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UPDATED: September 5, 2011 NO. 36 SEPTEMBER 8, 2011
Planning to Protect the Environment
China formulates a development plan for energy-saving and environmental protection industries

Many transnational companies have entered the Chinese environmental protection industries, such as France-based Veolia Environnement and Suez Group and Britain-based Thames Water Utilities Ltd. in the water sector and Onyx, the Waste Management Division of Veolia Environnement, Singapore-based Sembcorp Industries and Hong Kong-based Ecotech Pacific Ltd. in the waste disposal sector.

While competing with international companies, Chinese companies are often in unfavorable positions. Annual sales revenues of international giants such as Veolia and Suez have surpassed 100 billion yuan ($15.65 billion). Large Chinese companies' revenues usually do not exceed 2-3 billion yuan ($313-469.48 million) annually.

Hou Yuxuan, a researcher of the environmental protection industry at CIConsulting Industrial Research Center, said compared with foreign industrial development, China's environmental protection industry has problems with scale and industrial concentration, which is inconsistent with the fast-growing market environment of energy-saving and environmental protection industries in the country.

To enhance competitiveness, Hou said China's energy-saving and environmental protection industries should engage in massive mergers and acquisitions and find appropriate partners to maximize the benefits of integration.

Zhang Yanlin, an analyst at CIConsulting, said technology and intellectual property rights are the biggest weak points hindering China's energy-saving and environmental protection industries. Because of the high costs of introducing foreign technologies, most Chinese companies choose to work in cooperation with foreign companies to reduce costs.

The government plan says in the next few years China will nurture leading companies with annual sales revenue of 5-10 billion yuan ($782.47 million-$1.56 billion).

Choosing a plan

According to the NDRC, energetically developing energy-saving and environmental protection industries will help accelerate the transformation of the country's economic growth pattern and promote the construction of a resource-saving and environmentally friendly society.

With a huge population, China has small per-capita resources and a fragile ecological environment. As industrialization and urbanization take up vast amount of the country's resources, China must enhance its crisis awareness and promote green and low-carbon development. While focusing on energy saving and emission reduction, China should improve incentive and restraint mechanisms, accelerate the establishment of resource-saving and environmentally friendly production and consumption patterns, and enhance sustainable development models.

"China has worked out plans for seven strategic emerging industries, including energy-saving and environmental protection industries, which are conducive to accelerating new economic growth points and creating more job opportunities," said Li Pumin, Director of the Department of Policy Studies of NDRC.

Energetically developing energy-saving and environmental protection industries will allow for better participation and a more favorable position against international economic competition. According to the NDRC, profound changes are taking place across the global economic competition structure, and the development of strategic emerging industries have become a key strategy for major countries to occupy commanding positions in the new round of development. To obtain a favorable position, China must speed up nurturing and developing strategic emerging industries, specialize in key and core technologies and related intellectual property rights, enhance the ability of independent development, and comprehensively improve the technological level and international competitiveness of its industries.

"Since energy-saving and environmental protection industries are still in the initial stage of development and the gap between different countries is not yet big, to accelerate nurturing and developing energy-saving and environmental protection industries is conducive for us to establishing new international competitive advantages," said the NDRC release.

The commission also said when developing energy-saving and environmental protection industries, it will concentrate on selecting key sectors to make breakthroughs in.

Breaking the bottlenecks

China's energy-saving and environmental protection industries are facing certain realities: Incentive and restraint mechanisms are unsound; construction of corporate-led technology innovation systems are slow; channels to demonstrate and promote new technologies are rigid; and development of environment service industries are lagging behind competitors.

"Market investors firmly believe that the government will launch policies to support environment-related industries, but there is still argument on how powerful these policies will be," said Yu Hai, an analyst of environmental protection industries at Shenyin and Wanguo Securities Co. Ltd.

Yu said the country will establish an accountability system to reduce pollution and strengthen support for environment-related industries via economic leveraging such as green credit, environment taxes and a green trade system. However, the investment budget for environment-related industries shows that only 22 billion yuan ($3.44 billion) is designated for science and technology for environmental protection during the 12th Five-Year Plan period. Discussions between the Ministry of Finance and the Ministry of Environmental Protection and CAEPI about fiscal support on market operation and industrialization of environment-related industries are in full swing, but no agreement has been reached.

According to the Report on Chinese Environmental protection Industry released by CCID Consulting Co. Ltd., in the environment-related industry, large enterprises only account for less than 5 percent of the country's total, while small enterprises whose fixed assets are below 15 million yuan ($2.35 million) account for above 85 percent. When banking credit is restricted, cash flows of small and medium-sized enterprises begin to diminish. Now they also lack fiscal and tax support from the government. And financial constraints will only delay technological innovation of environment-related enterprises.

Aside from capital difficulties, input and output imbalances are also a negative factor affecting energy-saving and environmental protection industries, according to a report from the Chinese Academy for Environment Planning of the Ministry of Environmental Protection. Enterprises invest heavily to research and develop technologies and products, but the market is often hesitant to embrace their products due to high costs.

CAEPI said the government should set up a special fund to support the commercial application of new technologies, accelerate the industrialization of energy-saving and environmental protection industries, assist in independent research and development, and encourage enterprises to participate in formulating national norms and standards for environment products.

"We can establish demand-oriented technology alliances in environment-related industries with leading enterprises acting as major participants. This will help change the current trend that Chinese companies in these fields are weak and scattered," CAEPI Vice Chairman Chen Shangqin said.

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