McKinsey Quarterly

China’s commitment to a green agenda

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Rhetoric on the need to “green” China’s economy is nothing new: nearly two decades ago, the Chinese government called for transformation of its economic growth model; ten years ago, its leaders promised fresh air, clean water, and safe food. Today, little has changed: the country’s environment has continued to deteriorate, and these targets remain beyond reach. Yet willingly or unwillingly, China’s new leadership must deal with the imminent and daunting challenges of the country’s environmental degradation and its frightening impact on human health. Unlike their predecessors, President Xi Jinping and Premier Li Keqiang must build and leave a legacy of greening the world’s second-largest economy. They have no other choice.

Times have changed. For more than three decades, China’s economy—and its rapid growth—was the central issue for the political legitimacy of the country’s leaders. So long as GDP grew by double digits, the majority of the people were happy. That’s no longer the case. People are increasingly distressed by the accelerated risk of lung cancer caused by heavy smog, by tap water being considered unsafe in most cities, and by young mothers being forced to buy baby formula from abroad. Many Chinese have voted with their feet, choosing to move to environmentally safer places. Others have sent their children abroad, and even more are considering following suit. While people are not yet panicking, they are being increasingly cautious.

The new reality for the country’s political leaders is that environmental quality is becoming inseparable from the issue they have long prioritized: economic growth. Already, some international companies are finding that vacant positions in China are less attractive to prospective applicants. Other companies are considering relocating their operations to less polluted cities. There is rising concern that the state of China’s environment is beginning to poison the country’s economy, at a time when investment must continue to play a central role in the nation’s growth. That fact is not lost on governments at all levels, who have recognized the dangers and the need to respond quickly and effectively. There are several steps they must take.

First, China’s central government must tighten existing environmental regulations. Even senior officials and National People’s Congress members complain loudly about toothless laws on pollution control, and it is expected that higher standards and more severe punishments for violations will be put in place. At the various local levels of government, both standards and enforcement must be strengthened. Many local governments have been reluctant to take responsibility for environmental enforcement amid concern that it will scare investors. Yet instead, they now face angry citizens, who are unwilling to become victims of economic growth at all costs.

Second, governments must rethink where industries are located. Industrial investment in China is currently undergoing a major shift from coastal regions to the country’s inland. This movement from the east has been seen by most western provinces and cities as their chance to enjoy stronger economic growth. That is true to some extent: inland GDP growth has exceeded that of coastal provinces as many polluting industries have found bigger and more comfortable homes further west. Yet this shift is either a golden opportunity for more people to achieve the Chinese dream or a nightmare if pollution spreads wider and deeper into the more ecologically fragile west of the country. Beijing’s new administration should seize the opportunity to rethink where industries are located and, in the process, make industries more environmentally sound and economic growth more sustainable.

The third area of opportunity is urbanization. The McKinsey Global Institute was among the first to recognize and measure the potential economic impact of China’s urbanization on both the country and the world. And there’s no doubt that urbanization—the migration of people to cities from rural areas—will be critical to China’s economic policies. But policy makers should equally emphasize a new ambition for urbanization: smart, green, low carbon, and inclusive. Urbanization is a more environmentally sensitive way to industrialize than putting factories in the countryside, but urban areas nevertheless release three times the carbon dioxide per capita of rural areas. While we are not quite clear about how to address this, there are some early stones for crossing this river—and we must use them.

Finally, on climate change, China could surprise the world by not only meeting its commitment under the Copenhagen Accord but also doing even more. China has made a strong start: climate change is a key component of its 12th five-year plan and, of course, the country is among only a few in the world where political consensus is developed by the national leadership. Yet the real driver of action when it comes to climate change may come from domestic concerns about local pollution rather than international negotiations. No matter what global agreements are reached, China seems certain to make the investments necessary to reduce the local emission of all sorts of pollutants.1 This means that two efforts administered separately by two government agencies—energy saving (jieneng) and pollution reduction (jianpai)—will finally become integrated in practice.

At the 18th Congress of the Chinese Communist Party in November 2012, Hu Jintao described building a “beautiful” China as the “construction of ecological civilization.” Two months later, reality replaced romance: thick and severe smog overwhelmed almost all of China’s east coast, an area equal to the combined size of France, Germany, Italy, and the United Kingdom. The smog choked Beijing, leading to peak readings for air pollution during the Chinese New Year some 40 times the World Health Organization’s air-quality guidelines. There is perhaps no better demonstration of the urgent need to address the country’s environmental issues and green the economy. Is China ready and able to do so? Well, the government certainly has much catching up to do. Then again, so does everyone else.

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