Profit from China’s War on Pollution

China’s rapid growth has dragged hundreds of millions of people out of poverty. But it’s also had one very nasty side effect – a massive increase in pollution.

Until recently, most Chinese were happy to accept more pollution in return for faster growth. In any case, the political system left them with little choice.

But over the past few years there have been increasing protests about conditions. And with growth now slowing, people will have more time to get angry about the downsides of the country’s economic transformation.

A popular revolt is the last thing the communist leadership wants. So last week, premier Li Keqiang declared a ‘war on pollution’.

This will have a major impact on several industries. So how can you profit?

A pack-a-day cigarette habit – even for non-smokers

China’s most visible problem is its poor air quality. The problem is that China gets over two-thirds of its energy from coal.

Coal plants emit a lot of sulphur and soot. When this combines with vehicle exhaust and pollution from factories, it produces smog. According to official statistics, all but three cities in the whole of China breach international air quality standards.

Nowhere is this problem more obvious than in Beijing, China’s capital, which is regularly covered in smog for days at a time. During the last spell, which blanketed even the tallest buildings, flights had to be cancelled and factories shut. Similar problems have also been seen in Shanghai, which recently even took the unprecedented step of closing schools.

Things are so bad that some Chinese people wear protective masks, ranging from simple paper filters to industrial grade respirators, as they go about their day-to-day lives. And you can hardly blame them. The World Health Organisation reckons that in 2010, poor air quality contributed to the early deaths of 1.2 million Chinese citizens. And a study by Professor Michael Greenstone of MIT suggests that the effects of living with all that pollution are similar to smoking a packet of cigarettes a day.

The air pollution is bad in China, but the water pollution is worse

China’s air is obviously bad, and a very visible sign of pollution. But experts think its water may be even worse. Thanks to lax or non-existent controls, firms discharge all sorts of waste into rivers without treating it first.

As a result, over half of China’s rivers are classed as ‘poor’ or ‘very poor’. A fifth are considered toxic. Even ministers call it ‘grim’.

As with the polluted air, this is having a serious impact on the cities, towns and villages who depend on the water for drinking and washing. One of the most notorious cases is the river Huai. This river is so polluted that villagers living next to its tributaries can’t open their windows because of the smell. They can’t even use the water to irrigate their crops – it poisons them.

The Huai, and other rivers just as bad, has also been held responsible for a string of ‘cancer villages’, where rates of the disease are far above the norm. Water pollution has also been linked with birth defects and mutations.

Alongside air pollution, it is responsible for the third of Chinese children with high levels of lead in their blood – which has been linked with learning problems and criminal behaviour.

The other problem is that China already has too little water to go around. The fact that a large part of its supply is unusable has made this problem far worse. In 200 cities, water shortages are a critical problem.

Fixing China’s pollution problem – and how to profit

So what will the ‘war on pollution’ involve?

China admits that the problem may take over a decade to solve. But it has already started to tackle the problem, with a major program announced last year.

Firstly, there will be tougher standards and bigger penalties for polluters who break them. Secondly, there will be more spending on anti-pollution infrastructure, such as ‘scrubbers’ for power plants.

It seems likely that China will follow through on this, too. Apart from worries over popular uprisings, even the most corrupt government official can’t relish the idea of waking up in a penthouse swathed in smog, or of sending their child out to school with a gas mask in their school bag.

But there’s one quite obvious play that we’ve covered a few times recently – and you don’t have to invest in Chinese stocks to benefit from it. The government plans to spend a lot more on nuclear power to reduce reliance on coal. That’s set to have a knock-on effect on uranium prices (which are still at a pretty low ebb). Uranium is also set to benefit from increased Indian interest, and Japan restarting its nuclear power plants. One way to profit is through uranium miners which have large reserves.

Matthew Partridge,
Contributing Editor, Money Morning

Ed note: The above article was originally published in MoneyWeek. For an Australian perspective on how to profit from China’s ‘war on pollution’, consider a small Australian firm that is selling a direct solution to China and other Southeast-Asian markets. Tim Dohrmann analysed and recommended the stock recently for Australian Small-Cap Investigator readers. You can find out more here.

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