China’s Weaker Smog Rules Favor Economic Growth – Analysis
By Michael Lelyveld
China has eased its winter smog rules as the country faces threats from natural gas shortages and economic pressures, signaling that the push for better air quality may take a back seat to production growth.
On Sept. 27, the newly-named Ministry of Ecology and Environment issued a revised air quality plan for the region surrounding Beijing during the winter, when pollution from coal-fired factories has traditionally combined with emissions from heating systems to produce smog.
Officials have been trying to avoid the mistakes that stirred public anger last winter after the National Development and Reform Commission (NDRC) banned coal-fired heating in 28 northern cities. The deadlines were set before gas and electricity projects were completed, leaving homes and schools in the cold.
The top planning agency was forced to backtrack last December and lift the coal ban, but not before gas demand soared and prices of liquefied natural gas (LNG) hit record highs.
The NDRC vowed it would not repeat the “shortcomings” of last winter’s gas crisis. In August, Vice Minister of Finance Liu Wei said that attempts to convert coal-fired boilers to gas must secure a “matching supply source” from now on.
Last week, Vice Premier Han Zheng repeated the warning, telling local officials it is “absolutely forbidden” to leave residents without heat.
The attempts to control coal use last winter created a long list of consequences.
Seasonal production curbs on steel, along with cement and other high energy users, led to more problems as the market reacted to fears of supply limits by raising prices, providing an incentive to boost production outside the restricted zone.
In July, the cabinet-level State Council said it would expand the smog fight with production limits in 82 cities.
But the new rules for the coming winter suggest that enforcement will not be as strict.
The plan released jointly by central government agencies and six provincial-level regions will turn implementation over to local authorities, who have been told “to avoid the ‘one-size-fits-all’ method when it comes to curtailing the output of polluting industries,” the official Xinhua news agency said.
The rules call for emissions limits to “be strictly implemented on heavily-polluting sectors including thermal power, steel, petrochemicals and cement.”
‘A differentiated approach’
But the plan also urges “a differentiated approach, with companies excelling in pollution control to be exempt from output restrictions.”
The plan does not define emissions that may be considered as “excelling,” leaving the door open to local discretion and production growth.
According to the government’s China.org.cn website, the interagency plan will be implemented in only the original 28 cities, leaving the State Council’s earlier decision on expansion to 82 cities in doubt.
The designated areas include Beijing, Tianjin and cities in Hebei, Shanxi, Shandong and Henan provinces, the official English-language China Daily said.
The revised plan targets a three-percent reduction in average concentrations of small smog-forming particulates known as PM2.5 and a similar decrease in the number of heavily polluted days over a six-month period compared with a year before.
The reductions are less burdensome than the five-percent cuts proposed in an earlier version of the plan seen by the South China Morning Post in August.
“In addition, the two targets are well below the cuts of ‘at least 15 percent’ set out in last year’s plan,” the paper said.
The heating season runs from Nov. 15 to March 15, but pollution reduction targets apply to the period lasting from Oct. 1 to March 31.
The government site stressed the tougher aspects of the new rule, saying that localities must formulate three-year action plans to reduce smog and standardize warning systems.
The cities were required to update their analyses of pollution sources by the end of September, and provincial forecasting centers were ordered to acquire seven-day forecasting capabilities.
But other reports pointed to looser requirements.
Ma Jun, director of the Institute for Public and Environmental Affairs, said that this year’s pollution reduction goals are “considerably lower than those of last year,” China Daily reported.
The paper cited last winter’s “hasty gas-for-coal conversion projects and the shutdown of enterprises, which have caused public outcries.”
“This year’s approach is much more gentle and targeted,” Ma said.
The leniency of the new plan is already having an effect on the steel market, which has suffered from years of excess capacity and overproduction. More steel production could trigger further responses from the United States, which slapped tariffs on steel imports from China in August.
