Dragon News_2016#2_Focus story_ MF

A bumpy road to
sustainability
Significant policy
adjustments are
required in order for
China to become
sustainable, as China’s
investment-driven
growth model has
come to an end.
TEXT: Jan Hökerberg, Bamboo
[email protected]
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D
ozens of major Chinese
cities have worse air than
permissible in a smoking
room in a US airport. Access
to arable land is another problem; some 20
per cent is polluted by heavy metals. Access
to water, which is scarce in northern China,
is perhaps even more acute, with 60 per
cent of the country’s water unfit for human
consumption.
“When I lived in Shanghai I couldn’t
even cook pasta in tap water,” says Karine
Hirn, partner of East Capital, an asset
manager that recently decided to change
the direction of its China fund and mainly
invest in companies with sustainable
solutions (see separate article).
“Fears of water shortages are alarming
Chinese officials so much that roughly
half of the newly allocated environmental
funding in the 13th Five-Year Plan is
expected to go to water projects,” Hirn says.
Year after year, China’s leaders relied
on a development model based on doubledigit annual gross domestic product (GDP)
growth in order to keep the unemployment
rate low, not only in the interests of
creating social stability and a harmonious
society, but also in order to ensure the
Chinese Communist Party retained its
place at the helm.
Today, double-digit growth figures are
a thing of the past and China has entered
its 13th Five-Year Plan, which was adopted
in March, focusing on a more balanced and
sustainable economic development.
In the plan, the central government sets
the annual GDP growth target at 6.5 per
cent over the next five years. The growth
target reflects the Chinese Communist
Party’s long-term goal of doubling the
country’s GDP and household income in a
decade and fulfil President Xi Jinping’s so–
called “Chinese dream” of a “moderately
prosperous society” in 2020.
“China’s growth model – the way we
knew it 15 years ago – is over,” says Hirn. “The
average disposable income per capita moved
from US$930 in 2000 to close to US$8,000
in 2015. Today, more than half of the Chinese
population live in a city and the transition
from an infrastructure-driven economy
towards a service-driven economy already
started under the previous Five-Year Plan.
That structural adjustment process is focused
on the quality and sustainability of growth.”
According to the plan, a fifth of the
country’s energy sources will be renewable
in 2030. China is, today, the world’s
leading producer of renewable energy and
No 1 when it comes to wind power and
solar power.
Four myths about China (2)
As China’s economy slows down after more
than two decades of unparalleled growth,
some observers predict that this could herald
the collapse of China and that its political
and economic system is unsustainable in the
modern world.
For this year’s four issues of Dragon News,
the Swedish Chambers of Commerce in Hong
Kong and China will analyse some of the myths
surrounding China’s future development, such
as “China cannot innovate”, “the Chinese model
is not sustainable”, “Hong Kong is just a part
of China” and “China has no global brands”. Are
these myths true or false? Read for yourself to
find out.
“In the 1990s, China was already
talking a lot about sustainability, making
many proud, high-level declarations
without much happening,” says Karl
Hallding, senior research fellow at the
Stockholm Environment Institute (SEI)
where he is leading the Rethinking
Development research theme. “In the 11th
Five-Year Plan 2006-2010, China had the
ambition of reducing energy intensity –
that is, the ratio between the consumption
of energy and the GDP – but even if the
country did manage to fulfil its goal, the
reason for that was not less use of energy
but rather substantial increases in the GDP
growth rate,”.
From 2006 and onwards, China’s
leaders worried about not being able to
secure a sufficient supply of energ. As an
example, China went from having been a
net coal exporter in 2006 to becoming the
DRAGONNEWSt/011
12 DRAGONNEWSt/0
Karine Hirn, East Capital
China’s growth model
– the way we knew it
15 years ago – is over.”
world’s largest coal importer in 2010, while the oil import dependency
was expected to grow well beyond the current 60 per cent.
“Concerns about energy security, rather than to limit
environmental pollution, were the driving forces for China to put
so much effort into a programme for renewable energy sources. This
programme is all domestic and largely controlled by the government
through investments and subsidies,” says Hallding, who has had
extensive experience of international co-operation on environment
and sustainable development since the mid-1980s, with a focus on the
growing global importance of China and other emerging economies.
“Since there were many winners in China’s peculiar political
economy China quickly became the world’s largest market for
renewables and Chinese producers of renewable energy became the
biggest in the world,” he says.
