Under Smog-Darkened Skies, China Declares War—on Pollution

Chinese Premier Li Keqiang said the government will “‘declare war’’ on smog—which he described as “nature’s red-light warning against the model of inefficient and blind development.’’

Initial efforts will address the reduction of hazardous particulate matter known as PM 2.5 and PM 10 and will also focus on the elimination of obsolete energy producers and industrial plants, a key source of most of the smog. The country also will enforce a limit on energy consumption and implement a clean-water policy, Li said today in his address before the annual meeting of parliament in Beijing.

Pollution has become a “hot button issue,” Reuters noted. Public anger is rising over the fact that pollution has reached very unhealthy levels in recent weeks in most of northern China. Bloomberg News quoted one government adviser saying the smog was “unbearable.”

Not helping the matter was the recent release of a report by China’s Finance Ministry that reveals spending on energy conservation and environmental protection is actually down nearly 10% this year over last year, by about 180.4 billion yuan ($29.44 billion). The reduction was attributed to the termination of some subsidies designed for the promotion of energy-efficiency.

 A Pro-Economy Approach Will Be Taken

Craig Hart, an expert on Chinese environmental policy and associate professor at China’s Renmin University, told Reuters: “Their approach is going to have to be pro-economy. I think they will pump money into upgrading plants. This could be another green stimulus although it is not being packaged that way.”

Policies addressing pollution will make provisions for energy pricing reform, which will boost non-fossil fuel power. Li also promised to change for the better the manners in which energy is both produced and consumed by developing nuclear and renewables. Smart power transmission grids and the promotion of green and low-carbon technology also will be part of the program.

Revised guidelines will be issued that relocate some smog-producing industries away from urban centers, said the country’s economic planner, The National Development and Reform Commission (NDRC), in its report.

Travel Warning

According to China’s Real-time Air Quality Index (AQI), today the air in Beijing, where Li addressed parliament, wasn’t too bad. In fact, it was graded as Moderate, carrying a 59 on the index. Shanghai was also listed as Moderate, indexed at 87.

Those thinking of traveling to Chengdu or Guangzhou, however, may want to think twice. Both cities were graded Unhealthy, indexed at 156 and 160, respectively.

VCs Poised to Capitalize on China’s Green Cleanup Efforts

As we wrote on Nov. 15, 2013, China announced it was opening to both foreign and private investment its energy conservation and environment protection industries. According to Reuters, that marked a transformation in China’s clean energy approach, which was primarily funded by government subsidies—a system critics described as protectionist.

China’s opening of funding for those industries signaled its willingness to work with the international community to find ways to improve green technology. But China’s invitation has its limits: Foreign firms can only invest in equipment manufacturing, as well as maintain limited stakes in clean energy projects like wind farms.

But as public pressure mounts in the face of concerns over growing levels of environmental toxicity, China’s government has adopted a new sense of urgency as it sets about clearing up the nation’s polluted air and water.

As the Wall Street Journal reported, “private-equity firms are again betting on China’s environmental sector as the government adopts a new sense of urgency in cleaning up the nation’s filthy air and water.”

Private equity investments in China’s environment-related businesses rose to a record-high of $1.2 billion, a whopping increase of 7.1% compared to 2.3% in 2012 and 6% in 2011, according to the Hong Kong-based Centre for Asia Private Equity Research.

Fueling this record growth were two key policy statements made by Beijing owing to growing public sentiment that stronger pollution-reduction policies were needed. In August, the State Council voiced support to expand the environmental industry at annual growth of more than 15%, to $730.5 billion, by 2015. Then, in November, the Communist Party authorized a “decisive role” for markets in terms of the allocation of natural resources.

Largest PE Deals Seen In Waste Management, Water sectors

The largest deals 2013 were focused on water and waste management. RRJ Capital Co.’s $350 million investment in a 7.9% stake in Hong Kong-listed waste-management and energy company China Everbright International Ltd. was the largest. Prior, in April, Beijing-based Hony Capital invested $297 million in a 10% stake in Shanghai-listed Shanghai Chengtou Holding Co., a property developer and wastewater-management company. The deal was approved by regulators last month

Most of these deals involved basic “cleanup” technologies. Private-equity investors in China’s environmental sector are mostly investing in old technologies adopted long ago in the U.S. and Europe. One positive for private equity investors is that they only need to offer customized solutions; the riskier bets common in the general technology sector are unnecessary here.

CSD Water Service helps manage wastewater treatment plants in third- and fourth-tier Chinese cities overlooked by state-owned outfits. Qiming, which last year added to its original stake in this company, plans to help CSD Water Service apply to list on the ChiNext board, China’s market for start-up companies, this year.

Durham, North Carolina-based Phononic Devices, which makes energy-efficient cooling systems, received an investment from Beijing-based venture capital firm Tsing Capital in December.

Some investors are already seeing big returns following IPOs. Shares in Shenzhen-listed Beijing Originwater Technology Co. rose 42% over the past 12 months; shares in Power-supply equipment manufacturer Sungrow Power Supply Co. rose 324%.


To read the Bloomberg article cited in this story, click here

To read the Reuters article cited in this story, click here

To read the Wall Street Journal article cited in this story, click here




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