The China risk no-one talks about

What if China’s pollution problem went from being a major health hazard – which is bad enough – to being a political nightmare as well?

China’s government – and most other governments – focus on keeping their people warm, fed, housed and employed. When people have enough to eat, a warm place to live, and a job, they’re less likely to vote out (or overthrow) their elected, or appointed, leaders.

Clean air – or air that’s clean enough – is usually assumed. Governments rarely need to worry about air quality as a political risk. Investors rarely need to think about it as a risk either.

But that’s changing in China, and for investors in China. A friend who watches Chinese politics for a living recently visited China to meet with business leaders, investors, and people in government. He was in Beijing a few weeks ago during its first ever “red alert” for smog. That meant that schools had to be closed, and it kept a lot of cars off the road.

“The pollution is becoming a major crisis for the government,” he told me. “It’s unbelievable that the social and public backlash isn’t worse.”

One way to measure air quality is to measure how many micrograms (one millionth of a gram) of PM 2.5 particles are in each cubic metre of air. PM 2.5 particles are only 2.5 microns in size (2.5 millionths of a metre, or 1/30th the diameter of a human hair), and include soot from diesel engines, toxic compounds and heavy metals. They’re considered the most dangerous pollutants because they can travel long distances and lodge deeper in our lungs than bigger particles, such as dust.

The World Health Organization (which is part of the United Nations) recommends exposure to PM 2.5 of no more than 25 micrograms each day. On December 25, 2015, one of Beijing’s worst days for smog recently, Beijing’s PM 2.5 reading peaked at 647 micrograms per cubic metre of air. It dropped to 340 by the next morning. In Shanghai the reading was 157 on December 26.

By comparison, during September and October, when the CBD’s skyscrapers in Singapore were wrapped in haze, the PM 2.5 level averaged around 140-160 micrograms per cubic metre of air. (The PM 2.5 differs from the PSI (Pollutant Standards Index), the measure widely used in Singapore, in that PSI includes other particles besides PM 2.5.)

Part of the problem in comparing levels of air pollution is that different countries measure air quality in different ways. Some countries – given the political sensitivities – might adjust the numbers. Others just don’t have the resources to constantly monitor it. One of the few sources of objective global information is the World Health Organization (WHO). Their most recent air pollution database is from May 2014, and mostly contains data from 2010 to 2013.

On average, according to the WHO report, Singapore’s PM 2.5 reading in 2011 (the most recent data available from WHO) was 17. It has averaged between 16 and 19 for the past six years. That’s about the same as London and Paris.

Average PM 2.5 readings in 2014, according to China Daily, for the Beijing-Tianjin-Hebei region were 93 micrograms per cubic metre, which is almost four times the recommended levels. The average reading for Beijing alone in 2013 was 56. According to the Shanghai Environmental Protection Bureau, Shanghai had an average reading of 51 for 2014,. The highest average Chinese PM 2.5 levels for 2013 were found in Lanzhou, a major industrial city in northwest China, with an average of 71.

As bad as China is, India is worse. According to WHO, cities in India had the highest readings of PM 2.5 levels in the world. In 2013, Delhi posted the highest average at 153, or more than six times the recommended exposure levels. During the first week of December 2015, Delhi’s average PM 2.5 readings were 231, while Beijing’s were 140.

Some of the lowest readings for major cities are found in Vancouver, Canada, with an average of only 4 micrograms of PM 2.5 per cubic metre of air, and Sydney, Australia, with an average of 5.

China's air pollution problem

The Chinese government recently set a limit to how low fuel prices can fall, in an effort to help reduce emissions. Some coal plants, which are a major polluter (coal accounts for two-thirds of China’s energy), have been closed. But solar and wind energy are far more expensive. It will take a long time for the country’s economy to be weaned off cheap coal.

If the Chinese government doesn’t take bigger steps to address the air pollution issue, it could become an even bigger political challenge. And if that happens, any discussion of SSE valuations, government stock market bailouts, China’s debt situation and the depreciation of the yuan will take a back seat, because in China, politics can change everything – quickly.

Article courtesy of www.truewealthpublishing.asia

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