Hallding believes that China’s real economic growth today could
be lower than the official figures and he bases his assumptions on
statistical data.
“For more than 10 years, China has had big problems coping with
its growth, since it’s been investment-driven rather than driven by
productivity and regular market forces. The government has injected
capital into production that doesn’t result in output in a regular
market. It’s led to enormous excess capacity in the heavy industries,”
says Hallding.
“This policy has generated economic growth, for certain, but also
an extreme increase of greenhouse gas emissions. It’s a growth model
that hasn’t benefited anyone except for those who have made money
on such economic activities,” he adds.
Hallding points at remarkable dips in China’s current electricity
and coal consumption, which could indicate fundamental changes in
the Chinese economy.
“Both Chinese and international statistics indicate that coal
consumption essentially stalled or even fell in 2014. This was an
unexpected break in a long record of rapid year-on-year rises. This
sudden stagnation in coal consumption in an economy dependent
on coal for two-thirds of its total energy supply is highly significant,”
says Hallding.
“The reason for this stagnation is not because of environmental
policies; rather it indicates a substantial adjustment – some call it an
industrial collapse – in China’s heavy manufacturing,” he says.
Since the early 2000s, heavy industry has generated more than a
third of China’s GDP. Output figures from energy-intensive industries,
such as iron, steel, cement, aluminium, and so on, grew by 10-20 per
cent annually from 2004 to 2014, but now the output is negative,
between -5 and -15 per cent, according to Hallding.
6.5%
as 4 per cent growth on “the mendacious official data” for a year,
Other experts, such as Michael Pettis, a former Wall Street
trader and professor of finance at Peking University’s Guanghua
is a consumption-oriented fiscal stimulus program funded by the
School of Management, are warning of the growing imbalances in
central government and monetised by the People’s Bank of China,
the Chinese economy.
Buiter said in August last year, according to Bloomberg.
Pettis argues, in an interview in Fortune magazine, that the
Others, such as the e-commerce giant Alibaba’s executive
Chinese economy is following the example of many other countries,
chairman Jack Ma, are more optimistic about China’s future and
like the Soviet Union following World War II, the Brazilian economy
believes that China’s economy will face “a difficult three to five
in the 1970s, and Japan in the 1980s. In each of these cases, national
years” but the slowdown will be good for long-term development.
governments put forward policies that artificially boosted investment
In a recent interview in the South China Morning Post, which he
and suppressed consumption, policies that led to a fast build-up of
recently acquired, Ma dismissed fears that China would follow
growth and large trade surpluses. But eventually these imbalances go
Japan’s route to stagnation, saying the country still had huge
into reverse, and that is what is happening now.
potential waiting to be tapped.
Christer Ljungwall, head of the office of
Comparing China to an ocean liner, Ma said
science and innovation at the Swedish Agency for
the Chinese leadership understood the country’s
Growth Policy Analysis in Beijing, says he can see
old growth model was unsustainable and that they
some similarities:
needed to chart a new course.
“The most difficult process of any fast growing
“It is easy for a small boat to change its course.
economy is the adjustment period during which time
But as the world’s second-largest economy, China
The
annual
GDP
growth
the imbalances generated by rapid growth have to be
is like an ocean liner ... We have to choose either
target in China’s newly
addressed and resolved. For Japan the adjustment has
not to slow down and overturn the ship, or to slow
adopted Five-Year Plan.
– at least until recently – been locked into stagnation,
a bit to make the turn,” Ma said in the interview.
while for Brazil the adjustment has been brutally
difficult and the economy is currently in rapid decline,” says Ljungwall.
Since initiating market reforms in 1978, China has
“It is risky to generalise, but some aspects of China’s growth
experienced rapid economic and social development, lifting more
are similar to that previously experienced in Japan. For example,
than 800 million people out of poverty.
investment fuelled growth is accompanied by rapidly rising debt
“Rapid economic ascendance has brought on many challenges
levels and too little economic reform. There is a risk that China
as well, including high inequality; rapid urbanisation; challenges to
underestimates the difficulty of adjustment and starts this process
environmental sustainability; and external imbalances. China also
too late to avoid a financial crisis,” he says (read the full interview on
faces demographic pressures related to an ageing population and
pages 22-23).
the internal migration of labour,” the World Bank said in a China
Citigroup Inc’s chief economist Willem Buiter, who has also been
Overview report in April this year.
an external member of the Bank of England board, thinks that China
“Significant policy adjustments are required in order
is sliding into recession and the leadership will not act quickly enough
for China’s growth to be sustainable. Experience shows that
to avoid a major slowdown by implementing large-scale fiscal policies
transitioning from middle-income to high-income status can be
to stimulate demand.
more difficult than moving up from low to middle income,” the
The only thing to stop a Chinese recession, which Buiter defines
World Bank concludes. b
Karl Hallding, Stockholm Environmental Institute
The reason for this
stagnation [in coal
consumption] is not because
of environmental policies;
rather it indicates a substantial
adjustment – some call it an
industrial collapse – in China’s
heavy manufacturing.”
