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COMMENT: DOES THE ESTABLISHMENT OF THE MINISTRY OF ENVIRONMENTAL PROTECTION MATTER FOR ADDRESSING CHINA'S POLLUTION PROBLEMS? EMPIRICAL EVIDENCE FROM LISTED COMPANIES.

In "Administrative Reform and Environmental Protection: The Case of China," Xu, Xu, and Gui raise an important question: what is the effect of improved status and resources for a central environmental regulator (what they label CER in the article) on the companies it regulates? The question is indeed interesting and underexplored. But the lack of exploration is due in part to technical difficulties in isolating the effect of this elevation and measuring its effect not only on company behavior, which we can measure by adherence (or lack thereof) to the regulations, but also on their stock price or financial performance.

The authors have chosen to test the effect by using a stock market event study. The use of event studies to measure the effects of truly exogenous shocks, like earthquakes or other unpredictable disasters, is well established (MacKinlay 1997). Event studies are used to measure policy change, as well, but this latter use presents a greater challenge (Lamdin 2001), as we need to determine the full event window and whether there was a true exogenous shock.

China's environmental bureaucracy evolved rapidly from its founding. The first three iterations from the 1970s through 1998 became increasingly visible within the bureaucratic structure but still lacked enforcement power. Concurrently, the body of environmental law that required an effective implementor was growing. Thus, in 1998 the Chinese government created a true environmental regulator, the State Environmental Protection Administration (SEPA, Mol and Carter 2006). SEPA gained regulatory authority but was hindered by its low ranking within the bureaucracy. The SEPA Administrator was not a full minister, but instead was a half rung lower, as Xu and his colleagues discuss. This weakened SEPA by hampering its ability to negotiate with other ministers by minister-to-minister contact, by not being included in policy-making task forces, and by the translation of this lower rank to the provincial and city bureaucracy, where at every level SEPA officials were of lower rank than their industrial counterparts. As Xu et al. point out, this constraint had real effects in terms of SEPA officials' ability to carry out their work. Importantly, SEPA knew this and worked assiduously to increase their prominence and make the case for elevation to full ministerial status.

SEPA was public in its desire for full ministerial status, and it worked strategically to make the case to government leaders. Much of its advocacy was actually carried out in public, and we can document it. Throughout the 1990s and into the 2000s environmental officials had been strikingly more open than other ministries, and had actively sought international advice to argue for and bolster their position. In fact, Chinese environmental officials, working directly with international donors, founded the China Council for International Cooperation on Environment and Development (CCICED) in 1992. The Council is made up of 60 members, of whom half are Chinese, including top environmental officials and academics, and the other half are international experts from academia and NGOs. As the CCICED's own website says, "CCICED annual policy recommendations are circulated as official government documents by the Ministry of Environmental Protection to State Council departments and local governments, providing a reference for policy makers at all levels." Moreover, the website specifically states that the elevation to Ministerial status was taken following CCICED's policy recommendation. The Committee's November 28, 2007 policy recommendations included "Strengthening environmental management capacity at the national level through a larger, full cabinet-level Ministry of Environment." (1) This was a new recommendation at that year's annual council meeting, a meeting I attended as an observer. CCICED's organizers highlighted to me that ministerial status was their top goal.

Moreover, CCICED, which had a long history and balanced Chinese membership, was not the only organization SEPA turned to for support. In 2006, SEPA also invited the OECD to China to conduct its first ever environmental performance review of the country. A working party visited China with representatives of environmental ministries and departments from OECD member states, on November 8-9, 2006. The Chinese government was not then nor is now a member of the OECD, but it participates in a number of committees, and SEPA signed an MOU to cooperate with the OECD environment committee in 2003. (2) I attended the November meeting in an advisory capacity to the US Environmental Protection Agency's representative, and SEPA actively advocated for a recommendation on ministerial status. The performance review recommended that the Chinese government "consider establishing SEPA as a ministry; strengthen SEPA's supervisory capacity of EPBs in local government." (3)

Why is this important for the findings presented in "Administrative Reform and Environmental Protection"? The problem in the empirical strategy is that, throughout 2006 and 2007, the question of SEPA's status and potential elevation to ministry level was widely discussed among policymakers and technical advisors close to the government in Beijing. Moreover, the general consensus, as reflected in SEPA's willingness to publicly seek international backing for the move, was that the time had come. After the November 2005 Songhua River spill, the largest environmental disaster in recent decades, environmental issues had become much higher priority. Government concern translated into the first ever hard (mandatory) environmental targets in the March 2006 10th Five Year Plan (Seligsohn 2013). Pressure to meet these targets grew after relatively lackluster results during the plan's first year (Schreifels, Fu, and Wilson 2012).

As with legislation in any political system, drafting takes time and often involves numerous interests and parties. While the Chinese government is by no means consistently transparent, in fact, information often does emerge during these drafting processes, whether as part of a specific consultation mechanism (increasingly common) or by other means. By January 2008, the intention to raise SEPA to ministry status was well enough known--even among generalist reporters--that it was reported in the Economist. (4)

Thus, months if not more than a year before the March 5-15, 2008, meeting of the National People's Congress, regulated businesses were well aware of likely changes in SEPA's enforcement capacity. Markets, thus, should have factored this expectation into their valuation of the companies.

