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China event

Event report - China - The Economy and the Environment

6 July 2016

Opening the dual panel discussion Fraser Cameron said that there was a very close relationship between the economy and the environment in China. There was huge media coverage about Chinese debt, the stock market, the reform of state owned enterprises, the banking system, the renminbi exchange rate and excess capacity – with this latter issue linked to the decision on granting China market economy later in the year. The Centre had invited a number of experts for their views on the Chinese economy and prospects for MES which is now available on a video via the Centre’s website. Everyone recognised that the state of the Chinese economy was of vital importance for the EU as it is the second largest trading partner and a growing source of foreign investment. The environment in China was another vital EU interest. Its use and imports of natural resources impacts many places across the world and as one of the world’s biggest CO2 emitters China has a key role to play in combatting climate change. The Party seems to have recognised the enormity of the environmental problems it faces and is pouring resources into green technology, often with the help of European industry.


Panel I: China’s Economic Challenges and the Impact on Europe

Toshiya Tsugami, author of ‘China’s Rise: What should Japan do?’ and former Director at MITI, said that China was in a post-bubble era, which still came with a significant risk of crisis. To avoid this, Beijing should further pursue liberalisation. The era of high growth of 8-10% was over; the world would have to become accustomed to modest growth in China. The current economy was a mixed picture. The ‘new economy’ was growing fast (and more advanced than Japan) but the SOEs were not performing well and there were too many ‘zombie companies.’ The Party had still not decided how to tackle the mounting debt crisis. Politics inevitably interfered with economic theory.

John Farnell, author of a forthcoming book on EU-China economic relations and Senior Fellow at the EU-Asia Centre, agreed that politics was holding back reform. Little had been achieved since the 2013 Plenum. China’s SOEs still played too prominent a role in the economy and there was little progress on market liberalisation for services. Excess capacity was a big problem China had cut steel output by 10% but it was still 50% over-capacity. In these circumstances it was not surprising that the EU-China bilateral investment agreement talks had made little progress. The FDI relationship was asymmetrical. Since 2014, China was investing more in Europe than vice versa. China’s economy could not be described as a market economy as there were no bankruptcies. Change would be difficult as there were so many vested interests.

Jacques Pelkmans, Senior Fellow at CEPS, argued that an FTA between the EU and China would boost reforms. An FTA would strengthen EU-China relations, improve market access, and boost employment. There was no level playing field as regards FDI. China was much more restrictive than the EU as shown by the OECD’s Foreign Direct Investment Restrictiveness Index from 2014.

Rupert Willis, Advisor to the Directorate General for Economic and Financial Affairs, said there were many gaps in our knowledge about the Chinese economy. Three different indices provided completely different pictures of the state of China’s economy. There was consensus that consumption was now driving China’s economic growth. China’s G20 growth strategy did not even mention SOEs which were often a drag on economic efficiency. But restructuring the economy would be painful for vested interests. Maybe ‘the salami would have to be sliced with a thousand cuts”. In closing, Willis lauded the recent China communication issued by the External Action Service since it opened a lot of doors to engage with China while the negotiations for the investment agreement were ongoing.

The subsequent discussion addressed the EU’s approach to China’s One Belt One Road initiative, the development of domestic migration within China and whether Japan enjoyed better access to Chinese data given the language parallels. The discussion closed with a quick-fire question about reform prospects. Will the Chinese achieve a significant amount of their reform agenda (75%+) and within which time frame? John Farnell did not see an implementation to such a high degree and certainly not in a short time frame. Toshiya Tsugami held that despite Xi’s strong leadership vested interest obstructed both moving quickly and complete implementation, resulting in a medium implementation rate. Jacques Pelkmans held that economic reforms were extremely painful and that China was not that totalitarian anymore to simply push them through. Rupert Willis stressed again that progress that was made was not necessarily known to external observers. In the areas of the EU’s interest least progress was made and it should not be underestimated that some stakeholders in China benefitted from the status quo.

