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CHINA ENVIRONMENT

From red to green

Is China shifting to environment-friendly growth?

 

Since the start of the year, international investors have focused on two questions. First, how much longer will the US Federal Reserve keep market yields low? And second, how severe will the slowdown be on the mainland?

In early summer, delicate changes to Fed language caused government bond prices to tumble. Then in late June, the Shanghai interbank offered rate (Shibor) - the rate that mainland banks lend to one another - skyrocketed. The surge reinforced the idea the mainland would not resort to monetary easing to boost growth.

With the arrival of August, markets calmed and the Shibor drifted back to pre-shock levels.

Ultimately, however, the United States will migrate away from unusually loose monetary policy if conditions permit, which implies an economic recovery is underway.

For the mainland, the outlook is more uncertain. The storyline, however, is well versed: for China to graduate to higher levels of prosperity, low-value-added (and polluting) manufacturing must give way to a service-based economy stimulating higher wages and standards of living. A cleaner, greener China is central to this strategy.

However, China is the world's largest exporter of manufactured goods, largest consumer of energy and has the greatest steel, cement and shipbuilding production capacity, globally. China made 12.6 billion pairs of shoes in 2010 and 320 million computers according to 2011 data. All of this is built on an economy with access to 115 billion tonnes of coal reserves that has in part added to the environmental woes the country now faces.

At the same time, a growing section of China's manufacturing growth is aligned to alternative energies. It already makes four billion energy-saving lamps a year (once again, the world's leader). The data implies that should China apply the same focus to achieving a green economy as it has to its development, it would become the undisputed model for adapting environmentally friendly growth.

China is going green, but this means a period of lower employment growth and friction as the economy replaces old engines of growth in favour of new drivers. The uncertainty that comes with this process is not always market-friendly - it produces both winners and losers.

Critics of China would be hard pressed to identify another example from economic history where a nation has so ambitiously and quickly embraced such change. A greener, cleaner China will be a reality faster than most believe - but brace for speed bumps along the way.

 

Stefan Hofer is an emerging markets economist for Bank Julius Baer

 

 

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