China debates the downturn

Discussions about the path to economic recovery expose a rift between the advocates of “rebalancing” and those who argue job creation should override green concerns. Leo Horn-Phathanothai reports.

Dreadful as their consequences are, economic downturns are not always all bad news. For one, they tend to be good for the environment, as economic bustle is strongly associated with energy consumption and environmental pollution (whether in one’s own backyard or someone else’s). And economic recessions give pause for thought, and cause for healthy self-questioning. They offer that most precious of gifts for policy-makers: the chance for a fundamental change of tack. As Rahm Emmanuel put it: “you never want a serious crisis to go to waste”.

The current global economic downturn presents China with an historic opportunity to reorient its economy on to a more stable and sustainable path. It has laid bare the structural imbalances that are at the root of China’s current economic vulnerabilities and its profound social and environmental malaise. At the same the crisis calls for a counter-cyclical boost that could potentially unleash massive resources for a transformative green push. In other words, China’s stimulus package could serve as a crucial lever in nudging the economy on to a greener trajectory.

There are grounds for optimism. The Chinese government won much praise for its bold and speedy response to the unfolding global crisis, announcing its largest ever stimulus program as early as November 2008, well ahead of other major economies. And the government has made laudable progress towards reaching the ambitious environmental targets it has set itself. In April this year, China joined other G20 leaders in pledging to “make the best possible use of investment funded by fiscal stimulus programmes towards the goal of building a resilient, sustainable, and green recovery”.

The stimulus package is impressive in its sheer scale: four trillion yuan (US$586 billion) – equivalent to approximately 15% of China’s gross domestic product (GDP) – has been committed as part of the package. This has been accompanied by an unprecedented expansion of credit: in the first quarter of 2009 bank lending increased to about five trillion yuan (US$732 billion), almost triple the credit level reported during the same period last year. The expected loan growth for 2009 is around 10 trillion yuan (US$1.5 trillion), or 40% of GDP.

The signs are that China’s economic rescue package is working. Macroeconomic analyses indicate that China’s economy returned to a stable track by the end of the second quarter. The World Bank and the International Monetary Fund revised their 2009 growth forecast for China upwards by 0.7% and 1% respectively from the 6.5% predicted at the beginning of the year. China’s economy seems to have bottomed out.

What is more difficult to assess at this point, is how sustainable these early “successes” are, and at what cost they may have come.

Whether or not China will emerge greener from the current crisis will depend on the following, in increasing order of importance:

1) The proportion of the package earmarked for environmental purposes;

2) How different components of the package stack up in environmental terms (i.e. the overall environmental implications of the stimulus);

3) The extent to which the stimulus supports a broader shift towards to a more environmentally sustainable growth path.

The emerging evidence is discouraging on all three counts.

There are some notable green features to the stimulus package, but these have been modest in size. Initially, 9% of the investment package – amounting to 350 billion yuan (US$51 billion) – was set aside for “biological conservation and environmental protection”. However, when details of the package were announced in March this year, this amount was cut down to 210 billion yuan (US$ 31 billion) or just over 5% of the total package. In contrast to the speedy disbursement of funds for infrastructure projects, as of June, only 10% of that amount had been disbursed.

But there are broader environmental opportunities within the package. Environmental benefits that would result from directing the much larger spending for infrastructure and technology toward clean and energy-efficient solutions would far outweigh those that can be achieved through the 5% allocation. For example, the 280 billion yuan (US$41 billion) allocated for housing projects could be a major boost for improving energy and water efficiency in buildings. Likewise, the 1.8 trillion yuan (US$ 264 billion) proposed for the transportation and power sectors could deliver strong environmental benefits if focused on public transit systems and linking renewable energy sources to transmission lines. A recent report by HSBC estimates that 37.8% of China’s stimulus may be considered “green” if such opportunities were realised.

To date, however, the bulk of the stimulus spending is being funneled into energy-intensive sectors and large infrastructure projects, many of which have been on the books for years but slowed or halted by negative environmental assessments that are now being overridden in the interests of salvaging the economy. A similar story can be told of the massive injections of credit: because of the way the Chinese financial system is hard-wired, much of this new lending is channeled into state-owned companies in the highly polluting construction, manufacturing and infrastructure sectors, the latter two of which are already plagued by overcapacity.

