efficiency solutions that either save money or generate revenues, or by exploiting the opportunities generated by multilateral and untied bilateral assistance programs. (See Chapter 10 for further discussion of positioning U.S. exporters in the market.)

Box 2. Investing in the West: Hype Versus Reality

The 10 western provinces of Shaanxi, Sichuan, Guizhou, Yunnan, Gansu, Ningxia, Inner Mongolia, Qinghai, Xinjiang, and Tibet are the focus of China's western development plan. The region covers 57 percent of the country's landmass, is home to 23 percent of the population, and claims over half of all the country's verified natural resources. Yet 90 percent of the country's poorest people live in the region, registering a per capita GDP of only 60 percent of the national average. Much of the region is mountainous, and agricultural land is of poor quality. Infrastructure and transportation capacities are lacking, as are education and a supply of qualified industrial managers and administrators. Direct investment is scant, the region is disconnected from international and even domestic markets, the environment is deteriorating, and the poverty-stricken population, without the proper resources and know-how, continues to stress the local ecosystem. Additionally, the potential for social unrest resulting from inequitable development across the country is something the government can no longer ignore.

The development plan's intended focuses are infrastructure development; the fostering of industries that maximize local comparative advantage; capacity building for science, technology, and education; a vastly improved investment climate; and environmental protection. Official support for the initiative has been overwhelming, with many emphasizing that development in the region is long overdue. Promises of increased direct investment, preferential tax rates, eased restrictions on foreign investment, simple solutions to complicated foreign exchange issues, and other incentives to draw both foreign and domestic investment to the region have been made.

However, beneath the rhetoric run concerns that foreign investors must consider:
  • The plan is extremely long-term, with an anticipated timeline of 20 to 30 years or more.
  • The majority of proposed projects are large-scale, long-term infrastructure development projects, which are notorious in China. A Ministry of Finance survey of recently completed large-scale infrastructure projects found that, on average, such projects went 85 percent over budget and were 23 months behind schedule.
  • The region lacks a secure legal climate and high-quality human resources. Local officials blindly gather and promote projects with little regard for long-term, efficient planning. Such circumstances traditionally breed corruption and shortcuts in China, resulting in misallocated funds and final products of poor quality.
  • Official media reports indicate that total investment in the region increased 17.9 percent in 2000, constituting billions of renminbi. However, only a percentage of this money has actually been transferred or invested; the remainder is accounted for as signed proposals or contracts. Whether these funds will materialize as actual investment remains to be seen.
  • Many projects are billed as environmental or ecological projects, in keeping with the plan's environmental focus. However, prospects for environmental protection are not guaranteed. Although a proclaimed propensity toward environmental protection may offer opportunities for related industries, the phrase environmental protection is not well understood. Barriers and resistance to true environmental protection measures still exist.
  • In some estimations, the development plan is more a political campaign for social stability than an economically viable campaign for growth, as central planners continue to realize the need to narrow China's development gap.

Many foreign investors have investigated business prospects in China's western regions, but as a result of some or all of the above factors, most have left empty handed. The prognosis is not that China's west will never yield quality opportunities, but investors should consider how much progressive change is required before venturing in.

Market-Based Incentives

Market-based incentives, or the setting of resource and service tariffs (such as those for water and waste management) at a level that legitimately represents the cost or value of those resources and services, is an idea that is only just beginning to gain a foothold in China. The Chinese government is reluctant to institute drastic tariff changes for fear that rapidly increasing the costs of resources and services, which have thus far been covered by the state, could stir social unrest. Yet the government appears well aware of the need to begin a process of instituting these tools, and potential investors would do well to watch closely, as changes could be instituted rather quickly.

Water is the first natural resource to have been affected by market-based incentives, with tariffs rising several times in 2000 alone. In December 2000, the Yellow River Water Commission raised irrigation water prices by 100 percent, hoping to encourage water conservation. Household water tariffs, although still quite low, are on the rise in some parts of the country, thereby introducing the idea that consumers will have to begin paying for the resources and services they use. As tariffs increase, consumers (particularly industries with high water consumption rates) will likely start looking for ways to reduce their costs.

