PARIS: An incident in China in early December offered hope, to some at least, that the trend of environmental degradation that has accompanied the country's rapid industrialization might soon change.

After sustained protests over the construction of a large power plant and the sale of a local lake, residents of Dongzhou, a fishing village near Hong Kong, seized the plant. The police moved in, and as many as 20 residents were killed as the police opened fire in the ensuing melee, according to reports disseminated globally.

The incident was the deadliest clash yet in a series of confrontations between officials and local residents over the construction of factories, often on land seized with little or no compensation.

As the "not in my back yard" phenomenon spreads in China, policy makers there have woken up to the fact that the destruction of the environment has been so severe that, unless something gives, the country will not be able to sustain the recent gains in its standard of living.

Environmental damage from pollution is costing China the equivalent of 7.7 percent of gross domestic product annually, according to an estimate in a study on Asia's infrastructure needs published last year by the World Bank, the Asian Development Bank and the Japan Bank for International Cooperation.

Other sobering statistics in the report, called "Connecting Asia," include estimates of 6.4 million work years lost annually in China to air pollution, 178,000 premature deaths in major cities every year caused by the use of high-sulfur coal and the fact that 52 urban river stretches have been so contaminated that they are no longer suitable for irrigation. Those numbers do not necessarily incorporate the effects of deforestation, overgrazing, dust clouds, desertification and the strains of the great increase in internal migration and tourism.

"What is happening now in China is a watershed event in industrial evolution," said George Sorenson, the founder and chairman of FE Clean Energy Group, a private equity fund management firm in Darien, Connecticut.

Sorenson said that in terms of environmental standards, "China is now where the U.S. was in the late 1960s." Events like the waste-clogged Cuyahoga River in Cleveland catching fire in 1969 proved to be catalysts for an environmental movement and a series of landmark laws from 1970 to 1980 like the Clean Air Act, Clean Water Act and the Superfund toxic waste cleanup law, changing the way U.S. companies conducted business.

A similar process was seen in Japan, spurred by the Tokyo Olympic Games of 1964, and in South Korea, when Seoul was host of the Olympics in 1988. There is much hope that the 2008 Games in Beijing will prove as seminal in China's environmental development.

There are some encouraging signs, according to those familiar with the scope of the problem. In November, China quantified what it intends to spend on the cleanup. The State Environmental Protection Administration estimated that the government would spend around $156 billion in environmental protection from 2006 to 2010.

Bjorn Stigson, president of the World Business Council for Sustainable Development in Geneva, has been attending China's Council for International Cooperation on the Environment, a body bringing together experts from China, other Asian countries and the West, for the past eight years. He was at the last session in December and was heartened by the government's seriousness, but he warned that China's capital markets are still underdeveloped and that decisions take a long time to filter through to the right region or department.

As part of his work for the council, Stigson was chairman of a group of businessmen and officials that studied the refining, paper, cement and sugar sectors in China and found that in many cases it would be futile for China to simply add new technology in the hope of cutting down on pollution, as plants and technology are too usually old.

"To move toward international standards, the real need is to close old plants and rebuild from scratch," he said.

The study by the three institutions estimates that East Asia will need to spend $162 billion annually through 2010 on upgrading and maintaining its infrastructure to maintain projected economic growth rates. China accounts for $132 billion of that figure. For all of East Asia, the total includes $89 billion on electricity, almost $7 billion on water and $7 billion on sanitation - areas that offer great potential for the latest environmental technology.

Another report from the Asian Development Bank estimated that the global market for environmental goods and services will grow to $836 billion in 2015 from $607 billion last year. Of the total, Asia would account for $212 billion in 2015.

Figures like that are helping to open the eyes, and the checkbooks, of global investors - and, according to bankers, not a moment too soon.

"It's very clear that there's not enough private-sector involvement yet" in the environmental sector, David McCauley, senior environmental economist at the Asian Development Bank, said by telephone from the organization's headquarters in Manila. "Private capital will increasingly be required along with new institutions to channel it. The innovation is only just starting."

There are three main methods for overseas players to profit from environmental goods and services in China. A number of venture capital or private equity groups are buying into specific projects in the country. Investors are also buying direct stakes in those companies that are entering the market with their new technologies. Finally, traditional mutual funds and exchange traded funds offer smaller players a broader and less risky entry point.

The basic division in environmental companies entering the market is between those selling goods and offering services. The goods companies are directly selling their own innovations to governments or companies. Services companies are coming in to advise with the cleanup.

"If you win one contract, it can really snowball," McCauley, of the Asian Development Bank, said. The bank invests directly in venture capital funds, provides partial credit guarantees for local projects and tries to support intermediaries like fund managers willing to take on risk.

Sorenson's FE Clean Energy Group is currently putting together an Asia fund, which Sorenson expects to total around $75 million. Sorenson expects his Asia fund to return around 25 percent annually for the medium term from what he calls an "annuity-like investment." Typically, returns from investments in Asian emerging market renewable energy projects are 18 percent to 24 percent, he said.

Another private equity fund that offers a more specific exposure to environmental technology in the country is the China Environment Fund, set up in 2001 by Tsinghua Venture Capital Management, a fund management company affiliated with Tsinghua University in Beijing. Catherine Cao, executive director of the firm, said that its third fund should be ready by the end of 2006 and aims to raise $50 million. Two previous funds, of $13 million and $30 million, focused on recycling, energy efficiency, clean production techniques, degradable packaging and water treatment.

"There's a huge potential market," Cao said. "The door in China is opening wider and wider. It's not just a profit for investors. We are trying to solve a serious problem with market solutions."

The easiest means of entry for small investors still remains the mutual fund. The Impax Environmental Markets fund of £45 million, or $79 million, rose by around 32 percent in 2005. Among its biggest holdings are Casella Waste, a U.S. waste disposal company, Kurita Water of Japan and Horiba, a Japanese environmental testing company.

Ian Simm, the chief executive of Impax, said another means of entering the market would be to buy big utilities, especially European companies. Suez, the French utility, and Veolia Environment, another French company, have been active in water projects in China and East Asia. RWE, a German utility that took over Thames Water in 2000, is also heavily involved in Chinese projects.

For a stand-alone investment in a Chinese environmental company with prospects, Cao recommends one of her holdings, Shenzhen Dongjiang Environmental, listed in Hong Kong. Its share price has risen 24 percent in a declining broader market since May 2004.

Another company making strides in China is Zenon Environmental, a Canadian company, Simm said. In the wind sector, Nordex of Germany has a strong presence in China. Solar power is also a growing sector in China. Here, Japanese companies have made inroads, particularly Kyocera and Sharp. Analysts said their business might improve further if, as is hoped by all, more sunlight is soon able to penetrate the country's smog.

Source: http://www.iht.com/articles/2006/01/06/business/wbchina.php