So far, the main beneficiaries of the stimulus seem to have been cement, iron and steel producers. This is hardly surprising for an economy that invests over 40% of its GDP in infrastructure. Crude steel output in China rose to a record 266.6 million tonnes in the first half of 2009, as the stimulus spurred demand from the construction and automobile sectors.

Of greater concern are signs that, in its no holds barred approach to stimulating the economy, the government has systematically de-prioritised environmental concerns. The roll back of environmental impact assessments – through the establishment of a fast-track system, ironically called the “green passage” – is a surface sign of deeper power shifts within government.

Just as the Songhua River chemical spill brought to the boil simmering tensions between “pro-environment” and “pro-growth” lobbies four years ago – culminating in the forced resignation of the then environment minister – so is the stimulus proving to be a battleground for diametrically opposed visions and policy programmes.

The fault lines are broadly the same this time round.

On one side are those who recognise that the current mode of growth is socially and environmentally unsustainable and economically unsound, and advocate for a response that would address fundamental imbalances in the economy. I will call this the “rebalancing” camp. The Ministry of Environmental Protection (MEP), the National Bureau of Statistics (NBS), the People’s Bank of China (PBoC), and many prominent academicians, policy advisors and think-tanks seem to fall in this camp. They have all warned that the current stimulus may be exacerbating structural imbalances.

On the other side are those who maintain that the overriding priority is to safeguard jobs and that the only proven way to do so is to expand infrastructure, and prop up manufacturing and exports by throwing money at those same polluting and energy-hungry industries that have been China’s economic powerhouse over the past two decades. They can be called the “8%” camp, as that is widely taken to be the minimum growth rate needed to prevent spiralling unemployment and ensuing social unrest. Eight percent is also, unsurprisingly, the target growth rate that prime minister Wen Jiabao has vowed to reach. Municipal leaders, the Ministry of Commerce, the Ministry of Finance and the State Council at large seem to fall squarely in this camp.

This crisis should have strengthened the hand of the rebalancing camp. It threw into sharp relief the structural weaknesses and vulnerabilities that they had been cautioning against long before the crisis occurred. The need for a robust counter-cyclical boost to the economy offered the opportunity of marshalling resources on an unprecedented scale towards stimulating new, “greener” sources of economic dynamism and growth. Spurring green innovation would not only create green-collar jobs but also strengthen competitiveness. The crisis provided an occasion for cash-rich China to purchase state-of-the-art environmental hardware at rock-bottom prices from developed economies in disarray, to speed up industrial upgrading, build technological capabilities and strengthen its competitive edge.

However, all the signs are that the 8% lobby is getting the upper hand. The MEP appears to have been sidelined once again: in June China’s environment minister Zhou Shengxian publicly voiced concern about the escalating environmental risks and impacts of the stimulus. Environment vice-minister Pan Yue – once the government’s most outspoken environmental champion – was stripped of his responsibilities as environmental enforcer and has been absent from the political scene since the beginning of the crisis. The new vice-minister in charge of environmental assessments, Zhang Lijun, has announced that most stimulus projects will be eligible for fast-track environmental approvals.

Meanwhile, finance minister Xie Xuren has reiterated Beijing’s commitment to continue with the current policy response. Michael Pettis, a finance professor at Peking University lamented in a recent blog that: “policy is still being managed largely by policymakers who are far more worried about rising unemployment in the short term than about asset bubbles and an exacerbation of the unbalanced development model”.

China is certainly to be commended for its bold and swift response to the unfolding global financial crisis. Yet, as Gandhi once said: “speed is irrelevant if you are going in the wrong direction”. Unfortunately, China’s response so far seems to be reinforcing the structural imbalances that are at the root of its economic vulnerabilities and environmental ills.

A version of this article is forthcoming in China Environment Series.

Leo Horn-Phathanothai is policy specialist at the Regional Bureau for Africa of the United Nations Development Programme (UNDP). Prior to joining the UNDP, he was national coordinator for the UK-China Sustainable Development Dialogue. He writes here in a personal capacity.

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