Tariff liberalization trends are not altogether clear, but wastewater management is already being brought into the fold, and solid waste management will probably be affected in the near future. Additionally, there has been some experimentation with emissions trading as a market tool to influence air pollution management, an idea that the government is examining, and that may instigate increasing demand for monitoring devices and air pollution control technology. However, progress here is currently limited by the small number of participating enterprises and the lack of a free market for services such as electricity, in which individual enterprises are directly concerned with their own financial bottom lines.

The WTO and the Environmental Industry

The U.S.-China bilateral trade agreement that led up to China's accession to the World Trade Organization directly addressed the environmental sector only briefly and vaguely. In particular, it addressed China's commitments to environmental services, which include sewage services, solid waste disposal services, cleaning services for exhaust gases, noise abatement services, nature and landscape protection services, and other environmental protection services. However, environmental monitoring and pollution source inspection were not included. Additionally, foreign service suppliers could provide environmental consultation services via cross-border delivery, without establishing a presence in China; other service suppliers could operate in China through joint venture operations. Because the exact effects of the WTO's General Agreement on Trade in Services (GATS) on the sector are in fact quite vague, service providers are advised to consult a WTO specialist when considering the possibilities.

In addition to its effects on trade in services, WTO accession is resulting in significant tariff reductions on machinery and other imports. Overall, average tariffs will be reduced to 10 percent within five to seven years of accession. For specific details on the agreement and tariff schedules or to inquire about tariff rates for a particular item, contact the U.S. Department of Commerce for a copy of the agreement, or obtain a copy of the Regulations on Import and Export Tariffs of the People's Republic of China, available for RMB 240 from the Publishing House of the General Customs Administration, No. 6 Jianguomennei Avenue, Beijing 100730, China, +86 (10) 6519-5616, 6519-5615.

Although the agreement contains very little that is directly associated with the environmental sector, WTO accession is generating significant, indirect impacts on the industry. Many of the changes that benefit industries across the board, such as the dismantling of non-tariff barriers, the discouraging of import substitution policies, and (ideally) increased transparency, benefit the environmental industry.

Agreements on distribution services are also benefiting environmental industry players, and agreements on commission agent services, wholesaling, retailing, and franchising may all be central to the plans of exporters developing a presence in the country. Foreign service suppliers are now allowed to provide all - subordinate services, - including after-sales services. Once again, details in regard to these agreements are complex, and a WTO specialist should be consulted by service providers that are considering the possibilities.

In consideration of the role state-owned enterprises play in China's economy, governmental influence on the decisions of SOEs regarding the purchase and sale of goods and services has been addressed by the bilateral agreement as well. Under the agreement, decisions by state-owned and state-invested enterprises are based on commercial considerations, and the enterprises of other WTO members have equal opportunity to compete for contracts with such enterprises. Although China has chosen not to sign the Government Procurement Agreement, all procurements for commercial and nongovernmental purposes by state-owned and state-invested enterprises are considered nongovernmental procurement. Additionally, the receipt of benefits, investment approvals, and so forth, are no longer contingent upon technology transfers encouraged or imposed by the government. Under the bilateral agreement, technology transfers and similar issues are decided upon solely by the involved parties, without interference by the state.

Yet another significant and influential aspect of WTO entry is the effect it is having on other Chinese industries, which in turn affects market opportunities for environmental technology providers. According to the World Bank, as WTO accession slowly opens Chinese markets, China is shifting its industrial base to industries in which it benefits from comparative advantages (labor-intensive sectors as opposed to land-intensive sectors). Following are some of the industries that the World Bank expects to be affected by WTO accession, and the opportunities they may offer to environmental exporters:

Foreign technology providers have reported difficulties in managing the wastes of some leather treatment facilities in China, as leather treatment processes have a great deal of impact and some Chinese facilities are primitive. Foreign technology providers have indicated that they lack the technology or know-how to manage pollution in such facilities because these types of facilities were transferred out of their countries before control technology was developed.

Water conservation methodologies and water pollution control are important, as are cleaner leather production techniques.

Generally speaking, WTO accession is increasing competition, spurring local industries to improve technology, management, and general know-how. Efficiencies that both affect and are affected by environmental performance are increasingly important, particularly as awareness of eco-efficiency principles becomes more widespread. Additionally, increased scrutiny by international communities with an eye on environmental protection is strengthening Chinese industries' commitment to environmental protection and increasing their demand for environmental technologies as they seek to become competitive players in international markets.

