In January 2008, I journeyed more than 1,000 miles by train and bus from Shanghai to Beijing, through uninterrupted smog. Mile after mile, villages emerged and disappeared in the gloom. They all had one thing in common: smokestacks. This is part of the legacy of Mao’s Great Leap Forward in the late 1950s, when peasants were ordered to build village smelters and melt every metal item within reach, from kitchen utensils to farm tools, in order to boost the nation’s industrial might. As a result, heavy industry now exists in every nook and corner of the country. For decades, these far-flung factories were under centralized communist control, but in the late 1990s, the Beijing government decentralized the state-owned sector and handed the reins of industry to a hodge-podge of quasi-governmental owners: provincial, municipal, county, and village authorities. They’re still “state-owned,” but they now answer to local bureaucracies, not the central government.

One morning, I toured Luancheng, an industrial suburb of Shijiazhuang, the capital of Hebei province. My host was Zhang Zhongmin, the leader of Green Friends, a local environmental group. As we drove through factory landscapes virtually identical to Nanjing’s, Zhang informed me that the local government had shut down all power plants smaller than 300 megawatts. Shortly after he made the assertion, however, we came upon a brand-new power plant—a small one. Zhang later found out that the plant had been authorized by the local government, “because it was needed for the industrial park.”

Days later, in a Shijiazhuang teahouse, I interviewed the deputy director of the Hebei Province Environmental Protection Bureau, Yang Zhiming. He was a friendly, compactly built man, with bushy eyebrows that twitched as he spoke. I asked him whether his province—home to 68 million people and much of China’s coke, chemical, and aluminum industries—had complied with the central government’s energy intensity reduction edict. “This is very difficult,” he answered, brows jumping. “As you know, there are many different elements that are not yet in full coordination.” I then asked whether he knew who owned the power plant we had discovered, and who owned the chemical factories in the industrial park. He answered with a thin smile. “This also is difficult, but we are making our best efforts to find this out.”

Later, I asked Zhang, the environmentalist, whether he understood who owned what and who was in control. He was silent for a long moment. “Ah. That is difficult,” he said finally, his normally expressive face going blank. Having perhaps weighed the consequences of saying more, he changed the subject.

Exchanges like these might seem like the evasions of people who feel their necks are on the line, but even experienced financial analysts in Beijing say it’s nearly impossible to understand the chains of command in Chinese business. “The relationships of ownership and control are often very unclear, and this is a real problem for the central government in managing energy consumption,” says Arthur Kroeber, co-director of Dragonomics, a Beijing consulting firm. The central government can still make state-owned firms like Sinopec or China Aluminum meet national goals, he explains, but “it isn’t able to alter the behavior of something like Guizhou Aluminum Smelter #2 because there are so many of them. Some provinces, especially in the interior, mainly care about economic development, and the central government has no incentive or cost structures to change that.”

The standard Western response to the growing environmental threat from China has been to throw money at it—a state of affairs that suits China’s leadership but serves little functional purpose. Consider: China is currently the single biggest recipient of foreign aid through the Clean Development Mechanism (CDM), an arrangement within the Kyoto Protocol that allows developed countries to gain carbon credits by investing in emissions-saving projects in developing countries. (In the past two years $15 billion in CDM credits have been registered to China.) Now consider that China currently has the world’s greatest cash reserves—$1.6 trillion and growing by about $30 billion per month. Furthermore, because state-owned banks shovel vast amounts of loan capital to the same quasi-autonomous firms they financed for decades under orthodox communism, the country’s industrial corporations are likewise drowning in capital. Money, it seems safe to say, is not China’s problem.

page 3 | 4