Four Key China Reforms to Watch

Now, it's China's turn to get tough on pollution, and Credit Suisse analysts said in a recent report that the country is about to embark on a decade-long "green cycle" of stricter regulation and investment in green technologies and infrastructure. Guided by Japan's experience in the 1970s, the analysts estimate that total environmental spending in China during the government's current five-year plan (2011-2015) could total 3.4 trillion yuan (561 billion US dollars). The effort is going to prove a burden for some and an opportunity for others. It's going to cost companies in those industries doing the bulk of the polluting at present – particularly power plants, cement producers and steel manufacturers – a good deal of money to upgrade their facilities and production processes to comply with new air pollution regulations coming online this year and next year. Credit Suisse estimates that companies will spend 1 to 4 percent of what it would cost to build a new factory upgrading their existing plants and will see their operating costs increase between 1 and 2 percent thereafter.
 
But a green decade in China will prove a boon to many more. "Investment in the [waste treatment] sector is not just defensive (against) economic cycles, it is also exciting with sustainable earnings growth," the Credit Suisse analysts wrote. As China's relentless urbanization continues, efforts to contain the environmental impact will continue as well. Officials plan to spend 244 billion yuan (40 billion US dollars) to add 159 kilometers of sewer pipe by 2015, doubling the network's total size compared to 2011. The country also needs new incinerators to handle the increasing amounts of trash an expanding middle class will produce. And because water and arable land are extremely scarce, any company working on effective ways to treat and recycle wastewater or to decontaminate polluted soil will find itself with ample opportunities to prove that they've got the goods.
 
Cleaner Air
Considering the thick, throat-burning smog that blankets China's major cities some days, improving air quality is one of China's most pressing environmental concerns. In September, the Chinese government passed a five-year air pollution action plan, and some of the toughest emission standards on the planet will begin to hit utilities, cement and steel companies over the next two years. Yes, you read that right. The country's sulfur oxide limit for steelmakers will be between a third and one-half of what it is in environmentally conscious Europe, and coal-fired power plants will be allowed to belch out only half the air pollutants permitted to Japanese and European utilities. Of course, enforcing these stringent new laws is another story. China's systems for monitoring compliance are inadequate, the analysts say, and the fines for breaking the rules are often too low to be a compelling deterrent.
 
Vehicle Emission Standards
They've set ambitious goals in any case. By implementing tighter vehicle emission standards, Chinese officials hope that old, heavy-polluting vehicles will be off the roads by 2015 in cities such as Beijing and Tianjin, and by 2017 in the rest of the country. Officials also plan to replace small industrial boilers with models large enough to accommodate technology that reduces emissions. Finally, the government aims to gradually replace coal-powered power plants with natural gas ones and has created a dedicated fund (paid for by the coal-burners) to subsidize renewable energy projects. If implemented as planned, the new regulations could reduce annual emissions of major pollutants by 40 to 55 percent from 2011 levels by the end of 2015. That's a big "if," but it's also a compelling one.
 
Taking into account the costs of retrofitting factories and higher future operating costs, Credit Suisse says Chinese materials companies could take an earnings hit of as much as 90 percent in the long term, with individual effects depending on a number of factors, including the portion of increased costs that each company can pass on to its customers. The cement and steel industries, in which prices are set locally, will find it easier to pass on costs than industries that deal in commodities for which prices are set in global markets, such as aluminum and copper.
 
Cleaner Water and Soil
China's water and soil are nearly as polluted as its air. The culprits: Factories that discharge industrial waste improperly, farms that rely heavily on fertilizers and a dearth of systems to collect, treat and dispose of garbage and wastewater. And when the water and soil are contaminated, a nation's food supply is at risk: Dangerously high levels of heavy metals such as cadmium have been found in Chinese rice several times in recent years. Providing the new infrastructure needed to address these problems is going to be a big business. Analysts expect investment in trash incineration and treating hazardous industrial waste and wastewater sludge to grow by more than 30 percent over 2011 levels by the end of 2015, with total incremental investment of 264 billion yuan (44 billion US dollars) during that time. China went on a wastewater treatment plant building spree between 2006 and 2012, and the number of facilities more than tripled to 3,340. But there's still a need for more, as wastewater treatment demand should grow some 10 percent annually between 2012 and 2015. Some rural areas still need treatment plants, which will drive some of that growth. But so will simply catching up on infrastructure. Even as it churned out new treatment plants, China fell behind on constructing the sewers and pipelines that would collect and carry wastewater to the treatment centers. That means a lot of the new facilities aren't even running at full tilt. When you sum it all up, the analysts say, China will only be addressing 63 percent of its potential wastewater treatment market and 74 percent of its municipal solid waste market by the end of 2015.
 
Businesses In High Demand
Credit Suisse analysts point to four specific areas of environmentally focused businesses that will enjoy strong demand in China over the next half decade and beyond.
Waste-to-energy: Producing heat or electrical energy from burning garbage is not the most glamorous business, but Credit Suisse says demand for the service will grow 53 percent on a compounded annual basis in the next few years, and thanks to government subsidies, the payback period for building new facilities is an attractive seven years. China Everbright International (CEI), which focuses on environmental projects, is the country's dominant trash-handler right now, with facilities in coastal regions such as Guangdong, Shandong, Zhejiang and Jiangsu. But it won't be a hegemon for long, as Credit Suisse predicts new players will be drawn to the market by the attractive economics and government sweeteners.
Hazardous waste: The government has already placed a high priority on taking care of ultra-toxic industrial waste, but the market remains fragmented and local, with high barriers to entry due to the technical complexity and required regulatory approvals. That's good for pricing, and Chinese haz-mat treatment companies currently enjoy better margins and higher returns than their global peers, the analysts say. Demand for their services should grow by 33 percent on a compounded annual basis. CEI is a key player here, too, though it only has a 2 percent market share. Competitors include Yonker Environmental Protection Co., which has extensive expertise in soil remediation, and Dongjiang Environmental Co., which specializes in recycling industrial waste. 
 
Cement treatment: Cement companies have to fire up huge kilns to heat the limestone and other materials that make up the ubiquitous building material – so they might as well use trash as an alternative fuel source. After all, it has to go somewhere. The process of burning household garbage, industrial waste and wastewater sludge during cement manufacturing is a fledgling business in China, analysts say. But because it's relatively cheap to retrofit cement factories to run on garbage, the method could be attractive in the future – especially because it produces less dioxin, another cancer-causing chemical, than when other fuels are used. The idea has yet to really take hold, but a cement treatment joint venture between Anhui Conch Cement and Kawasaki Heavy Industries at a facility in Tongling is making a small profit, say Credit Suisse analysts. BBMG Corp., which makes cement and other building materials, runs two facilities in Beijing – one that treats sludge and another that treats industrial waste.
 
Wastewater treatment: Finally, as China continues to struggle to provide enough water for its residents, farmers and industries, treating and reusing wastewater will only become a more urgent priority. Three key players dominate the market, led by BEW, which had more than 200 wastewater projects across China as of mid-2013. Tianjin Capital, a sewage treatment company, started out in the northern city from which it takes its name and has expanded to control about 3 percent of China's municipal sewage treatment market. Finally, CEI shows up again as a key wastewater treatment player, with 11 plants already online and four more in the works. 

on February 1, 2014