DRAGONNEWSt/013
Sustainable investments
The vibrant side of the China story can be
found in the service sectors and in strategic
emerging industries, such as clean energy, new
energy vehicles, healthcare, internet, and so
on. These industries are the drivers of growth
today, according to Karine Hirn of East Capital.
Recently, the asset manager East Capital changed the
direction of its China fund to invest mainly in companies whose
products, services, technologies and infrastructure bring
sustainable development solutions to China.
“In China, where there is already a lack of sufficient
water and arable land for the world’s most populous country,
it will create serious threats to sustainable growth and
implicitly to social order if these challenges are not properly
addressed. This is why the Chinese government has started to
implement strong policy support and large investments in the
environment,” says Karine Hirn, partner of East Capital.
“As a result, the environmental theme for China offers
a strong potential for attractive returns with an investable
universe consisting of fast-growing and innovative companies,
many of which are upcoming global leaders,” she says.
Economists and analysts debate whether China is heading
towards a soft landing or a hard landing. Hirn does not believe
that China’s economy will collapse:
“China is not heading towards a hard landing scenario. The
ongoing structural adjustment process is mainly impacting
primary and secondary sectors and the government is
committed to restructuring them in an orderly way. At the
same time, there is a vibrant side of China that is often hidden:
the ‘New China’ characterised for example by the service
sectors and the strategic emerging industries, such as clean
energy, new energy vehicles (NEV), healthcare, internet, and
so on. These industries are the drivers of growth these days
and we will continue to see them contribute to a growing GDP
looking ahead.”
About 70 per cent of East Capital’s China fund portfolio
consists of shares listed in Shanghai or Shenzhen – socalled A-shares. Hirn points to Chinese companies that she
believes could have a great future and contribute to a more
sustainable China.
“We like Beijing Origin Water, for example – a leading
provider of membrane-based water-treatment solutions in
China. We also like BYD, China’s first auto manufacturer to
develop in the NEV business, as well as Huaneng Renewables,
a renewable-energy company with a focus on wind power
generation.”
China is already the largest clean-tech market in the world
and it is mainly dominated by Chinese domestic companies.
“Over the past 10 years, Chinese companies have been
demonstrating a very strong ability to climb up the innovation
14 DRAGONNEWSt/0
China is not
heading towards a
hard-landing scenario.”
Karine Hirn, East Capital
ladder and to offer solutions than can compete with foreign
companies. This is particularly the case in water treatment
and waste management technologies, electric vehicle battery
production, solar panels, wind turbine generators, high-speed
trains, LED lightning solutions, etc. The list is long and this
is reflecting the ultimate ambitions of the government to
create national champions that will be global leaders in their
respective areas within five years.”
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Sustainable manufacturing
QuizRR has developed an educational tool that
helps brand owners and suppliers to train their
employees to become more aware of rights
and responsibilities in the workplace.
Clothing has always played a big role in Jens Helmersson’s
life. After graduation from Uppsala University, he started to
work at H&M, where he gained experience in retail, purchasing,
marketing and production in countries such as Sweden, Turkey,
Romania, Bangladesh and Hong Kong.
Helmersson’s wife Helena also worked at H&M and when
she was appointed head of sustainability for H&M in 2010,
the couple moved from Hong Kong to Sweden. Helmersson
had spent 14 years with H&M and wanted to take on new
challenges. He found a job as purchasing manager at Indiska,
an India-inspired retail chain in the Nordic countries, where he
stayed for two years.
However, in Bangladesh a few years earlier, he met Sofie
Nordström, who at that time was producing training material
for global brands, such as videos for H&M’s suppliers, in which
they learnt about fire protection, safety and other important
workplace regulations.