Panel II: China’s Environmental Challenges and the Impact on the EU

Isabel Hilton, founder and editor of and journalist, said that there was good and bad news. The environment had been a major factor in driving the development of civil society in China but now there was a crackdown, especially on NGOs which received foreign funding. The legacy of pell-mell industrialisation without regard for the environment was now coming back to haunt China which suffered from severe, air, water and soil pollution. It would take a generation to recover from the damage. The good news was that the government understood the immensity of the problem and was taking radical steps to improve the situation. The growing middle class was also putting pressure on the authorities and the Party has to react. The legal framework was very fragmented and inconsistent. There was a further problem relating to unplanned urbanisation that meant high energy consumption.

Li Lin, Programme Executive Director of WWF China, noted that China’s eco footprint was rising as the Chinese were becoming richer. Stability was the top priority for the CCP which had to react to growing concerns about the environment. The country still ranked 101 in the Human Development Index, highlighting two diverging trends. While China’s 13th Five-Year Plan had been even greener than the 12th, something that was not expected by many observers, China was still using twice its biocapacity. Therefore the European perception that China was “coming to buy up natural resources” was correct. At the same time there were some encouraging signs. The Party had made many targets mandatory and consumption of coal was down. There were many opportunities for EU-china cooperation on the environment.

Nick Hanley, Director, DG Environment at the European Commission, noted that every time he went to Beijing there seemed to be another ring road. This could not continue and Beijing would have to do something like introduce a congestion charge. The EU had a major interest in a stable China with a sound economy and a clean environment. The Commission was thus working closely with the Chinese authorities to exchange best practices and to help China maximise the use of green technology. Timber and IPR remained problem areas.

Susanna Mocker, Research Fellow at the EU-Asia Centre, presented her forthcoming report on climate action in India, Japan and South Korea post-COP21. For the historic - but insufficient - Paris Agreement to enter into force it needed ratification by 55 states accounting for 55% of global Greenhouse Gas (GHG) emissions. Currently, only 19 states had ratified the agreement, accounting for 0.2% of global GHG. India, Japan and South Korea were the fifth, sixth and ninth biggest emitters, rendering their ratification particularly important. India’s image as a climate laggard was shifting, which was good news as in 2040 the country would account for the biggest energy demand worldwide. Post-COP21 India had reconfirmed its problematic plans to expand the use of coal, while at the same time it had become the world’s fastest growing market for renewables. Ambitions were high and Modi’s personal support crucial. Problems existed with access to finance, payment discipline and upgrade and expansion of the grid.

Post-Fukushima Japan had increased fossil fuel use dramatically and was the worst G7 offender in investment in coal. Its climate goals, reflected in the recently revised climate law and the adapted implementation plan, were not ambitious enough. Japan faced a risk of stranded assets in coal worth 60-80 billion dollars. Nuclear power was subject to legal and public debate, rendering its use unlikely. Renewables faced an uphill struggle, but Japan would install 14% of global solar capacity in 2016.

South Korea had the highest marginal emission increase within the OECD thanks to 83% fossil fuel use. Post-COP21 the inadequate climate goals had been locked in legally, a reform of the emission trading scheme issued and the government was currently devising the 2030 GHG Reduction Roadmap. Post-COP21 South Korea saw an intense debate about air pollution, which the government had answered by taking some encouraging steps like announcing the retirement of ten coal plants and a shift to Liquefied Natural Gas and was eyeing the liberalisation of the public energy sector. Japan and South Korea might ratify the Paris Agreement in 2016, while India has not committed itself to a date.

The subsequent discussion addressed the usefulness of international climate negotiations, how environmental NGOs could successfully operate in China and whether all coal plants were problematic. Fraser Cameron concluded by drawing the results of the two panel discussions. Unless economic growth took more care of the environment China would continue to lose some percentage points of its GDP in future clean-up operations. It was thus in all our interests to encourage a Green China.