“The fear is that China’s steel mills, already operating at elevated run rates, will keep churning out metal over a seasonally weak time for demand,” an analysis by Reuters said. “That risks flooding the domestic market, with the ensuing danger of more Chinese steel spilling out to the rest of the world.”
Cause for concern
Foreign steelmakers may have cause for concern that the smog plan will lead to a price slump, it said.
But the eased restrictions of the new smog rules appear to be driven by forces that the government will find hard to avoid.
The first is criticism of last year’s botched fuel-switching program after photos of freezing school children were posted online.
By shifting decision-making for conversions and factory cutbacks to local officials, the central government may limit the backlash against its own authority, whether the public complains about smog, gas shortages or production shutdowns.
Another reason for less rigid enforcement is the economy, which is already under pressure from the tariff war, whether higher steel production prompts more U.S. penalties or not.
Last week, the government reported economic figures that may heighten concerns.
Growth of gross domestic product fell to 6.5 percent in the third quarter from a year earlier, down from second-quarter growth of 6.7 percent, the National Bureau of Statistics (NBS) reported.
The quarterly growth was the lowest in nearly a decade, international news agencies said.
With the new smog-control policy, the central government is walking a tightrope, delicately balanced between cutting pollution and keeping economic growth from falling too far.
For the time being, policymakers appear to be leaning toward the growth side, but interpreting the government’s motives in formulating the final version of the winter plan may be a close call.
“Though concerns over economic growth may be there, I guess the government is trying to step back from the heavy-handed approach that resulted in disruption to energy supplies last year,” said Philip Andrews-Speed, a China energy expert at the National University of Singapore.
The ambitious fuel-switching plan for the last heating season pushed local governments to take “arbitrary short-term measures to meet targets,” Andrews-Speed said.
Whether growth concerns have driven the new policy or not, this year’s anti-smog effort will play out as economic pressures mount.
The latest NBS report suggests that softening in the manufacturing sector could accelerate if smog controls force factory shutdowns over the winter.
Industrial production growth dropped to 5.8 percent in September, dipping from 6.1 percent in August, the NBS said.
The most recent survey for the official manufacturing purchasing managers’ index (PMI) found a slower rate of expansion in September with a reading of 50.8, down from 51.3 in August. Any figure below 50 would indicate contraction.
But so far, production of crude steel has kept rising through good times and bad, posting a string of monthly output figures over 80 million metric tons through September after topping the mark in May for the first time in history.
A softening of year-to-year growth rates with a 2.7-percent increase in August may even be in doubt, since a calculation based on year-earlier NBS figures shows a gain of 7.6 percent. The agency reported a 6.1-percent increase in production for the first nine months of the year.
Hard to maintain momentum
The momentum may be hard to maintain in the face of economic cooling, tariff pressures and pollution controls, but the transfer of decision-making to local authorities could turn this winter into an open season for industrial growth.
Still, there are signs that provinces are pressing steelmakers to clean up their act.
In Hebei province surrounding Beijing, environmental authorities are requiring all mills to meet stricter emission standards by 2020, Reuters said in a separate report.
The new standards call for PM2.5 emissions to be kept to within 10 micrograms per cubic meter. Concentrations in the province averaged 65 micrograms per cubic meter last year, but readings fell to a low of 31 micrograms in September, Reuters said.
This month, Beijing officials also reported an improvement in PM2.5 readings before the start of the heating season.
In the first three quarters of 2018, the average PM2.5 density declined 16.7 percent from a year earlier to 50 micrograms per cubic meter, the city’s environmental protection bureau said.
Despite the reported readings, smog has returned to Beijing and the surrounding region twice in the past week.
The first bout prompted the city to post a yellow alert, the third-highest in its color-coded warning system.
The second over the past weekend forced 10 cities in Hebei province to issue a second-level orange alert.
Under anti-smog rules, heavy industrial plants are required to lower production by at least 20 percent, Reuters said.