In China, Pollution Concerns Weigh on Key Market Sectors

January 3, 2014 Updated: April 24, 2016

In China, Pollution Concerns Weigh on Key Market Sectors

Recent weakness in Chinese stock markets has been driven in part by declines in the traditional energy sector.  Concerns have been raised as elevated pollution levels in city centers are starting to weigh on prospects for certain stock groups.  Shanghai’s air quality index reached  above 500 for the first time since government ordinances began limiting factory production timetables and the number of vehicles allowed to be on the road at any given time.  Numbers this high fall into the “beyond index” category, according to the website for the U.S. consulate in the city, and in the “severe” category for the Shanghai government’s own six-tier monitoring system. 

The pollution fog has led to many inconveniences (for example, flight cancellations at multiple airlines).  But the market has responded as well, selling off stocks like China Shenhua Energy Co., which is the country’s largest producer of coal.  Energy shares in the Shanghai Composite Index (SHCOMP) have shown some of the most pronounced weakness, as the latest environmental changes have led to speculation that further restrictions might be placed on the use of fossil fuels.  Shanghai-based companies as a whole have also made up an area of weakness within the SHCOMP, as potential government restrictions are seen weighing on growth prospects well into next year.

These trends market something of a reversal, however, for companies based in Shanghai as their stocks benefitted most of this year from government economic reforms and zoning approvals for expanding construction activities.  The Chinese government is expected to provide additional details later this month, outline the specifics for how these reforms are scheduled to proceed.  But the country’s inability to rein in pollution could have a diminishing effect, and alter these plans in ways not previously anticipated by the investment markets.  Later this month, we will also have official projections for yearly growth targets, so it will be interesting to see the way these issues are addressed by the Chinese leadership.

Stocks to Benefit

But while most of the activity connected to the pollution problems in China is likely to weigh on growth prospects on both the corporate and national levels, not all companies are seen losing as a result.  “One positive example can be seen in Fujian Longking Co.,”  said Haris Constantinou, currency analyst at TeleTrade., “a company that manufacturers pollution control equipment.”  Lately, Fujian Longking has traded in a near inverse correlation relative to the rising pollution index, and gained nearly 1% in the session after Shanghai’s air quality index was seen rising into the unmanageable category.  But Fujian Longking is not the only sector example that has shown strong gains in these scenarios.  So, going forward, it will be important for investors focused on emerging markets to look at clean energy alternatives when looking for long term growth opportunities in stocks.