China is emerging as one of the most attractive new economies for foreign investors. Between 1993 and 1997, average annual economic growth rate was 11 per cent. Real GDP increased by 7.3 per cent in 1999 and for 2000 is forecast to be 6.9 per cent.

This growth has fuelled a rapid rise in energy consumption. After the USA, China is the world’s second largest energy consumer, and its production and consumption of coal is the highest in the world. Consumption of oil and natural gas is also rising.

FIgure 1. Total air pollution equipment market: revenues and revenue growth rates (China), 1995-2005
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Rapid economic growth and a heavy reliance on coal have together had a detrimental impact on the environment. Air pollution is a particular problem – China has one of the highest levels of air pollution in the world, surpassing World Health Organization (WHO) guidelines for several air pollutants, including sulphur dioxide (SO2), volatile organic compounds (VOCs), nitrogen oxides (NOx) and particulates.

Most of the coal burned has a high sulphur content, leading to acid rain in China as well as its neighbours. In 1998, approximately one billion t of coal was burned, mainly in electric power plants, up from less than 200 million t in 1971.

Consequently, there is a large and rapidly growing market in China for air pollution control (APC) equipment. A recent study by US consultants Frost & Sullivan found that in 1999, this market was worth $647 million, and is projected to grow to $989 million by 2005 – a compound annual growth rate of seven per cent per year.

The growth of this market is being helped by the Chinese government’s awareness of these environmental problems. Since 1989, China has promulgated six environmental laws, over 20 regulations and nearly 400 pollutant discharge standards. Local governments have also implemented around 600 environmental regulations.

Compliance issues

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But according to Frost & Sullivan, although attempts are being made to improve pollution levels in China, the APC equipment market is still a long way from providing a steady source of income for manufacturers. One of the biggest problems, said Karen Rasmussen of Frost & Sullivan, is with compliance, due to a lack of funding and lax enforcement by local authorities. “Enforcement has been a major issue and [so has] funding for the government institutions. Not only do they not have money for the municipalities and the electric utilities to install the facilities, the problem is also that they don’t have the money to go out and enforce the law.

“However, we are seeing a little bit of an improvement now, but in light of these regulations having been out for ten years, [their] effect has really been less than desirable.”

Market forecast

The lack of funding and enforcement has caused lower than

expected growth rates in the country’s APC equipment market. However, Frost & Sullivan’s analysis shows that the outlook is good. Growth rates in this market reached double digits in the early 1990s but fell later on in the decade due to Asia’s financial crisis which caused a slowdown in China’s economy. A decline in the price of APC equipment has also had an impact on revenues.

Over the next decade, Frost & Sullivan believes that sales of APC equipment in China will be driven by a number of factors:

  • Rapid economic and industrial development
  • The Chinese government’s long-term environmental improvement plans
  • Improvements in the enforcement of environmental legislation
  • Increasing population and urbanization
  • Increasing energy demand, with continued reliance on coal
  • An expected tightening of the regulations on VOC emissions in 2002

China’s current Five Year Plan (1996-2000) was the first to introduce environmental protection goals, including increased spending on the environment. As well as government funding, foreign capital and expertise are being sought in prevention and clean-up. Japan, which is concerned about acid rain from China, has already provided assistance in the form of a loan programme announced in late 1997.

China has also implemented sustainable development goals, outlined in its Agenda 21 programme. It is aiming to increase emphasis on energy efficiency and renewables, and to shift away from coal towards natural gas for power generation.

Historically, natural gas has not been a major fuel in China. It currently accounts for only three per cent of total energy use. China has recognised the environmental benefits of using natural gas, and has embarked on a major expansion of its gas infrastructure. Consumption is expected to more than triple by 2010, according to the US Energy Information Administration (EIA).

China has large natural gas reserves, but also plans to import LNG. Guangdong province has already launched a project to build six 320 MW gas-fired power plants, and to convert existing oil-fired plants with a total capacity of 1.8 GW to LNG.

Figure 2. Total air pollition control equipment market: percent of revenues by product type (China), 1995-2005
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The projected rise in the use of natural gas will not affect the growth of the APC equipment market, though according to Rasmussen: “I don’t think that in the next five to ten years, although there might be an increase in the use of natural gas, [that] it will significantly affect this market because there are so many facilities out there that don’t have anything installed in terms of APC. So even if you see a lot of new plant being built for gas, there is still an installed base of facilities that [will need] equipment for a long time.”

One factor that will fuel foreign investment and help to drive this market is China’s entry to the World Trade Organization (WTO). China concluded an agreement with the USA in November 1999 on a package of trade and investment liberalization measures that won US support for its entry to the WTO, and it is now negotiating with other WTO members.

These moves should facilitate investment by overseas companies, according to Frost & Sullivan, and will also enable the international community to increase pressure on China to improve its environmental record.

“Once the WTO membership comes through, you’re going to see a lot more money available in the market,” commented Rasmussen. “Right now, a lot of companies don’t want to touch China. One reason is that they don’t get control. Another is that they’re worried about patent infringement loss since copyright laws in China are not very good. Once this ‘jitteryness’ subsides, you’re going to see a huge influx of money into the country and you’ll see investment in [APC] technologies.”

Market structure

Foreign companies wanting to enter the Chinese market have to do so by establishing a company with a local partner that owns at least 51 per cent of the joint venture. Foreign investors in the ‘Special Economic Zones’ receive preferable tax, tariff and investment treatment, but China remains a tough market to crack.

China’s APC market is highly fragmented with several hundred companies active in the various equipment sectors. According to Frost & Sullivan, the top eight companies, most of which are wholly-owned Chinese operations, capture only 25 per cent of the market. The remaining 75 per cent is held by several hundred other companies, many of which are Chinese-overseas joint ventures.

As China opens up to foreign investors, increased competition between suppliers may lead to some consolidation. However, it is likely that foreign players will still need a local partner. This, said Rasmussen, will help companies understand that doing business in China is different to doing business in the rest of the world. “You [will] still need somebody that is local – it’s all about connections and understanding the local market.

“A good understanding of government organizations and how they work [is also needed],” says Rasmussen, adding, “and other than that, having a good technology at a competitive price.”

Environmental regulations: progress in China

1989: The Environmental Protection Law of the People’s Republic of China is adopted by the Chinese congress. The Chinese government agrees to integrate environmental protection efforts into its economic development. The environmental protection administration is asked to establish a series of pollution discharge standards. Industries are also required to take up the responsibility of environmental protection.

1993: During the second National Environmental Protection Conference held by the State Council, it is announced that environmental protection is to be a key state policy. Environmental management policies are issued, including ‘Priority is Prevention’, ‘Combine Prevention and Mitigation Treatment’, ‘Polluter Pays Principle’, and ‘Enforce Environmental Management’.

1995: The Air Pollution Law, which focuses on pollutants such as SO2 and harmful VOC emissions, is amended. Also, concerted efforts are expected to be taken on acid rain control and limiting use of coal.

1996: The National Ninth Five-Year Plan and the Long Term Targets for the Year 2010 for Environmental Protection are issued in an attempt to combine environmental protection and industrial development.