China's Circular-Economy Push Addresses Waste Reduction and Overcapacity

Fitch Ratings-Hong Kong/London-17 August 2021: China’s inaugural Circular Economy Roadmap could drive long-term corporate shifts to reduce industrial waste, improve resource efficiency and tackle overcapacity in key industrial sectors, Fitch Ratings says.

The July 2021 roadmap released by the National Development and Reform Commission (NDRC) encourages corporates to improve recycling facilities and use clean production technologies and green designs to contribute to a circular economy by 2025. The plan covers industrial sectors such as steel, cement, metals and mining and petrochemicals, as well as downstream sectors, including construction, electronics, autos, plastics and packaging.

The NDRC aims to increase the productivity rate of major resources, including fossil fuels, steels, metals and biomass, by 20% from 2020, meaning higher economic output with the same resource consumption, with energy and water consumption per unit GDP to be reduced by 13.5% and 16%, respectively. Efficiency targets for crop straw, solid waste, scrap paper, steel and metals are also defined.

China faces higher pressure to tighten regulations on industrial production and waste disposal due to rising waste imports and rapid economic development. In 2017, it issued a ban on 24 types of solid waste imports.

Fitch expects the roadmap to prompt a reduction in persistent overcapacity in certain sectors, aligning objectives with China’s supply-side reforms aimed mainly at the steel industry. Industrials will face higher regulatory pressure during the 14th Five-Year Plan (2021-2025) to cut carbon emissions, consolidate industry structures, and boost energy efficiency. Targets to improve recycling rates of solid waste, scrap steel and metals will help address the environmental and waste issues from these sectors.

Improving self-sufficiency of critical major resources, such as oil, natural gas and metals, is another priority of the roadmap. China is looking inwards to boost domestic production and consumption as a consequence of growing trade tensions and disruptions from the Covid-19 pandemic. A circular-economy strategy highlights the government’s shift towards the domestic market by enhancing regional resource security and industrial products’ profitability.

Fitch expects the roadmap to encourage industrial-material producers to control production, switch to cleaner fuels, upgrade recycling technologies and improve scrap collection, which could reduce the need for primary resources in the medium term, and support the search for cleaner and more resource-efficient alternative materials. Implementing these changes could add cost pressure on performance metrics

Downstream sectors that use primary materials face higher costs as they replace primary materials with cleaner options and increase capital and operational expenditure to establish or expand recycling facilities. The roadmap also points to the need to establish a robust “remanufacturing” industry that extends the lifespan of original products, particularly in industrials, autos and electronics.

We think regulations will be a key driver of investments in advanced technology to improve efficiency, green product design and recycling infrastructure. Related regulations to tackle waste are still being developed by various ministries and local governments. Fitch’s previous report highlights China’s efforts to ban single-use and non-degradable plastics by 2022, and we expect the government to release further initiatives to increase recycling of plastic waste.

Policies to support circular-economy projects could include fiscal support, tax benefits and green finance tools including bonds, loans, trust and insurance. So far, only a few cement, steel and construction companies have issued green bonds. We expect more Chinese issuers to tap the market in the coming years amid the policy push for a circular economy and carbon neutrality.

The circular-economy policies could be relevant to Chinese corporates' credit profiles in the longer term, via the “Waste and Hazardous Materials Management” elements under Fitch’s ESG Relevance Scores, reflecting cost pressures linked to policy tightening in the future. However, the near-term credit impact is limited, as there are no credit relevant impacts recorded (ESG Relevance Scores of 4 or 5) for this element among Fitch-rated Chinese corporate issuers.

Contact:

Jingwei Jia
Research Associate, Sustainable Finance
+852 22639843
Fitch (Hong Kong) Limited
19/F, Man Yee Building,
68 Des Voeux Road Central, Hong Kong

Marina Petroleka
Senior Director, Sustainable Finance
+44 (0) 20 3530 1072

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Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com

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