Environmental Stresses Offer Investment Opportunities
BMI View: China is at a major inflection point with regards to the ongoing degradation of its environment, and with the tide of public sentiment rapidly shifting, we believe that the time is nigh for the government to adopt more meaningful and wide-reaching reforms. As China begins to enter a more mature stage of development, we note that opportunities abound in the healthcare, agribusiness, energy, and even automotive sectors, with aggressive government targets as well as increasing consumer awareness set to drive new areas of growth in the economy.
The scale of environmental degradation in China has taken on increasingly concerning proportions, manifesting in deleterious effects at virtually every stage of economic production as well as in the lives of the country's 1.3bn people. Nearly six years ago, we asserted that China's 'growth at all costs' economic model was leading to the failure by the government to take concerted action to fight pollution, and that this failure could result in large-scale social unrest, thereby undermining the country's substantial economic development. Since then, the situation has become considerably worse. Indeed, China emitted far more CO 2 than the US in 2010, despite the fact that the former's economic output at the time was less than half that of the latter.
|The New Global Leader|
|Global - Total CO2 Emissions In 2010, Gigatons|
The Other Side Of The Development Coin
As such, China appears to be approaching a tipping point in terms of the balance between economic growth and the increasingly overwhelming degradation of the country's environment. In addition, beyond the pollution related to increasing levels of economic output, affluent Chinese citizens are consuming progressively more each year. This has enormous implications: for example, we project that total vehicle ownership (a particularly useful proxy for consumer-led pollution) will skyrocket from approximately 15% in 2012 to nearly 28% by 2017. While social unrest has not yet approached crisis proportions, awareness of the adverse health effects linked to the pervasive pollution has risen dramatically. In an April 2013 survey conducted by China's Public Opinion Research Center in coordination with Shanghai Jiao Tong University, 80% of respondents indicated that they felt that environmental protection measures had displaced economic development as the chief priority. In the same survey, over 60% of those polled stated that they did not believe that the government had been fully transparent on the subject of environmental protection.
Given these results, it is not surprising that, according to Taiwanese newspaper Want Daily, the number of major environment-related protests has been growing at an annual rate of 29%, overtaking land disputes as the chief impetus for the country's estimated 30,000-50,000 'mass incidents' of unrest that take place each year (notably, the total number of mass incidents was cited as high as 180,000 by the European Council on Foreign Relations in 2011). Indeed, according to the vice chairman of the Chinese Society of Environmental Sciences, the number of major environmental incidents soared by 120% in 2011, with public anger boiling over as environmental data and protection laws are considered to be both too abstract and difficult to access.
While material changes have been witnessed in China's environment, such as the seemingly ever-present smog that now shrouds Beijing, a city of more than 20 million people, the deleterious health effects on the country's population have been perhaps even more alarming. As denoted in the chart below, which depicts the spot Air Quality Index (AQI) in major Chinese and Global cities as of May 17 (with readings over 100 considered to be the level at which sensitive individuals will begin to be affected), Chinese cities tend to fare noticeably worse than their global peers. According to Medical Journal The Lancet's Global Burden of Disease (GBD) Study 2010, pollution contributed to approximately 1.2 million premature deaths in China in 2010, accounting for 40% of the world total and reducing 25 million healthy years of life from the population as a whole.
|A Clear Difference|
|Global - Air Quality Index (AQI)|
Political Imperative At A Turning Point
Faced with increasingly grim figures and burgeoning social discord, the government has begun to react, dramatically altering its language on both environmental and economic reforms. Although we have written in the past (and it continues to be our view) that the new administration of President Xi Jinping is likely to be extremely deliberate with political reforms over the course of the next five years, Xi and Premier Li Keqiang have gone out of their way to emphasise a new and potentially very different approach to sustainable growth.
Moreover, the Ministry of Environmental Protection's twelfth 'Five-Year Plan for the Environmental Health Work of National Environmental Protection' (2011-2015) includes promising commitments such as the expenditure of CNY350bn (US$56bn) in order to curb pollution in major cities by 2015. Although the plan also includes a range of aggressive targets which may or may not be achievable, such as the reduction of fine particulate emissions (PM 2.5) by at least 5% in 117 cities, we note that the government rarely if ever misses hard spending targets.
Indeed, while the government's chief concern dating back to the 1980s has been the achievement of consistently rapid economic growth, the true motivation behind China's famously high GDP targets has always been the maintenance of the Communist Party of China (CPC)'s mandate to govern. In light of rapidly evolving popular opinion towards environmental concerns, we believe that the CPC will be forced to react accordingly given the particularly sensitive nature of its mandate as an unelected government.
Taking Stock Of The Opportunities: What Does It All Mean?
Despite the fact that it will likely take decades to reverse the severe damage that has been done to China's environment (as well as to eradicate the practices that have led to the current state of the environment), we believe that there will nevertheless be ample opportunities for investors to play the 'China Clean-Up' story in the near-to-medium term. In the healthcare sector, we expect lingering pollution issues to continue to contribute to China's burden of disease, providing opportunities for pharmaceutical and medical device firms that manufacture products such as air purifiers, masks, and inhalers. In the energy sector, emissions control and abatement equipment manufacturers are set to benefit as the government targets the deleterious effects of coal emissions, and in the agribusiness sector, ample opportunities abound for companies providing water and waste management equipment, as well as high-yielding seeds and machinery. There are even promising spots in the autos sector, with manufacturers of hybrid vehicles and engines, catalytic converters, and electric vehicles (EVs) well placed to benefit from progressively stricter government emissions criteria. Indeed, it is with all of these factors in mind that we believe China's current environmental crisis can signal not only targeted economic opportunities, but also an inflection point for the country as a whole to embark on a more sustainable development path.