20 Mar 2013

Pollution masks the sky – and the economy – in China

On Monday I saw the sky for the first time during my visit to Beijing. A wind blew through on Sunday night, clearing the dense smog that had been squatting over the city like a fat, grey toad.

I was in Beijing for the Bookworm Literary Festival. It’s been a good opportunity to catch up with people and take stock of the changes in China since I left in 2008.

Pollution is the number one topic of conversation. It was bad when I lived in Beijing but friends say the smog rarely dispersed this winter and they fear to let their children outside. Both Chinese and foreigners wear face masks in the street, and within a day I had developed a smoker’s cough and red eyes.

In 2008 there were just over three million cars on the streets of Beijing – now the number has topped five million. Central government has also failed to shut down or move the heavy industry surrounding the capital.

According to the brokerage and investment house CLSA Asia-Pacific Markets, the five provinces around Beijing produce 52 per cent of the country’s steel, 22 per cent of cement, 25 per cent of aluminum and 31 per cent of coal-fired power.

The government provides cheap inputs and keeps interest rates artificially low so these state-run industries continue to borrow and expand, regardless of efficiency or the needs of the economy, let alone air quality.

Shadow banking

It is, effectively, a subsidy from the people to the state – the residents of Beijing are paying to be poisoned.

Just as pollution masks the sky, so the official finance system hides what’s going on underneath. With no independent credit rating agency, no-one knows how much debt provincial governments owe, nor which state-owned plants are viable. Meanwhile, the unofficial banking system is lending at market rates to businesses that can’t get credit from state banks. The value of the shadow banking business may be as high as 35 trillion yuan ($5.54 trillion), or half of the Chinese public’s total savings, but no-one really knows.

In the boom of the last 20 years it was easy to hide such contradictions, but the economy has slowed down now, and economists say it will falter unless the government allows more transparency.

“They will have to open up the books,” says one analyst. “They can no longer afford not to.”

China’s middle class has grown rapidly. The restaurants and shops I used to frequent have been replaced by larger, fancier, more expensive ones, full of affluent Chinese. They’re better educated than ever before and 80 million travelled overseas on holiday last year.

At some point they’re going to demand that the fog lifts – both the one that hides the Beijing sky and the one that cloaks the reality of what’s happening in the economy.

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