It is a fact that many places in China have gained economic prosperity at the expense of environmental resources. The problem has reached a critical level in certain areas and forced the central government to push for stricter environmental protection policies, including many energy-saving measures.

A recent statement by the National Development and Reform Commission (NDRC) indicates that the energy conservation situation is far from satisfactory in many provinces and the central government needs to push for more measures as soon as possible.

According to the NDRC, most provinces in China will face huge challenges in energy saving during the second half of this year. Energy consumption in the provinces/regions of Inner Mongolia, Jiangsu, Zhejiang, Jiangxi, Henan, Hainan, Gansu, Qinghai, Ningxia and Xinjiang experienced rapid expansion in the first half and will see the toughest situations going forward.

According to some reports, the energy consumption per unit of GDP in Inner Mongolia was targeted to decline 2.5 percent year-on-year (YoY) in 2011, but it actually increased 0.96 percent YoY in the first quarter of 2011. Total energy consumption in secondary industries grew 14.3 percent YoY in Inner Mongolia in the first half of 2011.

Provinces such as Hebei, Fujian, Hubei, Guangdong, Guangxi and Shaanxi will also face challenges in completing their energy savings targets this year due to the robust expansion of energy consumption. These 16 provinces/regions accounted for more than 60 percent of national energy consumption in the first half of 2011, and their rebound in energy consumption poses a huge test for China's energy-saving efforts this year.

The central government plans to reduce the energy consumption per unit of GDP by 3.5 percent YoY in 2011. If GDP growth reaches 9 percent this year, the year-on-year increase in energy consumption should be kept to below 5.2 percent for the year. Based on some official statistics, the rough estimate for overall net consumption of coal, crude oil and natural gas increased more than 9 percent in the first half. I estimate that actual energy consumption grew more than 7 percent and energy consumption per unit GDP declined less than 1.5 percent in the first half. As such, most regions/provinces, especially those mentioned above, will need to do more to save energy in the second half.

Facing huge pressure to conserve energy, the central government is likely to continue tightening measures on energy consumption in the future. The authorities will extend its controls on financing and land supply on energy-intensive sectors to restrain their expansion. Meanwhile, the elimination of obsolete production capacity under the energy-saving and environmental standards in related industries will be firmly enforced in future.

These measures will probably have some negative effect on value-added industrial output growth in the second half. In the relative longer term, resource prices and tax reform as well as preparation work for environmental protection-related tax collection will probably be accelerated during the next few years.

On the other hand, the relevant authorities also plan to provide more support for energy-saving initiatives. A special development plan for energy-saving and environmental protection industries reportedly will be made public in September. The government reportedly plans to boost the industrial output of the energy-saving and environmental protection (ES&EP) sector by more than 15 percent annually during 2011-15, bringing its value added to about 2 percent of total GDP by 2015.

Enterprises operating in the ES&EP sector are expected to benefit from tax exemptions, financing support and other preferential policies in the next five years. The central government will continue to encourage enterprises and consumers to purchase and use energy-efficient power generators, electrical machinery, home appliances, lighting fixtures and automotive vehicles through fiscal subsidies and other support policies going forward.

The author is executive director of BOCI Research Ltd. The views expressed here are entirely his own.

(HK Edition 09/28/2011 page2)