China's Smog - What Are the Economic Costs?

Ng Han Guan

Taken through a glass window, buildings are obscured by haze in Beijing, China.

A report that increasing air pollution in China is cutting short the life span of people living in the north of the country is yet another piece of bad news from the world's second largest economy, which is struggling with decade-slow growth.

The worsening pollution in China could now force the government to further sacrifice growth in its effort to tackle the problem, but experts say that in the long-term, a transition to a more environmentally friendly economy will boost growth.

"A move to more efficient and less polluting energy sources and infrastructure will boost investment, if the government indeed decides to do so," said Alaistair Chan, economist at Moody's Analytics.

(Read More: China Bowing to Public Outcry Over Environment: Advocate)

"Higher life expectancies would also clearly boost economic growth and reduce the costs to the government in terms of health care," he added.

According to a study published this week in the U.S. journal 'Proceedings of the National Academy of Sciences' the average person who was alive in the 1990s and living in Northern China will live an average of five-and-a-half years less than his counterpart in southern China, Reuters reported.

China's pollution problem is markedly worse in Northern China where the government, has in the past used a policy of handing out free coal for heating during winter. Last month the Chinese government set a target for reducing emissions in key industries by 30 percent by the end of 2017.

(Read More: Politics of Pollution: China's Oil Giants Take a Choke-Hold on Power)

Eight more cities in China, the world's biggest auto market, are likely to announce policies restricting new vehicle purchases, an official at the automakers association said, as Beijing tries to control air pollution, Reuters reported on Thursday. Beijing, Shanghai, Guiyang and Guangzhou already use measures to restrict vehicles on the road.

Audrey Goh, investment strategist at Standard Chartered, said that if the government does take effective measures to tackle China's deteriorating pollution, the economy could take a hit in the short-term.

"Short-term, any measures to control pollution will have an impact on the economy from higher cost of compliance to potentially lower production. But longer term, these measures are likely to result in a more sustainable growth trajectory. This is part of the government roadmap to reform and rebalance to more inclusive and sustainable growth," she said.

China's air pollution, which is largely due to over-reliance on coal as a source of energy, a growing number of vehicles and the poor enforcement of pollution laws, spiked to alarming levels in January when it reached 30-45 times above recommended levels in Beijing.

(Read More: Beijing's Toxic Smog Was Years in the Making)

According to Patrick Chovanec, chief strategist at New York-based Silvercrest Asset Management, China's pollution problem was already having an adverse impact on the economy, which has slowed to growth of around 7.5 percent, a far cry from days of 9-10 percent expansion.

"Protests taking place at chemical plants [over health risks from toxic emissions] across the country have led to the closure of several factories, which is bound to have an impact on production and growth. It used to be a no-brainer that you would build a factory to create jobs and growth [in China], but now there is a greater concern for people's health," he said.

(Read More: Beijing Shuts Factories, Removes Cars, but Pollution Stays High)

Chovanec added that China's pollution would inevitably have an impact on its business climate as a lower quality of life deters skilled workers from moving to China and Chinese ex-pats from returning home.

"This issue will affect China's ability to attract highly skilled expatriates to Beijing where the air quality is poor. I know many expats in China who I thought were 'lifers' who are now considering moving home," he added.