This commentary originally appeared in Forbes.
When I first moved to China, in the mid-1990s, every time I went outside my throat felt like someone had taken sandpaper to it and my eyes burned in pain. At the time, 80% of the country's electricity came from coal, factories belched soot and grit into the air and I could count on one hand the number of times a year I saw blue sky. The World Bank had found that 16 of the world's 20 most polluted cities were in China.
China's neighbors protested that blankets of smog from factories invaded their territory. Even California, 5,000 miles away, detected Chinese contaminants in the air. And that was all before an increasingly wealthy Chinese populace made the country the largest auto market in the world. China's pollution problem a decade ago was very, very bad.
Is it still so dire? What about the future? Pollution is definitely still a problem: Levels of particulate matter in the air are far above safety thresholds--they're about 10 times as bad as New York's. However, there is reason for real optimism.
To begin with, the Chinese government recognizes that it has a severe problem and is doing something about it. This is a turnaround from just a few years ago, when the government argued that heavy pollution was a necessary part of economic development, Western countries having gone through it in the Industrial Revolution. The nation's rulers were more worried about feeding their citizens than about preserving their environment.
But today, most Chinese citizens have access to adequate food and shelter and are increasingly concerned about pollution's effect on their health.
Spiraling health care costs have also pressured the government. Unlike in the U.S., where private insurers control the market, most Chinese are covered by state health care programs. With mounting health care costs incurred by pollution straining an already unstable health care system, the government has realized it has to act.
Thus it has pushed the use of renewable energy and tried to reduce reliance on fossil fuels. The country has plans to provide 15% of its energy needs from renewable sources by 2020; it recently suggested that it will revise that goal upward to 20%. Most of that renewable energy will come from hydroelectric, solar and wind projects. Installed wind power capacity already jumped from .76 gigawatts to 12.21 gigawatts between 2004 and 2008. The government has announced it aims to have 30 gigawatts of wind power capacity by 2020; it will likely have closer to 100 gigawatts.
To get around the objections of the power brokers who benefited from the soot-belching status quo, the central government cannily used the 2008 Beijing Olympics and 2010 Shanghai World Expo to break down their resistance. Arguing that China would lose face in the international community because of its pollution problems, the government imposed more stringent automobile emission controls than those of the U.S., made stores stop giving away free plastic shopping bags and made capital investment harder to pursue in high-polluting and high-water-usage industries.
In Shanghai, public buildings are not allowed to set their thermostats below 78 degrees Fahrenheit in the summer. Some local officials have eased labor laws to spur economic growth during the economic crisis, but the government still won't green-light investments that run counter to China's green objectives.
The government is actively promoting private investment in clean technology. Despite the protectionism creeping into China's $586 billion stimulus package, it is even seeking out foreign investment. Why? Because it knows that multinational corporations can offer superior technology. Foreign companies like General Electric (GE) and Corning (GLW) have taken advantage of this situation to sell water- and air-purifying treatment products, generating new profits that offset weak sales in the U.S. and Europe.
Many Chinese entrepreneurs are launching new businesses in the field. Analysts often argue that Chinese companies are better at copying than at innovating, but that's not true anymore. More and more Chinese are studying in the West and gaining management and technical skills at multinational firms, then venturing out on their own. Look for more innovative Chinese firms to emerge and become world-class companies. The country is already fast becoming the world leader in clean technology innovation.
Venture capital and private equity businesses are noticing all this. My firm, the China Market Research Group, interviewed several dozen venture capital and private equity executives in the last three months, and more than 80% of them told us they expected to invest what adds up to several billion dollars in clean technology projects in China. Many have already put money into solar companies like LDK Solar (LDK) and Suntech (STP).
China's automobile manufacturers may be the most innovative in the world today. Unburdened by a legacy of factories, unions and gas stations, they are rushing to produce electric cars that are years ahead of anything from Ford Motor (F), General Motors (GM) or even Toyota (TM). BYD (OTCPK:BYDDF), which is backed by Warren Buffett, is selling electric cars that not only reduce carbon dioxide emissions but are stylish too. Its sales have soared 183% this year to more than 200,000 cars.
Look for the boom in electric cars in China to continue as the government adds tax breaks and pushes taxi companies and government fleets to go electric. More than 20 million electric bikes have been sold in the last three years too. The technology is improving at both the low end and the high end.
China's economy is going to keep growing, and its growth will continue to strain the environment as wealth increases and more and more consumers demand packaged goods, cars and electricity to power their lives. The challenges that come with growth are very real, but so are the steps China is taking to mitigate the damage it causes while taking up the mantle as a global leader in clean technology.
It is too early to breathe a sigh of relief, but so far, the situation keeps getting better. For savvy individual investors and companies alike, China's legacy of terrible pollution translates into a wonderful opportunity for growth.