How smog affects spending in China

Research findings by Prof. Panle Jia Barwick, Prof. Shanjun Li, Deyu Rao and Nahim Bin Zahur (professors and students at Cornell University) are published in The Economist.

A new study suggests the costs of battling the country’s toxic air may be larger than previously thought.

WALK down the street in a Chinese city, and you are likely to see nearly as many kouzhao as eyeglasses or wristwatches. Anti-pollution masks that cover the nose and mouth have become ubiquitous on the streets of Beijing and Shanghai, especially during the winter months when coal is burned for heat. Chinese consumers, particularly those living in busy megacities, shell out 4bn yuan ($600m) on masks every year. Many are manufactured in Dadian, a town in Shandong province in eastern China known as “mask village”.

Kouzhao may be the most visible expense caused by China’s toxic air, but they are far from the largest one. A new working paper published by America’s National Bureau of Economic Research suggests that the costs of pollution in the country may be far greater than previous studies have suggested. Panle Jia Barwick, Shanjun Li, Deyu Rao and Nahim Bin Zahur, a group of economists at Cornell University, analysed the relationship between air pollution and health-care spending across 367 Chinese cities. Combining hourly pollution readings with debit- and credit-card transactions made between 2013 and 2015, they found that when levels of PM2.5 (fine-particulate matter) are high, consumers tend to spend more on health-care goods and services. A temporary 10 micrograms per cubic metre (µg/m3) jump in PM2.5 is associated with an 0.65% surge in health-care transactions. A permanent increase of this magnitude yields an increase of 2.65%, which the authors estimate to be worth 59.6bn yuan ($9.2bn). While air pollution leads to higher spending at hospitals and pharmacies, it causes spending at supermarkets to fall as shoppers opt to stay indoors (see chart).

Such findings suggest that efforts by the government to cut air pollution could yield significant savings. Since 2014, when Li Keqiang, China’s premier, declared “war” on air pollution, the country has closed polluting factories, shuttered coal-fired power plants and taken millions of vehicles off the roads. These measures have helped reduce concentrations of PM2.5 in major Chinese cities by 32%. If the country’s PM2.5 levels are cut to 10 µg/m3, a level deemed safe by the World Health Organisation, the study’s authors reckon that Chinese households could save tens of billions of dollars in health-care expenses. That would provide a welcome financial cushion to the vast majority of the country—though the residents of “mask village” might harbour mixed feelings.