GETTING TOUGH ON THE ENVIRONMENT

C O N F I D E N T I A L SECTION 01 OF 02 SHANGHAI 000415

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DEPT FOR EAP/CM, INR/B AND INR/EAP
NSC FOR WILDER AND TONG

E.O. 12958: DECL: 7/5/2032
TAGS: PGOV PINR SENV EINV ECON CH
SUBJECT: GETTING TOUGH ON THE ENVIRONMENT


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CLASSIFIED BY: Kenneth Jarrett, Consul General, U.S. Consulate,
Shanghai, Department of State.
REASON: 1.4 (b),(d)




1. (C) Summary: During a June 28 luncheon with the Consul
General and the Pol/Econ Section Chief, three of our more astute
business contacts assessed that Beijing was starting to get
serious about environmental protection. Beijing had begun to
tell local leaders to accept lower growth for a cleaner
environment. Moreover, environmental protection had become a
serious measure of cadre evaluation, with performance directly
tied to the clean-up efforts of the largest polluters in their
areas. One of the major problems in the central government's
efforts to clean up remained the relatively weak oversight
capability of the State Environmental Protection Agency (SEPA).
End summary.

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Environment Versus Development
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2. (C) In a Consul General-hosted luncheon on June 28, three
Shanghai contacts agreed that there seemed to be a greater focus
on environmental protection trickling down from Beijing.
Citibank China CEO Richard Stanley said Citi's economists
estimated that the cost of environmental degradation was 3
percent of overall GDP growth. According to Shanghai Municipal
Government Office of Financial Services Deputy Director General
Fang Xinghai, in the past, Beijing set environmental goals that
were only carried out by a few localities because the goals were
not accompanied by specific directions. Moreover, although
Beijing had been touting the concept, no one really knew what
was meant by "Green GDP." In the past, local government
officials had received no specific directives from the central
government; they just heard about the "Green GDP" commitments in
the media.


3. (C) Beijing was now starting to give clearer direction. For
instance, Fang said he had recently met with a deputy party
secretary of Wuxi in Zhejiang Province who said that the central

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government was giving specific direction to accept lower
economic growth for higher environmental protection. CLSA China
Macroeconomist Andy Rothman added that Sinopec and other large
state-run companies had recently been purchasing environmental
clean-up equipment that, up until a few months ago, they would
not have considered.

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Developing Green Cadres
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4. (C) Rothman said CLSA had heard that environmental
protection was now one of the top five criteria for evaluating
cadres. According to Rothman, Beijing would soon be monitoring
the largest local industries for pollution emissions and energy
usage. The performance of these companies would be directly
tied to the evaluations of local leaders. So, for instance, if
Shanghai's Bao Steel did not meet its environmental targets for
the year, Shanghai leaders would be held accountable (Note: It
was unclear if this referred to party or government leaders or
both. End note.). The idea, according to Rothman, was to
create personal disincentives for local leaders to take bribes
from big polluters or "look the other way." If leaders knew
they would be held personally accountable ("and take a bullet in
their head," as Rothman so colorfully put it),they would be
more likely to crack down on polluters, even if it meant
sacrificing some economic growth, for the sake of their careers.
Rothman also said, in the absence of agreed criteria for Green
GDP, there was talk of sending in central government teams
periodically to monitor air and water quality.

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SEPA Needs to Grow Up
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5. (C) Fang noted that one of the outstanding major problems
with enforcing environmental protection was the disconnect
between the State Environmental Protection Agency (SEPA) and the
local Environmental Protection Bureaus (EPB). Under the current
structure, local EPBs were horizontally integrated with local
governments, not vertically tied to SEPA. This created a
situation where the local environmental watchdogs were inclined
to favor local interests over central directives. Fang noted a
case in Zhejiang Province where a company met environmental

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quality standards by diluting its wastewater with clean water.
Stanley laughed, saying it wasn't so different from some of the
efforts to reduce nonperforming loan ratios in the financial
sector by making lots of new loans.


6. (C) Fang said that there were, however, periodic discussions
in Beijing to strengthen SEPA. Some were advocating elevating
SEPA to full ministerial rank, vice its current "administration"
status. There was also discussion about making local EPBs
report directly to SEPA. Fang did not believe that things "were
to that point" yet.

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Comment: "People First" Means a Cleaner China
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7. (C) Central leaders are beginning to realize that the costs
of development at all costs may be too high. This new focus on
"green" cadres and strengthening China's environmental
protection regime comes during a period of increasing
nationwide--but not interrelated--protests over environmental
concerns and local catastrophes and reflect a growing concern
that polluted water and air could ultimately destabilize China,
despite economic gains. Concern over the environment is part of
President Hu Jintao's Scientific Development Concept and
Harmonious Society construct, which utilizes a "putting people
first" philosophy--part of the party's survival strategy of
doing whatever it takes to keep the public content and less
likely to call for regime change. The party is also aware that
its credibility also hinges on delivering continued economic
gains. Like a patient battling multiple life-threatening
diseases, the Chinese leadership is seeking to cure the most
pressing ailment first, with the hope that the side effects of
the treatment won't exacerbate its other conditions.
JARRETT