China unveils steps to control air quality

Air quality is a major public health problem throughout Asia. There have been pictures of the ‘airpocalypse’ in Beijing, but many Indian cities have even higher levels of air pollution. In addition, access to a safe water supply is one of the top priorities for developing Asia.

After years of prevarication, the improved political stability in these countries is allowing governments to make firm, long-term commitments to invest in infrastructure buildout and environmental protection.

The low price of oil is enabling emerging market governments to reduce their spending on fuel subsidies and increase taxes on fossil fuels, freeing up finance for longer-term infrastructure projects.

China’s consumption tax on oil products has been raised three times in as many months. Proceeds from the higher taxes – estimated at Rmb200bn (£20.8bn) – will mainly be allocated to counter-pollution initiatives. These include air quality control projects in the most polluted regions, sewage pipeline construction, encouraging the uptake of electric and hybrid vehicles and renewable energy consumption.

In early March, a documentary by journalist Chai Jing called ‘Under the Dome’ – which purports to reveal the truth about China’s air pollution – caused a national storm. The programme was the most high-profile investigation the Chinese public has ever seen. It showed just how lax the country still is on polluting industries, and how serious this issue is across the country.

The share prices of many domestic environmental companies shot up in a knee-jerk reaction to the broadcast.

However, the government does now appear to have spending on environmental projects at the top of its agenda. China is approaching the completion of its 12th five-year plan at the end of 2015, having pledged more than $1trn (£644.5bn) for environmental amelioration.

Some $330bn has also been earmarked specifically to tackle the contamination of scarce water resources, while stringent new targets have been set to reduce air pollution by up to 25 per cent.

Chinese president Xi Jinping appears to have an even stronger focus on environmental protection for the next five-year plan to the end of 2020, which is due to be announced at the end of this year.

There is already a significant rise in new project approvals and bidding for initiatives in waste water, high-speed rail and metro and waste-to-energy schemes, which are translating into further investment opportunities in companies involved in these sectors.

Meanwhile, if Indian prime minister Narendra Modi succeeds in removing much of the bureaucratic red tape in the country’s government, it should result in swifter implementation of major infrastructure projects, many of which have historically struggled to complete at anything like the original intended scale or even get off the ground.

The nation’s estimated economic growth is likely to lead to a trebling in energy consumption by 2050, but its domestic coal and gas supply has failed to keep pace with demand, leading to power rationing and outages. The government has responded with an ambitious commitment to quadruple renewable capacity to 175 gigawatts by 2022.

Huge investment in the water supply chain is also being made. India is already under significant water stress and demand is set to outstrip supply by 50 per cent by 2020. About $20bn has been set aside for the five years ending March 2017 for building irrigation, water treatment, recycling and desalination projects.

Investment opportunities in Japan are focused on energy efficiency, particularly factory automation, the manufacture of high-value components and the electrification of cars. The nation is a world leader in automation and lean manufacturing and has one of the highest factory robot density ratios in the world. Japanese firms are well placed to export these technologies and the domestic market is starting to show demand.

Sustained economic growth in China, India and Japan looks set to continue, with strong growth of resource efficiency markets across the region. Improved political stability, a major focus on environmental infrastructure roll-out and a growing number of investment opportunities – driven by corporate restructuring, merger and acquisitions and initial public offerings – should continue to furnish investors with long-term outperformance.

David Li is a director at Asian markets specialist Impax Asset Management