April 30, 2019
Given the enormous environmental challenges of our times, it is no wonder that Chinese policymakers are determined to clean up China’s cities and villages as part of their efforts to transform the country.
Great strides have been made over the years through a variety of initiatives, from promoting electric cars to providing subsidies to the solar and wind power sectors. But perhaps no other industry has played a more direct role than the environmental services industry, which is poised to see rapid growth as the country has rolled out ever-more ambitious targets.
Achieving these targets will require the participation of both state-owned (SOEs) and non-state-owned enterprises, and we could see more partnerships and joint efforts between the two. However, as policymakers continue to raise the quality standards for the industry, SOEs and leading players may be better able to capitalize on the new opportunities given their financial strength.
Environmental protection has been one of the five key focus areas for the Chinese government since the 18th CPC National Congress in 2012.
In the past 3 years, relevant reforms can be seen in the areas of environmental checks, environmental taxes, pollution permit system, and government accountability systems.
In addition to policy support, fixed asset investment in environmental services jumped from Rmb132.8bn in 2014 to Rmb323.5bn in 2017, a CAGR of 35%.
Environmental services encompass many segments and among the most important are solid waste treatment and wastewater treatment.
Solid waste treatment
China’s 13th Five-Year Plan (2016–2020) sets out a number of goals, among which is the shift away from landfills to using waste incineration. As such, we could see high growth in the expansion of waste incineration capacity to meet the stated aim of ending the use of landfills in qualified cities and having over 50% of household solid waste incinerated. To highlight the room for growth, in 2017 the waste incineration capacity in Chinese cities was about 298,100t/day, according to the China Urban-Rural Construction Statistical Yearbook, accounting for about 43% of overall harmless solid waste disposal capacity. The 13th Five-Year Plan requires the ratio to exceed 50%.
The Five-Year Plan also aims to raise the capacity for waste-to-energy (WTE) projects to 591,400t/day (implying a 20.3% CAGR over 2015–2020) and the capacity for kitchen waste treatment to 47,500t/day (implying a 29.4% CAGR over the same period).
In addition, the State Council has issued a notice about a pilot program to create waste-free cities, which could also support companies involved in solid waste treatment, including those engaged in recycling. The aim of the program is to select 10 cities that can comprehensively manage hazardous waste and increase the recycling of household waste starting 2020. Establishing these waste-free cities may offer new investment opportunities.
A key part of China’s policy on wastewater treatment is its 2017 Yangtze River protection plan, which aims to raise the ratio for wastewater treatment to 85% in counties and 95% in cities along the river by 2020.
According to hcstzz.com, which publishes environmental data, there are 928 polluted water spots in urban areas along the Yangtze River. Furthermore, the Ministry of Ecology and Environment in July 2018 said a significant number of new polluted water areas have been reported, with the number increasing by 221 (or one-third) to 676 in 36 key cities. The scale of the clean-up effort may lead to investment opportunities within the industry.
China is also pushing to treat pollution in agricultural and rural areas, which could boost demand for wastewater and solid waste treatment.
Wastewater treatment in rural areas lags significantly behind cities and counties, though rural areas along the Yangtze River and in Beijing, Tianjin, Hebei and Guangdong are slightly better than in other regions.
China aims to build household wastewater and solid waste treatment facilities in 130,000 villages by 2020, which could be a boon to the environmental services sector.
Financing conditions and PPP projects
In 2018, a number of non-state-owned environmental services companies defaulted or faced rising risks related to stock pledges, as deteriorating financing conditions pressured their funding. As such, non-SOEs could become more cautious in pursuing projects requiring large investments. Furthermore, these companies could introduce SOEs as strategic shareholders to mitigate funding pressure.
For example, China Three Gorges Corp and Sichuan Provincial Investment Group announced plans to buy stakes in non-state-owned environmental companies. Given their stronger access to financing and as policymakers continue to introduce higher standards for environmental projects, leading SOEs could take the opportunity to gain market share.
However, non-SOEs still have a vital role to play in China’s push to clean up the environment. To illustrate their importance, the government released a policy document that encourages private-sector and foreign companies to invest in compliant public-private partnership (PPP) projects, in a bid to curb local government debt levels. The policy also supports investment from PPP funds and insurance funds. These factors could boost financing conditions for PPP projects of non-SOEs, which is positive for successful project implementation.
All things considered, closer cooperation between SOEs and non-state-owned companies are likely to be seen as China pushes ahead in cleaning up the environment.
For more information, please refer to our report Urbanization’s growing pains to drive municipal infrastructure boom published in January 2019; Financing improves marginally; leading SOEs to seize market share published in February 2019