China’s Pollution Problem About to Become Everyone’s Problem

by James Brumley | February 4, 2013 12:33 pm

It was Sir Isaac Newton who first noted that for every action there is an equal and opposite reaction. Although he was talking about physics (motion, to be specific), it’s an idea that applies universally to every facet of life.

Just ask the people in China.

China’s “action” was hyperbolic economic growth. Over the past 20 years, the country has grown from just another trade partner to an economic powerhouse that rivals the United States’ global trade prowess.

There was an “equal and opposite reaction” to that rapid growth, however: pollution.

While it always has been something of a problem for the nation-state, China’s heightened industrial growth over the last decade has now made pollution a stifling problem for the country. Something’s got to give soon, though, and it might ultimately end with China taking its foot off the economic gas pedal.


Pollution in and around Beijing is literally as bad as it has ever been — at least since measures of pollution have been recorded. Late last week, the region’s air pollution measured a score of 755 on the air quality index. Anything between 300 and 500 is deemed dangerous, so a score in the 700 is near terrifying. China’s government asked its citizens to avoid going outside, and simultaneously convinced many factories to slow or halt their operations until the air quality improved.

The culprit? A lot of (too much) industrialization, with a huge chunk of that productivity powered by coal. Since 2000, China’s usage of coal to produce has more than doubled. Indeed, China accounts for almost half of the world’s coal usage now — a usage that clearly hasn’t materialized without effect.

China isn’t ignoring the problem. All told, 103 factories have been closed in the wake of the heavy pollution, and nearly a third of the government’s vehicles have been taken out of use.

It might be too little too late, however, unless the country is willing to concede its role as the world’s fastest-growing industrial powerhouse … an unlikely outcome. Yet, it’s clear Beijing isn’t afraid to crimp — if not outright halt — the country’s productivity on an as-needed basis.

How might this willingness to do so affect investors?

Who’s Impacted

The relatively good news is, most Chinese factories are small, privately owned organizations, and won’t directly impact publicly traded stocks. On the other hand, some American companies are still being impacted by the current pollution fallout in China, and what will most assuredly be a crackdown in the near future.

Though not directly linked to the current smog crisis, Apple (NASDAQ:AAPL[1]) is one of those vulnerable names.

To be fair, a recent audit of Apple’s suppliers following a report from China’s Institute of Public and Environmental Affairs (or IPE) showed that Apple and its supply chain had taken several significant steps to curb pollution. Yet, that same report also pointed out that Apple had more work to do to this year. Particularly, Apple is expected to continue to develop ways to reduce excessive pollutive emissions for its suppliers, and implement its own oversight system.

More immediately impacted were plants like Beijing’s Hyundai Motor Company (PINK:HYMLF[2]) facility — one of the more than 100 factories slowed or stopped while the smog clears.

Further down the hit list are China’s oil refiners PetroChina (NYSE:PTR[3]) and Sinopec Shanghai Petrochemical (NYSE:SHI[4]). Though neither has a hand in the coal industry, both have a hand in what’s believed to create a quarter of China’s pollution — automobiles. Both companies have wrangled with Beijing’s Environmental Protection Ministry over who should foot what will be a multibillion-dollar bill to build the refineries needed to make cleaner fuels. To date, neither side has budged, though the government agency has started to show its teeth in just the past few months.

Undoubtedly, the EPM will bark and growl again in the shadow of the recent surge in pollution levels.

Bottom Line

As prolific as news of the smog — and its impact — has been, it’s perhaps what hasn’t been said yet that should worry investors most.

While the temporary shutdown of factories and construction projects is an admirable move, it’s also an impotent one to truly solve the bigger pollution problem. This is a challenge that has taken years to develop, and has become structural … built into the very heart of what has made China a major economic player. To effect change now will take years, and will mean an overhaul of the way China approaches not just industry, but politics and finances.

There’s no fast fix for that.

In the meantime, look for U.S. companies ranging from the likes of Logitech (NASDAQ:LOGI[5]) to Boeing (NYSE:BA[6]) to AT&T (NYSE:T[7]) — and hundreds more — that rely on Chinese-made components or materials to gradually hit a headwind … a headwind that could end up lasting for years as China figures out how to improve its oil refining processes, better manage toxic waste and continue the transition from coal power to wind and solar sources.

The shutdowns in late January are the least of anyone’s worries now.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. AAPL:
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