In 2013, Helmersson and Nordström continued the
discussion on how they could use their experience to help
more workers. They came up with an idea to develop what
Nordström had worked with into a digital educational tool to
ensure decent working conditions and safe workplaces.
“Our idea was to combine videos with a quiz, all on tablets,
and create a tool that made it possible to not only educate
the workers but also measure sustainability progress,” says
Helmersson.
Helmersson and Nordström co-founded QuizRR (the two
“R”s stand for rights and responsibilities). Nordström runs the
company from Sweden, while Helmersson moved back to Hong
Kong with wife Helena and their two children last year, after
Helena became H&M’s global head of production.
QuizRR faced many of the hurdles that small startup
companies deal with. However, the interest was there from
some bigger companies, such as Clas Ohlson and Antonia
16 DRAGONNEWSt/0
Jens Helmersson, QuizRR
Our ambition is to
have trained two
million workers by 2020.”
Ax:son Johnson Foundation for Sustainable Development
(Axfoundation), which bought licenses in advance so that
QuizRR could finance building the product.
A business incubator, the Centre for Social
Entrepreneurship Sweden (CSES), also supported QuizRR with
legal advice, coaching and an office. A digital design firm,
Ocean Observations, halved its price for developing the tool.
“With the funding in place, which also included our own
savings, we could start to develop QuizRR 1.0. We went to
Bangladesh and China four times to evaluate the users’ ability
to understand the tool before spending any money on IT
development and we also produced videos in local languages
with local actors,” says Helmersson.
A pilot project that involved almost 3,000 training session
was held in China in the autumn of 2015, with participation of
managers and workers from 12 factories that supply brands such
as Lindex, MQ, Filippa K, Axfood and Intersport. A finished solution
was launched with kick-off meetings that were held in Shanghai
and Shenzhen in April this year and more than 50 factories, that
are suppliers to Swedish companies, have joined today.
A similar pilot project is also underway in Bangladesh.
“We believe that our solution comes at a right time,”
says Helmersson. “China is moving from being a low-price
manufacturing country to more value-added production, where
factories need to live up to taking more responsibility. Our
tool secures the employees’ understanding of workers’ rights,
workplace policies, health and safety regulations, fire and
building safety and workplace dialogue.”
In a short period of time, QuizRR has grown from three to
nine people, and earlier this year three financiers joined to help
the company with the funding.
“Our ambition is to have trained two million workers by
2020. We hope to open two new markets each year, with
Cambodia, Vietnam, Indonesia, Myanmar and Ethiopia next on
the list,” says Helmersson.
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Sustainable agriculture
A self-cleaning, moving floor for pigs, cows and
calves leads to healthier animals, increased profitability for farmers and, not least, huge environmental advantages. Moving Floor is now targeting China, which could be its next big market.
One day in 1995, the farmer Tommy Lindvall in Ekeby
municipality on the Swedish island of Gotland watched a TV
programme about gnues on the African savannah. Thousands
of gnues live together but are very rarely sick. The reason
is that they wander over large areas and never stay in their
own or others’ manure. Constant movement gives them much
better hygiene.
Lindvall thought about his own farm, which was home to
5,000 pigs, and the difficulties he had cleaning the barn floors
with water – a task that could only be carried out twice a day
by hand. It was not possible to move the animals, so he came
up with the idea of moving the floor.
After his invention was ready, he applied for his first
patent, which was quickly approved. Lindvall was surprised to
hear that no one had done this before.
Agriculture is the basis of human life but it also causes huge
negative environmental impacts. According to the Food and
Agricultural Organisation (FAO) of the United Nations, a cow
releases as much emissions as a car and a pig consumes a
half bathtub, or 170 litres, of water per day only for cleaning
its living area. Between 70 and 80 per cent of all antibiotics in
the world are used for animals. The FAO estimates that food
production needs to double by 2030, while the environmental
impact needs to decrease by 50 per cent.
The sustainability advantages of Lindvall’s invention,
Moving Floor, were enormous. It cleans the floor around 15
times per day, thereby preventing significant bacterial growth.
No water is used in the cleaning process: rather the manure is
transported away on rolling hoops.
However, running a farm is a time-consuming job and
Lindvall had little time to run a company on the side. In 2009,
he let his two daughters, Peg Söderberg and Katja Lindvall,
develop the business. The Moving Floor technique had been
approved by Swedish Board of Agriculture and systems were
developed for pigs, cows and calves. Today, some eight families
of patents in up to 28 countries have been approved.
