Environmental protection is currently receiving more attention in Chinese domestic policy than ever before, and all indications are that this attention is going to continue to increase. Spending on environmental protection topped 1 percent of China's gross domestic product (GDP) for the first time in 1999, and investment rates are expected to continue rising. Similarly, citizen awareness and the demand for environmental well-being are increasing. The central government, increasingly cognizant of the financial and social costs of a deteriorating environment, has clearly made its protection a priority.
In November 2000, the Chinese Research Academy of Environmental Sciences (CRAES) estimated that RMB 700 billion ($85 billion) would be needed to meet the environmental goals of the Tenth Five Year Plan (2001-2005). Other estimates indicate that as much as hundreds of billions of U.S. dollars will be necessary to address all the issues thoroughly. The World Bank has estimated that 2 percent of GDP will be needed just to bring air quality standards within range of those seen in the United States in the 1980s. Regardless of the estimations observed, the central government is expected to contribute only 11.4 percent of the CRAES estimate ($9.7 billion) over the next five years, while 34 percent of that estimate (nearly $29 billion) is expected to be sourced from provincial and local governments and 55 percent (over $46 billion) from business enterprises themselves.
The financial demands indicate a strong need for non-public investment, whether it be directly from Chinese state-owned enterprises (SOEs), from the small but growing domestic private sector, or from a variety of foreign investment channels. Under ideal market-oriented circumstances, such investment might materialize with relative ease, but as the system currently functions, it remains challenging to operate profitably in China's environmental sector. This is due in part to the facts that pricing strata for environmental services such as waste and water management do not reflect the actual costs of providing those services, guarantees and security mechanisms are not well established to mitigate the risks of private investment, and legal transparency and equitable enforcement of the law remain lacking in many instances. The government appears to be aware of these conflicts and the fact that they must be addressed if the private sector is to play a considerable role in the environmental protection plan. The rate and efficacy with which these issues can and will be addressed is uncertain.
There is already a trend toward the liberalization of environmental service tariffs. Water prices are rising, and some investors report cooperation from local governments in setting water prices at rates that offer potential for returns on long-term facility investments. Similar tariff liberalization may carry over to wastewater treatment and, in due time, to solid waste management as well. Nonetheless, the common consensus is that, in order to enter the market and eventually turn a profit, investors must have both ample finances and patience.
Because most of the government bodies and enterprises (both SOEs and private enterprises) seeking to invest in environmental protection work under financial constraints, it is critical that the technologies they invest in are efficient and affordable. A fundamental underlying indication of this market analysis is the Chinese demand for innovative technologies that can provide significant results at relatively low marginal costs, management and clean production schemes that can assist in the attainment of efficiencies, and innovative recycling techniques that can turn waste products into money-generating commodities.
Yet, before attempting to enter the Chinese market, it is important to keep in mind the eccentricities of doing any sort of business in China. Numerous complications and barriers, many of which are addressed in detail throughout this document, are encountered by nearly all exporters and foreign investors that enter the Chinese marketplace. Perhaps paramount among those is personal relations, referred to in Chinese and colloquially among non-Chinese as "guanxi." Personal relationships are often at the core of business dealings in China. For those who lack the time, money, ability, or interest to establish such relations and presence in China, an increasing number of service providers with extensive connections and know-how can, for a fee, provide the necessary connections, networking, and guidance. Regardless of the facilitation and assistance sought, entry into the Chinese market can be a slow and sometimes exasperating process; those willing to spend the time and effort may find the payoff worthwhile in the end.
For the purposes of this report, the environmental sector is divided into the water sector, the solid waste sector, the air sector, the services sector, and resource management. All of these sectors present unique opportunities and complications, which are discussed in turn in the corresponding chapters. Additionally, efforts to enter markets in any of the sectors are subject to a relatively standard set of conditions that apply across the environmental sector and in some cases to foreign investment in China in general; these conditions are addressed in the remaining chapters.
This market study aims to clarify three things for U.S. companies looking to invest in China's environmental protection industry: 1. The real demands for environmental protection in China, 2. The current investment climate in the environmental protection industry and developing trends that may affect it in the near and medium-term future, 3. Methods to access the market and potential results that can be reasonably expected from investment efforts.
This report does not provide comprehensive lists of industries looking to buy or manufacture equipment, local governments looking to implement initiatives, or massive infrastructure development programs that may offer opportunities to technology providers, as all these types of information are time dependent and would be obsolete soon after printing. It does, however, indicate channels by which investors can find this information while offering insights into what the market may have to offer as China pursues its goal of rapid modernization.