Environmental Enforcement Is Driving Prices Up. What Do Factories and Nonprofits Make of the Tightening Rules?

The policy has never been clear. Nothing has changed.

Prices are rising, in places you can see and places you can't.

The corrugated paper used to make cardboard boxes cost 2.2 times as much in October 2017 as it did in October 2016.

Rock wool, the insulating, fireproof material used in buildings, went up in price three times in 2017. As prices climbed and supply ran short, Luyang Energy-Saving Materials, a big maker of rock wool and ceramic fiber board saw its gross margin climb from 15% to 30% between June 2015 and June 2017.

Then there are vitamins. The price of vitamin A rose tenfold between June 2017 and February this year.

Manufacturers and analysts trace every one of these increases to the same cause: environmental protection.

For a long time, China's efforts to control pollution were thought to be getting nowhere. A Wall Street Journal report from April 2014 used the phrase "environmentalism with Chinese characteristics." Four years later, a New York Times report published this March declared that China's war on pollution had been won.

1

Zhang Chunjiu owns a mannequin factory. Working with resin and paint, it turns out about 20,000 life-size mannequins a year. Most go to shopping malls in Shanghai and Hangzhou; "a small portion" have also ended up at Shanghai Disneyland, which opened in 2016.

The factory's pollution problems have always been there. As at most factories that use resin and paint, the main ones are dust and smell. The workers have to put up with the fumes, and if the fumes aren't treated before they drift off, the residents around the factory smell them too.

From 2010 to 2016, Zhang's factory sat in a village under Nanqiao Town, in Shanghai's Fengxian District, an hour's drive from the city center. The workshop measured 2,000 square meters. In 2010 the rent was 120,000 yuan a year. At first, village and township officials would sometimes remind Zhang to watch out for workplace safety, and for the dust and the paint. They wanted to keep the residents calm, but had no intention of making trouble for him, and no one mentioned that the harmful ingredient in the fumes was xylene, which appears on the World Health Organization's 2017 list of Group 3 carcinogens.

There were ways to fix this. Zhang named at least two: switch to a greener, costlier paint, or buy a full set of equipment to treat the smell. He didn't know that at the time, and once he did know, he still didn't do either. In 2016 he used a "homemade fix": he moved the painting into a small sealed room to keep the smell from spreading. It cost him almost nothing.

Zhang had been worried. He never got any official notice, but "someone came round to pass along word" from the village government that a factory had been driven out after "residents complained." The message also carried something that set his mind at ease: the government had pushed that factory out only "because it had no choice," and "if you keep your head down, you should be fine on my end." That was another reason he settled for the compromise.

Small factories like his are an important source of tax revenue for the village. On top of that, the everyday habit of "giving gifts" keeps the personal ties between factory owners and village officials in good repair. The practice is still common. In Tangxia Town, Wenzhou, Zhejiang, a plant that assembles bathroom faucets described much the same thing: during a big environmental inspection last fall, "in Tangxia's Xinfang Industrial Zone, almost the whole zone shut down." Because "an acquaintance in the Wenzhou environmental protection department said someone from the provincial department was coming to inspect," the owners closed their doors on their own and waited out the storm.

Business owners believe that what comes through official channels is always vague and "high-sounding." What they hear from acquaintances tells them things aren't that serious.

Move the factory, or shut it for a while, and you can keep the business going. At the end of 2016 the village suggested Zhang move his factory somewhere "more out of the way, with fewer residents." Even if inspectors come down from the Shanghai city government, they hinted, "they won't check the out-of-the-way places."

Zhang's "environmental awareness" grew a good deal sharper, because he didn't want to keep moving. When he used a broker to look for a workshop, what he asked about first was whether the area had "any problems on the environmental side, whether you can do paint work there." In February 2017, in Shaochang Town, about 40 kilometers east of Nanqiao Town in Fengxian District, a landlord promised him that paint work was allowed, and that if it later turned out not to be, Zhang would be compensated.