Even the announcement itself occurred on multiple different days. It is typical for government ministries to hold official press conferences during the course of the National People's Congress. Thus, the date that a piece of legislation or work report passes is generally after the information is fully in the public domain. This was true of SEPA's elevation. Reuters reported on March 12 that the Ministry was announced two days earlier, meaning March 10. (5) China.org.cn in fact reported on March 10 that the Ministry had been announced the previous day, that is, March 9. (6)

Xu et al. show that there was stock movement on March 17, but it is difficult to see how this would related to the creation of the new ministry, a widely expected event. Markets are subject to random fluctuations or "animal spirits" and so it may not be possible to know the cause.

This history of SEPA's elevation to MEP is critical to conclusions that can be drawn from the policy treatment. As Lamdin (2001) explains, referring directly to the MacKinlay model that the authors' use, "In the case of a regulatory change, the event window is a less concise time and concept. A regulatory change was at some time first substantively broached, then debated, and ultimately resolved when the change was enacted or defeated. The event window would encompass this entire time frame." He then proceeds to describe a policy change that required a four-year event window.

The event window for this policy change most likely should include the entire period from the adoption of the 11th Five Year Plan and its targets in March 2006 to the elevation to Ministry status in March 2008. At the very least, the period from the OECD review in late 2006 through March 2008 needs to be included. The consideration of ministry status was very much in the public domain by the end of 2006. The wider window might have made detecting an effect more difficult, but that simply suggests that event analysis may not be the ideal method for examining policy change in a place like China. The stock market is still relatively immature, and imputing causality to stock market changes is always a challenge.

Xu et al. undertake an important task in seeking to measure the effects of institutional and regulatory change. However, we need to acknowledge the extent to which policy discussion, even in an autocracy like China, occurs in public and is thus available to businesses and investors to consider. Especially during the mid-2000s, environmental policy was widely and openly debated and government positions were relatively easy to obtain. Thus, the highlighted institutional and policy changes could be anticipated, and we would expect the market to price in their likelihood. Of course, investors can incorrectly predict and then respond with surprise, but that seems unlikely in this case, where there was actually an official press announcement the previous week. Obviously the market moved, but it may have been due to something else inside or outside China, or even to mysterious random fluctuations. We should be more cautious in ascribing causality to this type of market movement.

doi: 10.1017/jea.2019.1

Deborah Seligsohn is an Assistant Professor of Political Science at Villanova University.

NOTES

(1.) The information on CCICED comes from its website, www.cciced.net, with the policy statement accessible at www.cciced.net/cciceden/POLICY/APR/201608/t20160803_74631.html.

(2.) "OECD-China Cooperation: The First Ten Years," November 2005. www.oecd.org/global-relations/ keypartners/37071640.pdf.

(3.) OECD Working Party on Environmental Performance; Environmental Performance Review of China: Conclusions and Recommendations (Final)," November 8-9, 2006. www.oecd.org/environment/countryreviews/37657409.pdf.

(4.) "Environmental Protection in China: Don't Drink the Water and Don't Breathe the Air," The Economist, January 24, 2008. www.economist.com/node/10566907.

(5.) "China Again Vows Cleaner Air for Beijing," Reuters, March 12, 2008. www.reuters.com/article/ environment-olympics-pollution-dc/china-again-vows-cleaner-air-for-beijing-idUSPEK27317420080312.

(6.) "Sepa Gets Stronger." www.china.org.cn/environment/news/2008-03/10/content_12143406.htm.

REFERENCES

Lamdin, Douglas J. 2001. "Implementing and Interpreting Event Studies of Regulatory Changes." Journal of Economics and Business 53 (2-3): 171-183.

MacKinlay, A. Craig. 1997. "Event Studies in Economics and Finance." Journal of Economic Literature 35(1): 13-39.

Mol, Arthur P.J., and Neil T. Carter. 2006. "China's Environmental Governance in Transition." Environmental Politics 15 (2): 149-170.

Schreifels, Jeremy J., Yale Fu, and Elizabeth J. Wilson. 2012. "Sulfur Dioxide Control in China: Policy Evolution During the I Oth And 11th Five-Year Plans and Lessons for the Future." Energy Policy 48: 779-789.

Seligsohn, Deborah. 2013. "Environment as an Element of Development: The Growing Role of Energy Efficiency and Environmental Protection in Chinese Economic Policy." In Getting Development Right, edited by Eva Paus, 195-212. New York: Palgrave Macmillan.

Deborah Seligsohn, Journal of East Asian Studies follows strict double blind peer review policy to ensure the highest level of transparency. This manuscript has undergone a rigorous peer review and the identities of both authors and reviewers were open for an insightful discussion only after the final decision had been made.
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Author:Seligsohn, Deborah
Publication:Journal of East Asian Studies
Geographic Code:9CHIN
Date:Mar 1, 2019
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