"Boomtown to Gloomtown." That's how CLSA Asia-Pacific Markets titled a September report on Hong Kong's worsening air pollution. Last month, Merrill Lynch analysts called on the city's government to "wake up and smell the airborne cocktail" choking its future.
It's a funny thing, really. Hong Kong is routinely rated the world's freest economy thanks to low taxes, a duty- free port, the free entry of foreign capital and the rule of law. And yet nowhere in analyses do observers measure the right to breathe.
Hong Kong claims to be tackling its smog problem, one that's encouraging a growing number of skilled expats to leave the city of 6.9 million amid mounting health hazards.
The government talks about "green" growth, but does little to advance it. In politicians' denial lies the biggest risk to the Asia-Pacific region's eighth-biggest economy.
"The air quality in Hong Kong is now regularly so poor that the long-term competitiveness of this city state is, in our minds, in some doubt," says Spencer White, Hong Kong-based chief equity strategist at Merrill Lynch Asia Pacific.
What's more, bad air is becoming an Asia-wide problem. The region's booming economies are paying all too little attention to the negative side- effects of rapid growth. The question, really, is this: will Asia choke on its own economic success?
"Asia is at a point where it definitely needs to find a balance between fast growth and getting control over the environment," says Wu Hai, a Beijing- based partner at consulting firm McKinsey & Co.
This all sounds very unfair. Europeans polluted plenty when they industrialized in the 19th century. Americans did more than their share in the 20th century, and still do with their sport- utility vehicles and failure to get serious about the risks of global warming. Shouldn't Chinese, Indians and other developing Asians have the right to pollute as much as the West did?
In a perfect world, yes. It's unclear, though, that this world of ours is capable of coping with almost three billion Asians growing richer and polluting the way Westerners have.
In a recent report on China's economy, the Economist Intelligence Unit put it quite well: "Think of the worst excesses of global industrialization in the past 100 years, factor in a population of 1.3 billion, and then you will get some idea of the scale of environmental challenges created by China's rapid growth."
It's heartening to see China's leadership grasping the seriousness of environmental risks, yet it faces an arguably unprecedented task. Walking through smog-enveloped Beijing or Shanghai these days is shock enough. The future hardly looks brighter when you consider that most power is still coal-generated, vehicle ownership is rising fast and environmental laws are as hazy as the sky.
Consider how Asia's skies will look when 400 million Chinese, 400 million Indians and hundreds of millions of Southeast Asians own one or more cars. That's on top of factories throughout the region maximizing profits by burning more and more coal. All this will lead to increasing health risks, slower growth, less foreign investment, increased government debt and higher bond yields.
The bottom line is that many parts of Asia are reaching their environmental limits and the blind pursuit of gross domestic product just isn't possible anymore. In the year ahead, environmental issues simply will have to become a bigger blip on the radar screens of Asian governments and investors alike.
The good news is that it's not too late. "Today's rapid growth offers a window of opportunity to find ways of mixing growth and a cleaner environment," says Jack Perkowski, chief executive of Beijing-based auto-parts maker Asimco Technologies.
Asia needs to use today's good times to find greener methods of production, power generation, transportation and providing clean water and sewage. If not, the future may be as bleak as the air Asians breathe.
This week's meeting of the Association of Southeast Asian Nations, or ASEAN, in Cebu, Philippines, offers a rare chance to turn the tide. Between North and South Asia's smog and Indonesia's forest fires that darken neighbors' skies each year, there's plenty to discuss.
Hong Kong is an intriguing microcosm of the risks. The city's worsening pollution and its denial about the costs led Merrill Lynch last month to cut ratings of the shares of three office property companies on concern more professionals will leave.
Instead, Merrill Lynch says investors should buy the shares of Singapore developers and landlords. The broker cut the ratings of Hongkong Land Holdings, Hysan Development (0014) and Great Eagle Holdings (0041), while recommending Singapore's City Developments, CapitaLand and Suntec REIT. Cleaner air will give cities like Singapore, Tokyo, Seoul and Sydney advantages over China- and India-region ones.
Dirty air costs Hong Kong about HK$21.2 billion a year in hospital admissions and lost productivity, and about 1,600 deaths a year might be avoided if air quality improves, according to research by three universities and a think-tank. And that's in a city with a tiny population relative to China, India and Southeast Asia. It's vital for Asia to use today's window of opportunity to tackle pollution. If not, someday we may be unable to open our windows in this part of the world. BLOOMBERG