The promise broke quickly. Zhang's first real encounter with the environmental protection department came in May 2017. The inspectors hadn't had a single resident complaint about his factory — they were simply passing the workshops and caught the sharp smell. They didn't hesitate. They told these factories that "failed to meet environmental standards" to write out a pledge: "On October 1, 2017, I will cease production in Fengxian District, Shanghai, and voluntarily leave Shanghai."

2

"Honestly, it's new packaging on the same old thing." So said a rock wool manufacturer whose factory also left Shanghai, in the second half of 2015. He found a workshop in Zhapu Town, in the northeast of Zhejiang province, a place people in the trade then called a safe "no-man's-land" — and the new factory handled its pollution no better than the old one. He asked that neither he nor the factory be named.

The towns and townships around Shanghai, large and small, were ready to take in the pollution moving out of the big city, along with tax revenue and jobs on a scale they could not have imagined before.

A state-owned maker of rock wool building materials, based in Shanghai's Qingpu Industrial Park, began shifting its production lines in 2015 to Dafeng, in Jiangsu province, 280 kilometers away. It is a big company, one of the top three in the industry. In Dafeng, small factories and logistics firms have sprung up around the new plant, which turns out roughly 600 tons a day. Since few of its Shanghai employees were willing to move with it, the company hired local workers in Dafeng by the hundreds. The anonymous rock wool manager said the state-owned plant supplied his wire mesh and panels; because his supplier had moved, he too had to hire a local logistics company in Dafeng to haul the materials back to Shanghai.

Word reached him that the state-owned plant, because it owned its land, collected relocation compensation from the government even though pollution was the reason for the move.

Most small factories have no hope of compensation; they are usually just short-term tenants in their workshops. When Zhang Chunjiu left Shanghai in October 2017, his new workshop in Shaochang Town had been running for less than eight months. The landlord paid the 60,000 yuan he had promised. It came nowhere near the cost of moving. Zhang said the earlier move, from Nanqiao Town to Shaochang Town in early 2017, cost him 150,000 to 200,000 yuan just to transport his molds, on top of the losses from halted production and late deliveries. All told, he put his outlay after the move at no less than 800,000 yuan.

The rock wool manager said the same thing: "Every move wipes out a year's profit, and it disrupts production." He also found it hard to accept being ordered to stop work whenever a major event came around: "Take our furnace — once it's lit, it takes two days at least to reach normal temperature. Shut down, start up, shut down, start up. The costs pile on." Workers are usually paid by the day, and they can't sit around waiting for the furnace to heat back up; by then they've found their next job.

During the 2016 G20 summit in Hangzhou, the rock wool factory that had moved to Zhapu was shut for 20 days. It was during those same 20 days that a group of Zhejiang rock wool makers got together, talked over what to do, and decided to raise prices in unison to cover the added cost.

"It's not that we want to raise prices. The government never said so outright, but there's an invisible hand at work here," the rock wool manager said, sounding irritated. "I'm a small man with no clout. All I can do is follow the crowd."

3

Some factories did read the new situation early and bought pollution-control equipment, or moved to a new industrial park that could treat waste for everyone. One large foreign-invested chemical company in Shanghai spent more than 6 million yuan to add two connecting pipelines nearly 2 kilometers long. "Six million yuan is nothing on a project with total investment of more than 10 billion," an employee there said. "We have the money. Small companies don't have that option." Because the company is sensitive about anything to do with the environment, the employee asked that neither he nor the company be named.

Sinopec is planning a large coal-chemical plant to make polypropylene and polyethylene. An employee handling the project's early environmental impact approvals, asked about the ever-rising standards, said: "Sometimes the targets are a bit harsh, but you can't say they can't be met — put in a bit more money and you'll get there in the end. They're reasonable. Nobody's saying they're unreasonable." The project carries total investment of 21 billion yuan, of which about 2 billion is set aside for pollution control. Planning began in 2013; construction has yet to start.

Beyond cases like these, QDaily's reporting found that a great many factories, small ones above all, still have no pollution-control equipment to pass an environmental impact assessment, and no plans to buy any — even though every one of them says environmental protection is a good thing.