A number of WTO-associated Web sites are listed among the resources for further reading at the end of this chapter.

Box 3. Town and Village Industrial Enterprise: The Little Big Polluters

Town and village industrial enterprises (TVIEs), which are economically significant small private and collectively owned enterprises, are slipping through the enforcement web of China's environmental protection. Very few, if any, of these facilities are up to state standards.

Unlike SOEs, TVIEs are weakly linked to the government, and pressures upon them to meet environmental standards are quite low. This may be a result of practical and logistical problems associated with enforcement of protection policies, or it may reflect the significant economic performance of the sector, which some are reluctant to restrain.

Pollution statistics relevant to TVIEs are far from complete. Nevertheless, there are strong indications that TVIE pollution is a significant contributor to total pollution discharges and that emissions target rates for the sector are in fact increasing. Year 2000 chemical oxygen demand targets for TVIEs increased 36 percent over 1995, while those targets remained generally unchanged for SOEs. The Ninth Five Year Plan target levels for TVIE SO2 emissions were nearly 50 percent higher than the actual 1995 levels, while the target levels for SOEs were reduced.

The United Nations Industrial Development Organization (UNIDO), with funding from the Global Environmental Facility, has initiated a program to bring energy-efficient technologies to TVIEs by strengthening capacity to govern the clean development of TVIEs and by stimulating demand for clean technologies through regulatory and market reforms, as well as the development of financing mechanisms. Exporters that offer goods potentially of benefit to TVIEs, but that have avoided the market due to TVIE financial constraints or market instability resulting from sporadic government cleanup campaigns, may find the UNIDO program instrumental in facilitating market entry.

Structural Trends of Pollution Control Investment

The structure of total investment in pollution control (TIPC) has changed over time in regard to the three main categories receiving that investment: urban infrastructure construction, renovation and redevelopment of existing enterprises, and new projects (see Figure 1.2).

Investment in urban infrastructure has seen both the most overall growth and the largest increase in percentage of total investment. Investment in this sector was $1.8 billion during the Seventh Five Year Plan and reached $15.6 billion in the first four years of the Ninth Five Year Plan. In 1999, investment in this sector accounted for 58 percent of TIPC, while it accounted for only about one-third of TIPC during the seventh Five Year Plan.

Investment in renovation and redevelopment of existing enterprises has remained relatively constant since the seventh Five Year Plan but has declined as an overall percentage of TIPC. Investment in this sector as a proportion of TIPC fell from 41.2 percent during the seventh Five Year Plan to 16.9 percent and 18.5 percent, respectively, in 1998 and 1999.

Investment in new projects has increased consistently from year to year but has fluctuated in terms of TIPC percentage. It accounted for 26.6 percent of TIPC during the seventh Five Year Plan, rose by less than 1.5 percent in the eighth Five Year Plan, dipped to 19.7 percent in 1998, and rose to 23.3 percent in 1999. Overall, the share of investment in new projects has declined slightly since the seventh Five Year Plan.
Figure 1.2 Structural Trends of Total Investment in Pollution Control in China, 1991 - 1999
(billions of yuan renminbi)

Investment in urban infrastructure projects
Investment in renovation and redevelopment of existing enterprises
Investment in new projects

Understanding China

Definitions of environmental protection vary from place to place, and China is no exception. In fact, because it lists initiatives such as urban beautification (i.e., fixing sidewalks and painting buildings) as environmental protection, China's definition may be one of the broader examples known in the world. Therefore, it is important for investors to keep definition variances in mind, as they may positively or negatively affect things such as tax brackets, incentives, and market demand.

On a similar note, it is necessary for investors to understand the Chinese market and adapt themselves and their products to it rather than try to impose a change to create a more favorable investment climate for themselves. The Chinese environmental protection market is increasingly open to the technology, skills, and know-how of the foreign sector, but tolerance is limited for investors who insist on doing things their way, without considering the situation, needs, and desires of the Chinese. Thus, techniques and technologies that have proven successful elsewhere may not be appropriate in China. Investors should keep this in mind when establishing market-entry strategies and should work hard to adapt themselves to the particular demands of the country.

