MEE declares full steam ahead on China’s environmental initiatives, including an NGDF, private sector finance, Yangtze River conservation, and the social credit system.

By Paul A. Davies and Zoe Liu

Xu Bijiu, director general of the general office of China’s Ministry of Ecology and Environment (MEE), has given the clearest signal to date that China’s environmental ambitions will not be impeded by the projected slowdown of the Chinese economy.

Dismissing suggestions that increased environmental protection had led to downward pressures on the economy in recent years, Xu stated that China has, in fact, benefitted from a “harmonious, win-win relationship” between economic development and increased environmental protection. Xu confirmed that the pollution targets MEE set last year for the end of 2020 would not be altered, despite the fact that some areas of the country (such as Hunan in south-central China) missed their PM 2.5 air quality targets in 2019.

Xu also took the opportunity to reinforce MEE’s view of the importance of green finance to Chinese investment in 2020 and beyond. China will officially launch a national green development fund (NGDF) in 2020, which will focus on green investments within China. The NGDF is the first Chinese investment fund to have a primarily green focus, although other investment programmes, such as the Belt and Road Initiative, have, in recent years, given increased consideration to their environmental impacts.

In addition to the NGDF, Xu emphasised the importance of private sector finance in achieving the sustainable economic goals that China has set for the country. This approach mirrors that highlighted by the EU in its recently released green deal, and points to the growing international consensus that governments alone do not have the resources required to achieve a transition to a sustainable economy.

Further, on 27 December, a draft law on Yangtze River conservation (the Draft Law) was submitted to the National People’s Congress Standing Committee for first reading. The Draft Law acknowledges the importance of national legislation to protect the ecological integrity of the Yangtze River, and focuses in particular on flood prevention work. However, during discussions at a panel of Chinese lawmakers (also on 27 December), participants highlighted that a number of provisions should be added to the Draft Law to reflect the importance of “social participation” in ensuring the river is protected. This social participation would include a number of methods that would seek to influence the lifestyles of people across the region, such as additional education about the importance of Yangtze River conservation in schools, and the introduction of a national award for local authorities, institutions, and individuals, for outstanding contributions to the conservation of the Yangtze River.

This acknowledgment of the importance of social action at a local level is further evidence of the Chinese authorities’ recognition that centralised action can only be part of the solution when it comes to environmental protection, in much the same way as it can only form part of the solution in the transition to a sustainable economy. It will be interesting to see whether, and how many of, these proposed additions to the Draft Law are incorporated by the time the law is enacted.

The consideration of social issues in the context of the above is also indicative of Chinese authorities’ broader approach to environmental regulation. China’s corporate social credit system, which authorities will continue to roll out in 2020, will encompass environmental protection as one of its regulated sectors. This will likely lead to a company’s environmental performance being a vital component of its overall social credit score, meaning that bad performances in the environmental space have the potential to lead to significant, business-wide ramifications, such as the removal of tax breaks, increased factory inspections, and restrictions on obtaining licences.

In conclusion, China’s continued focus on the importance of environmental protection is notable, even in the face of a projected slowdown of the economy. The various initiatives outlined in this post, such as the roll-out of the social credit system, will ensure that Chinese environmental regulatory landscape will be a key focus for market participants in 2020 and beyond.

Latham & Watkins will continue to monitor developments in this area.

This post was prepared with the assistance of James Bee in the London office of Latham & Watkins.