Cost is a big part of the reason. "There's nothing to be done about dust and smell. Well, there is something, but it takes money. At least 500,000 or 600,000 yuan — we've done the math. Five or six hundred thousand: how many pipes do I have to make to earn that back? Some pipes sell for one yuan each, some for 1.20 yuan. How am I supposed to make that kind of money? How many years before the investment pays for itself?" the rock wool manager said.

Zhang Chunjiu had done his own math long ago. Switching to environmentally friendly paint, he said, would raise his costs by about 40%, and pollution-control equipment would run to around 1.5 million yuan. But he made another point: "It's not that the factory can't bear it. It's that the market, the consumer, can't bear it. If I use the green paint, my costs go up, but my competitors may still be using ordinary paint, and the result is that my customers walk away."

"You can't fix small factories by making them clean up their act, because they're so small that the moment you force them to, they can't keep going. So it's either shut down, or wait for the storm to pass and find ways to keep working on the sly." So said the manager of the bathroom-faucet assembly plant in Tangxia Town, Wenzhou, Zhejiang, who thinks only big factories with 200-odd workers would even consider putting together an environmental impact assessment report.

Almost every person interviewed believes the government wants to use environmental enforcement to close down "low-end" small factories.

Chen Jining, then Minister of Environmental Protection, said in a speech in March 2017: "Environmental protection is not a burden on development. On the contrary, good environmental policy is an important lever for transforming and upgrading the economy, raising the level of urban and rural development, and improving the quality and efficiency of growth." The Ministry of Environmental Protection was reorganized this March into the "Ministry of Ecology and Environment," and Chen — a former scholar trained at Tsinghua and Imperial College London — is now the mayor of Beijing.

An analysis from the Wind database notes that ever-stricter environmental standards are a reflection of "supply-side reform." "Supply-side reform" mainly means shutting factories with excess capacity. The report also notes that once the small factories are gone and large companies dominate, any halt in production will have "an enormous impact."

Nor can these small factories simply close overnight. Payment from their customers is usually governed by a "one-year quality guarantee": the factory has to keep operating normally for a year after delivery, or the customer has grounds to withhold the money. Zhang Chunjiu said this is one reason he keeps moving his factory instead of closing it — at every stage, a small factory is "at other people's mercy." A motor factory in Rui'an, Wenzhou, had its power cut and was ordered to close last July over its paint work, and still kept one small line running to service the products it had already sold.

Zhang Chunjiu didn't close his factory. Last October he moved it to Nantong, in Jiangsu province. The foreign chemical company mentioned above had meant to build a new plant in a new industrial park in Shandong, but the park's environmental impact assessment dragged on without approval, so they moved to Jiangsu instead. The rock wool factory's new site is on the border between Huzhou and Suzhou, also in Jiangsu.

The moves broke up a supply-chain geography that had formed on its own, and the rock wool factory's shipping costs rose 70%. Zhang Chunjiu raised the price of his mannequins by 10%. The large foreign company found that with so many small factories closed, its products were selling faster than it could make them: a plant that had lost money for years turned a profit last year.

4

Just recently, Zhang Chunjiu heard that things had grown tense in Jiangsu too. Word reached him that at the end of February this year, factories around Zhangjiagang, in Jiangsu, received similar orders to move out, with a deadline of May 30.

In Zhangjiagang as well, Green Jiangnan, the environmental NGO where Fang Yingjun works, took on a water pollution case last year that stayed with him. "Villagers had been raising it with the village for more than a decade," and nothing had been done. After more than ten rounds of evidence gathering, Green Jiangnan handed a research report to the local environmental protection bureau, and the pollution was cleaned up. The whole thing took a month.

Green Jiangnan was founded in 2012 and is based in the Suzhou Industrial Park. Over the past year it filed 24 research reports with government environmental protection departments, "and every one of them was acted on in the end." Fang Yingjun, the group's director, believes "government environmental protection departments are working with real force and real speed now, because they're afraid of being held to account over some small thing."