It must also be noted that the Chinese do not take kindly to being used as a testing ground for unproven environmental schemes, particularly when they are expected to provide the funding. If newly innovated, untested, but relatively promising technology or management schemes are presented to China, complete with funding, there is some possibility that the Chinese will allow a pilot project to be developed in the country. However, schemes that are considered suspect or require financing from the Chinese government will not be looked upon favorably.

Finally, many Chinese industries still view environmental protection as a significant financial burden. With policy changes and stepped-up enforcement poised to increase that burden, many industries may see environmental protection as more of a threat than a boon. For that reason it is critical to offer, whenever possible, technologies and innovations that can turn environmental protection into a profitable endeavor. In marketing technologies or consulting on management methodologies, it is vitally important to clearly and convincingly stress efficiency, recycling, and the fact that environmental protection need not incur long-term costs but can in fact be profitable if instituted properly.

Many upgrades that could initiate efficiency and profitability require heavy doses of capital investment. Much of China's industrial sector lacks that capital, and many of the businesses propped up by the SOE supporting apparatus have barely enough to get by, never mind invest. Thus, it is necessary to consider these factors at all points of strategy development and to keep in mind that some enterprises, in some regions, are far more likely to accept and benefit from eco-efficiency strategies than others.

Box 4. Environment and Social Stability Face Off Across the Country

As 2000 drew to a close, goals set by the Ninth Five Year Plan to bring all polluting industries in the country into compliance with state pollution standards by year's end had companies scrambling to clean up and governments closing down operations.

The SEPA and other related departments intensified inspection processes during the period; proud claims of high compliance rates were heard, as were troubling stories of closing enterprises and distraught laborers. The tricky balancing act of shutting down heavy industrial polluters and preventing unemployment from skyrocketing further out of control was underway. Enterprise closure is a stiff threat used to pressure polluters into compliance, and under new air and water laws, it will likely continue to play a strong role. But some enterprises, particularly the antiquated industrial behemoths of China's fabled - rust belt,- simply cannot cover the costs of upgrading and protecting. Closures, on the other hand, bring the burden of unemployment and potential social unrest. As an insurance policy, most closures have taken place in dispersed smaller enterprises rather than in large operations.

Meanwhile, despite initial successes in pollution reduction among those industries still in operation, inconsistent monitoring and enforcement strategies may, in the long term, undermine what has been accomplished. Intermittent and poorly executed inspections in many parts of the country may not be sufficient to prevent enterprises from lapsing back into old habits after the pressures of the campaign subside.

The economically more dynamic eastern and southern regions of the country have been most successful in bringing about compliance that is likely to hold, particularly through improved production processes and the development of cleaner technologies. Those regions heavily burdened with decrepit industrial facilities, however, are left balancing concerns of environment and social stability.

Selected References and Web Sites

Policy and Regulation Department, General Customs Administration. Customs Import and Export Tariffs of the People's Republic of China. Beijing: Publishing House of Economic Management, 2001. (Available for RMB 220 from the Publishing House of Economic Management, tel. +86 (10) 6519-4173.)

State Environmental Protection Administration. China Environment Yearbook. Beijing: China Environment Yearbook Publishing House, 1999.

Wang Jinnan, Wu Shunze and Luo Hong. Integrating Economic Development and Environmental Protection in China During the Tenth Five Year Plan Period. CRAES: November 2000.

U.S. and Foreign Commercial Service, Beijing. Environmental Project Approval and Financing in China: A Perspective for U.S. Companies. Beijing: U.S. and Foreign Commercial Service, November 2000.

Web Sites

Central Intelligence Agency:
Far Eastern Economic Review:
National Bureau of Asian Research. NBR Publications:
South China Morning Post:
U.S.-China Business Council:
U.S.-China Business Council: China and the WTO:
U.S. Department of Commerce:
www.doc.gov, www.usatrade.gov
U.S. Department of Commerce, International Trade Administration, Office of Environmental Technologies Industries: www.environment.ita.doc.gov
U.S. Embassy, Beijing:
U.S. Embassy, Beijing, Country Commercial Guide: China:
The World Bank Group in China Web site:

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