How to Respond

Faced with growing regulatory scrutiny, companies have several strategic alternatives. To avoid environmental liabilities, for example, a company may join an industrial park to share the costs of pollution control with others, Du says. As a temporary measure, companies can move from a coastal province where enforcement is getting tougher, and relocate to an inland province where regulatory enforcement is still relatively lax.

For some, the new scrutiny may actually create new business opportunities. Large, efficient cement producers, for example, may be favored right now as the government tries to shut down dirty, small-scale cement factories. "Every small city in China has its own cement factory, and its own brick factory and its own steel factory, all of which -- because they are so small -- are sub-scale and generate way too much pollution and use way too much energy," says Michael.

The government may come to larger producers and say, "If you can add X capacity, we will shut down at least that much capacity of smaller, inefficient producers," Michael predicts. These mom-and-pop factories might seem like an odd target for government ire, given that there are so many larger factories in China. In fact, they may represent one of today's biggest opportunities for greenhouse gas reduction in the world: China's cement sector accounts for 5% of the world's total carbon emissions, according to World Resources Institute estimates.

Similar fragmentation -- and eventually perhaps, similar opportunities -- exist across many industries. The irony, according to some historians, is that one of the justifications of the Great Leap Forward Campaign, which promoted the development of decentralized industry, was a desire to limit the pollution that had accompanied previous industrial revolutions.

Looking ahead, Pinney also sees a variety of new business opportunities arising as a result of more serious environmental regulation. "Because of the energy subsidies and higher tolerance for pollution, companies haven't had much incentive to adopt new technologies and become more innovative in that regard." That should change in the medium and longer term as domestic energy prices creep closer to the market price. And as incentives for cleaner growth increase, he says, companies will respond.

Similar opportunities for environmental technology transfer may exist outside of China, too. One group, the Berkeley, California–based China Rivers Project, notes that the Chinese are now beginning to export their construction skills in large-scale infrastructure projects, such as dams. While the worldwide economic slowdown may dampen the need for these projects in the short term, over the long run demand for such work will be strong in many places that are starved for better infrastructure. Many of these projects reportedly don't meet international environmental standards or labor standards, however, and that will create a new set of problems for already beleaguered emerging market governments.

More generally, Lee is confident that Chinese manufacturers will weather the shift toward tighter enforcement of environmental quality. "Yes, there's going to be an impact, but will the impact be prohibitive? I don't think so."