On Accountability Hour (《问政时刻》), a television program that started in 2017, the head of Xi'an's environmental protection bureau, after being grilled on air by panelists, reporters and viewers, said then and there that he felt "deeply ashamed and guilty." In February 2017, four officials in Gansu province were removed from their posts over damage to the Qilian Mountains ecosystem.

"Some of it is inherited from the past, honestly, but a lot of people now working in the environmental protection system feel the job is getting harder and harder. The pressure on them is too much," Fang said. Those government departments are now going out and asking non-governmental organizations — environmental NGOs — for help. Since last year, the environmental protection bureaus of Kunshan, Changshu and Zhangjiagang have all approached Green Jiangnan about working together. "Why? Because there are so many pollution cases, and they simply don't have the people."

Another environmental NGO, headquartered in Beijing, said much the same: its relationship with the government is not what it used to be. NGOs and the government were once seen as facing off defensively; now both sides lean toward cooperation. Because it was "not convenient to comment publicly," the interviewee asked that the NGO not be named.

The cooperation usually involves compromise. The government, for instance, doesn't want environmental NGOs into every last detail, especially when it would rather not release certain real pollution figures to the public. Fang hasn't run into that himself, but he understands it. He added that Green Jiangnan prefers not to give its research on polluting companies to the press, and hands it straight to the government instead, because it "doesn't want to make trouble for the government — we just want to help solve the problem."

After the new Environmental Protection Law took effect in 2015, Green Jiangnan says it "held out an olive branch" of its own accord, sending its research reports to the provincial environmental protection department, the inspection office, the Taihu Lake Office and local environmental protection bureaus. After that they started sitting down together. The meetings are frequent enough now that Fang can no longer remember what the first one was like.

Short of staff, government environmental protection departments sometimes pay environmental NGOs a fee — a few tens of thousands of yuan — to help investigate polluting companies, or to find representative pollution lawsuits to hold up as examples. Fang said he resisted this at first; his group was supposed to do what non-governmental organizations normally do, which is "apply for foundation money." Then he changed his mind, realizing that both sides needed something.

"It isn't about the money. What matters is the change, the meaning of it." Just as companies do, the government can buy environmental services, "and that's where things are heading."

Asked whether this might cost NGOs the independence and the watchdog role that come with being "non-governmental," Fang said he had never thought about it that way. "How could anyone be bought off with a few tens of thousands of yuan?"

"We won't pick a fight with companies, and we won't pick a fight with the government. The only thing we'll pick a fight with is pollution." Then he added: "Polluters don't deserve sympathy."

5

If the environmental authorities come for his Nantong factory too, Zhang Chunjiu plans to go back to Anhui — he is from Lu'an, in Anhui. He has heard that plenty of people have already moved their factories inland, mostly to three provinces: Anhui, Sichuan and Jiangxi.

Zhang has run the numbers again. Inland workshops are cheaper than in Nantong, and although shipping costs more, so many small factories have been closed that a newly arrived one would probably see its order book grow — which might cover the higher costs, or even leave him better off than before. "But the environmental policy isn't clear, so we don't really know. If we move to Anhui, will there be no environmental problems there either?" he said down the phone.

Some scholars think environmental policy is already clear enough. Zhang thinks a clear policy would look like this: "If the state decides our industry is low-end, high input and low output, then let the state guide us — set aside an area for us and give us a term. Say this industry is allowed to survive for three to five years." Or else develop new, affordable, environmentally friendly materials that factories can use.

"Right now we do today's work without knowing what tomorrow brings," Zhang Chunjiu said.

What business owners fear most is policy that keeps changing. Now they have become firm supporters of Xi Jinping and the recent extension of his term. The rock wool manager reached for a phrase — "a cause for public rejoicing" — that had all but disappeared from Chinese life for years to describe how he felt. Their reasoning is that this guarantees "policy you can predict," and that "policy that keeps changing" will not change again.

Will it really work out that way?

Securities firms, at least, are still telling companies in their research reports to watch for risk: enforcement of environmental policy may fall short of expectations. Warnings like that have become almost routine.

Cover image from: official website of Tangshan Ganglu Steel, QDaily