Clearing the Air?

What’s holding back China’s economy?

Photo: John D. Liu. Source: World Bank

One possibility is pollution. China’s economy has grown dramatically over the past two decades, as market-based incentives and expanding global trade have encouraged them to produce more and capitalize on their natural advantages. Over the past two decades, the size of their economy has grown ten-fold, from $1 trillion to almost $10 trillion dollars.

But such growth comes at a cost. While China’s economic miracle has lifted hundreds of millions out of abject poverty, it imposes costs on the environment. After all, you need a lot of power to fuel this growth. Energy production has almost doubled during this time.

Source: World Bank

Lately, Chinese growth has slowed, downshifting from over 10% per year a decade ago to only 7% now. That’s still a lot, but the transition has many people wondering why this is happening.

Pollution is a real problem. Air pollution can be particularly dramatic. Smog and soot slows food production and creates health issues. In Beijing, smog has been reported at 20 times the safe levels. This has grounded flights, closed highways, and kept workers home. Water pollution also makes people sick and contributes to a water shortage. Pollution may be costing the Chinese economy as much as 5% of its economy, or $500 billion per year.

This is reminiscent of the pollution problems western countries had as they industrialized. London’s “pea-soup” smog was immortalized in the verse of T.S. Eliot—“the yellow fog that rubs its back upon the window panes.” All countries have to address environmental issues as they grow.

Ultimately, China will have to manage its environment along with its economy. Otherwise, its future will be shrouded.

Douglas Tengdin, CFA

Charter Trust Company

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