Katja Lindvall, Moving Floor
“We’ve installed our concept at 100 farms in northern
Europe,” says Katja Lindvall.
“We’re collaborating with universities to prove the concept’s
functionality,” she says. “Tests have shown indications of a 2030 per cent increase in daily growth of calves, which not only
means healthier animals but also increased profitability for the
farmers. Furthermore, with our concept, ammonia emissions are
95 per cent lower compared to conventional systems.”
China could be a big future market for Moving Floor. Since
its launch in 2009, the company has sourced half of its
components in China for the manufacturing that takes place
in Ekeby. Prefabricated modules are delivered to the farms in
flat, freight-optimised packages. Mounting and installation is
done on-site.
As urbanisation has become an engine of future
development, China is now also focused on making the
agricultural sector more efficient. China’s State Council has
initiated goals for significantly changing the way the country’s
agriculture is running by 2030 – for example, by speeding up
the establishment of highly productive farms equipped with
modern facilities and managed with the assistance of modern
technology.
“Over the past year, we have noticed much increased
interest from China. At the moment, we are working on
establishing demonstration farms in China. Since our products
are based on modules, they work well in both big and small
farms,” says Lindvall.
Demonstration farms will be set up outside Beijing and in
Hainan and Shanxi provinces. The company is also collaborating
with China Agricultural University and Tianjin Animal Science
and Veterinary Research Institute.
“We are still a small company,
but if can get a breakthrough
in China we will probably
set up production there,”
says Lindvall.
With our concept, ammonia
emissions are 95 per cent lower
compared to conventional systems.”
18 DRAGONNEWSt/0
Sustainable fabrics
SpinDye has invented a process for manufacturing of fabrics, reducing water usage by 85
per cent and the use of chemicals by 73 per
cent, while demanding half the energy compared with conventional dyeing.
Andreas Andrén moved to China in the early 2000s, when he
and his brother, and later another Swedish partner, developed a
street-wear brand. They also sourced suppliers and conducted
quality control for other Swedish and European brands.
Eventually, in 2011, they sold their business to a Chinese
company but continued to work for the new owner who was
based in Hangzhou.
Back in Sweden, Andrén met with Axel Mörner and Martin
Berling, two entrepreneurs who had founded a company called
We are SpinDye (WRSD), or simply SpinDye. In October 2014,
Andrén joined the company as chief operating officer.
SpinDye’s vision is to dramatically reduce the textile
industry’s dependence of water.
“Our ambition is to become the world leader of sustainable
fabrics. With our technology, we’ve managed to reduce water
usage by 85 per cent and use of chemicals by 73 per cent,
with only about half of the energy consumption compared with
conventional dyeing,” says Andrén.
Spin dyeing is not a new technology. It has been used by the
automotive industry for interior textiles in cars, but SpinDye
has refined it so it suits clothing manufacturers, which
generally manufacture in smaller quantities and use much
thinner threads.
Conventional dyeing is normally carried out with a special
solution containing dyestuff, chemicals and large volumes of
water. Spindye’s technology takes water out of the process,
with pigments added to the spinning solution before the
solution is extruded.
Through this process, the colour pigments become a part
of the fibre, and the fabric gains excellent colour fastness that
stands up to light, washing, rubbing and perspiration.
“The end-consumer normally doesn’t want to pay extra for a
sustainable solution, so it should be considered a bonus. Today,
customers also expect their suppliers to work in a sustainable
way. That’s why we can’t rely on simply being sustainable –
we also have to show that the performance is better with our
technology. Using our SpinDye process the colours become
part of the fibre resulting in outstanding colour fastness
performance and gives garments a longer lifetime,” says Andrén.
SpinDye’s suppliers, such as master-batch manufacturers,
spinners, weavers and knitters, are all located in China and the
company delivers finished fabrics to its clients.
One of SpinDye’s first customers is Fjällräven, a Swedish
company specialising in outdoor clothing and equipment; for
example, the popular lightweight Kånken
backpack. Fjällräven is using SpinDye’s fabrics
for a new version of Kånken that will be
released later this year.
SpinDye is still in the startup phase but
has eight employees in Stockholm and three
in China.
“Conventional dyeing of textiles causes
around 20 per cent of the whole world’s water
pollution, so our technology could have a huge
impact,” says Andrén.
Our ambition
is to become
the world leader of
sustainable fabrics.”
Andreas Andrén, SpinDye