Courtesy of Knowledge@Wharton

Ten years ago, the skies over Hong Kong were often blue, according to Wharton management professor Marshall Meyer. "The water was questionable, but the air was clear." Today, the skies are permanently gray -- covered with smog from southern China's factories -- and residents say the only clear days are during the Chinese New Year week, when workers take a rare break for the holiday. "Hong Kong is utterly polluted," Meyer says.

Those busy factories have made China one of the world's most important manufacturing hubs in just two decades. This year, in fact, China is forecast to displace the U.S. as the world's number-one producer of carbon dioxide, one unhappy measure of that manufacturing strength.

Now, some wonder if the country can take much more smog-driven success. Over half of China's shallow groundwater is contaminated, according to the Chinese Geological Survey and seven of the world's 10 most-polluted cities are in China, notes a 2005 World Health Organization study.

In the short run, the global downturn may keep the Chinese sky a bit bluer, but in the long-run, the old idea that the only metric that mattered was GDP growth seems likely to end. For one thing, it's getting expensive -- some analysts estimate that costs associated with environmental degradation shave 12% off total GDP every year. For another, many Chinese are becoming extremely concerned about the environment, which is putting pressure on the local and national governments to change: In 2005 alone, there were 51,000 demonstrations of more than 100 people protesting the contamination of land and water, according to the latest available government statistics.

For manufacturers, the government's gradual shift in emphasis from wanting growth at all costs to growth without a high environmental cost creates new challenges and opportunities. In this article, part of a special report on manufacturing in China, experts at Wharton and The Boston Consulting Group (BCG) weigh in on the government's response to the environmental crisis and what stiffer regulations will mean to the world's biggest shop floor. Who will gain as China cleans itself up? Who will lose? And what opportunities will this historic shift in national priorities create?