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Despite foul air and economic slowdown, China’s capital is still in business

In December, the dismal state of Beijing’s ecosystem was highlighted by two pollution red alerts issued by Chinese authorities. As grey smog enveloped the Chinese capital, citizens donned their face masks, authorities ordered cars kept off the road, schools closed and traffic was restricted.

It was the latest embodiment of concerns that Beijing may no longer be capable of handling the cost of its rapid expansion and uneven economic growth. Despite attempts to curb pollution, the city saw only 186 days with air quality meeting the national standard in 2015, according to a report by Business Standard. Perhaps worse, the American Chamber of Commerce’s annual survey showed that at the outset of 2015, 77% of companies felt less welcome in China than a year ago, up sharply from 47% as reported in early 2015.

Yet those who do business in Beijing hardly expect such malaise to rob the city of its enduring role as a key point of contact with policymakers for multinationals in China—even if the haze is going nowhere fast.

“Beijing prioritizes growth over environmental issues,” Alicia Garcia-Herrero, Chief Economist for Asia-Pacific at French investment bank Natixis, told China Economic Review. Garcia-Herrero said that while authorities were taking steps to foster a cleaner environment following the recent spell of heavy pollution, “we see that these kinds of commitments only come after the government has fulfilled its economic goals.”

Dirty money

Pollution in Beijing remains a chief complaint among multinational firms’ upper management, and in 2015 the local government took a tougher stance on combating polluters and improving the climate in the capital. Needless to say, improving air quality in the city has proven a challenge, leaving doubts as to how much effect government measures truly have. Nor are all of the obstacles within Beijing’s power to clear away.

First, air pollution in the city is caused by regional factors: According to data released by the Ministry of Environmental Protection in 2014, eight of China’s ten most polluted cities are located in the Beijing-Tianjin-Hebei region. In recent years, coal consumption in the region has eclipsed that in the Yangtze River Delta region and the Pearl River Delta regions.

That means reducing smog depends on effective cooperation between governments in Beijing, Tianjin and Hebei on enforcing environmental regulations, said Tin Sun, head of research at property consultant CBRE Northern China. That could take a while.

“The reduction of air pollution in Beijing is expected to depend on the long-term upgrading and enhancement of the urban and regional industrial sector,” he said. “London issued the Clean Air Act in 1956, but air quality did not significantly improve until the 1970s. Elsewhere, it took Los Angeles more than 30 years to solve its air pollution after enacting legislation in the middle of the 20th century.”

The timing for a move away from coal is also inopportune, as the mineral remains the chief power source for China’s manufacturing industry—now under considerable stress thanks to shrinking margins, but which still contributes more than 40% of GDP growth. Nor does a shift to services require that coal will be abandoned as an energy resource.

“Even though authorities wish to wash out the importance of the manufacturing sector, the highly volatile nature of services [sectors such as finance] would mean the former is still an important source of growth in coming years,” Garcia-Herrero said, adding that “under such reliance on the secondary sector, we don’t think the problem of pollution will be significantly reduced.”

Hardship posting

The question remains of how much air quality is actually affecting Beijing’s work space environment. In answer to that query, CBRE conducted a survey in 2015 to more accurately gauge the impact of poor air quality on the Beijing real estate market.

Companies cited employees’ health as their biggest concern related to air pollution, with 68% of respondents saying they believed that “air pollution has been threatening employees’ health and work efficiency”. In addition, 60% of respondents believed that “air pollution has made senior expatriates less willing to work in Beijing”.

Senior-level expatriates usually have more control over their location and are therefore more likely than local employees to relocate due to air pollution. “Accordingly, the number of such expatriates based in Beijing has been declining over the past two years as concern over poor air quality has grown,” said Sun.

At the same time, leasing activity and net take-up have both declined. Despite the assumption that the two phenomena are directly linked, demand for office space in Beijing remains strong, according to CBRE. Sun stated that there currently is no evidence to suggest any direct link between lower net absorption and poor air quality.

“Leasing activity in Beijing has been suppressed in recent years due to the lack of available space and increasing rental costs, both of which have had a far more significant impact on occupier decision making than poor air quality,” he said.

Staffing up

According to Lulu Zhou, Head of the Beijing office at recruitment firm Robert Walters, many have questioned if the rapid growth of second and third tier cities are making Beijing a less attractive option to local job seekers that might prefer to work closer to their hometowns. As people put a greater emphasis on quality of life, this is certainly factoring in to an increasing number of cases.

For international job candidates that tend to put a high emphasis on their work-life balance and quality of life, Beijing’s air pollution and traffic congestion are major deterrents. “To counter these concerns, companies are adopting creative strategies to attract and retain talent, for example, offering flexible work arrangements for employees to avoid traffic,” he noted.

Nevertheless, world cities like Beijing still promise economic opportunity and modern lifestyles that second and third tier cities simply cannot offer. “Particularly for mid to senior-level professionals, Beijing and Shanghai are still considered the top choices for job seekers in China.”

Just visiting?

Beijing’s modern landscape can be traced directly to the 2001 bid to host the 2008 Olympic Games. The city’s victory put the capital under the international spotlight, as the leadership quickly poured investment into major infrastructure and facilities projects, boosting Beijing’s connectivity and creating channels for further development.

Construction also means destruction. Massive swathes of the city’s historic neighborhoods were razed to transform winding hutong alleys into modern bastions for the kind of high-profile international meetings and events China’s leaders are so eager to host. Linda Wu, General Manager of Sunrise Kempinski Hotel in Beijing cited the 2014 Asia-Pacific Economic Cooperation (APEC) summit as a prime example of Beijing’s capacity to act as a world stage for top leaders from around the globe.

Despite slowing economic growth, Sandy Wang, General Manager of the city’s Northeast Marriot Hotel, maintained that hoteliers and investors still see plenty of potential in Beijing, in part due to the fast growing domestic tourism and strong business travel markets. The capital was selected in August to host the 2022 Olympic Winter Games, an opportunity Wang suggested would “further bolster government investment into the city.”

Indeed, Sellen Zhang, Beijing Deputy City Manager of Ascott China seems unperturbed when it comes to the city’s serviced residence industry. Despite the economic slowdown and environmental concerns, Zhang believes that “based on Beijing’s huge economic capacity, and influenced by the increase in both tourism and foreign investment, the serviced residence industry has seen steady growth in recent years.”

Striking a balance

However booming business may be, Garcia-Herrero notes, China will be put on an even more difficult path when it comes to balancing economic growth and protecting the environment in the face of the current slowdown.

In 2015, overall growth of the Chinese economy decreased to 6.9%, marking the weakest pace since 1990. Looking ahead, she predicts China’s real GDP to expand at 6.7% in 2016. “With the goal to double GDP by 2020, there is limited room for a slowdown and the Chinese government is paying efforts to keep economic indicators in check – at least for the headline GDP.”

With such focus on an ailing growth rate, environmental concerns are being put in second place—and even if they could be prioritized, there would still be an enormous regulation-implementation gap to be closed. But while it may be cold comfort to those who have to breathe its air, business momentum in the nation’s capital, at least, remains intact. 


Authors: Viola Rothschild, Maurits Elen

Editor: Hudson Lockett (@KangHexin)

 

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