China’s anti-pollution drive will hit economic growth, raise prices, economist says

China’s drive to cut pollution could reduce economic growth by 0.25 percentage points in the next six months while boosting factory inflation, according to Paris-based banking and financial services firm Societe Generale.

Production cuts to curb emissions and tougher nationwide environmental inspections would also support the profits of large industrial companies as producer prices rose, Yao Wei, the company’s chief China economist, said.

The campaign would give a “notable supply shock” to the economy, she said.
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“The Chinese government has turned very serious about fighting pollution,” Yao wrote in a note. It would be “more than a transitory objective for the current leadership. Modestly slower growth will be a necessary sacrifice for maintaining social stability over the medium term”.

Authorities have intensified their anti-pollution drive before a twice-a-decade Communist Party Congress set to begin on October 18. The expansion has not yet shown signs of suffering for it, and economists surveyed by Bloomberg forecast a second straight year of 6.7 percent growth.

Yao reiterated her view that leaders were likely to tolerate growth rates below 6.5 percent in 2018 and beyond. That is the country’s longer-term growth target for the five years through 2020 as well as the target for this year when policymakers have said they were aiming for gross domestic product growth “of around 6.5 percent, or higher if possible in practice”, she said.

Annual growth should be no less than 6.5 percent in the next five years to realise the goal of doubling 2010 GDP and per capita income by 2020, President Xi Jinping said in 2015. The 13th five-year plan unveiled that year was the first to confront an era of sub-seven percent expansion since Deng Xiaoping opened the nation to the outside world in the late 1970s.

If China managed to grow by 6.8 percent this year, the pace of expansion needed to achieve Xi’s goal would be just 6.3 percent in each of the next three years, Yao said. She wrote in a December report that China was poised to abandon its 6.5 percent growth target within two years as leaders pushed to contain asset bubbles and financial leverage.

The Ministry of Environmental Protection’s new plan to tackle winter air pollution focuses on Beijing, Tianjin, and the provinces of Hebei, Henan, Shanxi and Shandong. It aims to reduce coal consumption, used for power generation, and vehicle emissions.

Assuming production cuts were strictly implemented, industrial production growth was likely to be 0.6 to 0.8 percentage points lower than otherwise, while GDP growth would be 0.2 to 0.25 points lower in the next six months, Yao said.

“This campaign is likely to result in additional production disruptions on top of the impact of the anti-air-pollution plan, as the inspections may have led to the closure or production suspension of factories throughout the country in a wide range of sectors,” Yao wrote, adding that supplier shutdowns could upset production by several major carmakers.

The push might have a lasting impact on local officials’ behaviour when it came to balancing economic growth and non-economic development, she said.
Inspection results “are said to have affected the potential promotions of thousands of officials, a stern reminder to other officials that environmental production should be given higher priority”, she said.