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SHANGHANG COUNTY, China (Reuters) - When Zijin Mining Group threatened to move its headquarters some 270 kms from its home county of Shanghang to Xiamen on China's southeast coast, a local Communist Party boss rushed to confront the company's chairman Chen Jinghe.
"If you want to move, you'll have to move the Zijin Mountain to Xiamen as well," the official told Chen, referring to a vast local mine that has helped transform the firm into China's top gold producer and second-biggest copper miner.
The exchange, recited with some pride by local residents, reflects the anxieties felt by regional governments as they consider the prospect of losing their biggest cash-cows.
It also highlights the challenges facing Beijing as it tries to take on entrenched local bureaucracies and the powerful state-owned polluters they sponsor and protect, with the central government desperate to address decades of chronic environmental damage and force growth-addicted provinces to raise standards.
"The problem is that they still chase profit," said one resident outside a store near Zijin's Shanghang headquarters who did not want to give his name. "Protecting the environment is like taking medicine, and they don't want that."
Zijin Mining is one of China's biggest state-owned firms, with projects in 20 provinces and seven countries. In 2010, it was rocked by two major pollution scandals that cost it millions of yuan in fines and compensation payments and battered the share price of its listed vehicles in Shanghai and Hong Kong. It had already been reprimanded by the Ministry of Environmental Protection for failing to meet standards and its reputation was now badly damaged.
In Shanghang itself, a 9,100 cubic meter torrent of toxic slurry from the Zijin Mountain gold-copper mine burst through a tailings dam and entered the Ting river, killing 4 million fish. It took nine days before Zijin admitted a problem had occurred, prompting accusations of a cover-up by state media.
But Shanghang is a one-company town, and the Zijin Mountain mine dominates the landscape and the economy, providing 70 percent of local revenues and most of the county's jobs.
Zijin's largesse has helped build a highway connecting Shanghang to the rest of Fujian province and has funded a building boom. While residents remain wary, the local government is reluctant to do anything that could jeopardize growth.
Shen Hongbo, a professor at Shanghai's Fudan University who studied the 2010 incidents, believes the Zijin case is of "universal significance" and raises questions that apply to hundreds of state-owned firms and their government sponsors.
Hugely dependent on the tax revenues and jobs provided by big polluting firms, local authorities have long been regarded as one of the biggest obstacles to Beijing's promises to reverse decades of environmental damage. State news agency Xinhua said in a strongly-worded editorial in March that "blame lies in governments at different levels" for chasing growth and letting environmental problems fester.
According to a proposal submitted by delegates at last month's National People's Congress, there have been more than 30 serious incidents of heavy metal pollution in the past three years, and many were caused by "regional governments blindly pursuing economic development, as well as law enforcement and supervision not being strong enough".
China has the laws, but its ability to enforce them is weak, especially in the face of giant firms that pour millions into otherwise bereft local government coffers. Critics say Beijing also lacks the will to tackle the problem.
"People want growth. People want development, but they don't accept that this should happen at the expense of their quality of life, and even the health of their children, but it's very hard to hold the local government accountable," said Ma Jun, head of the Institute of Public and Environmental Affairs (IPE), a non-profit group that monitors pollution across China.
Neither Zijin Mining nor the local government in Shanghang responded to interview requests by Reuters for this article.
Like many state-owned firms, Zijin is more than just an enterprise, and has benefited from a vast state support system giving it access to cheap credit and a blind eye when it comes to pollution. Its dominance of the local economy also means that many officials think that what's good for Zijin is generally good for the community at large.
The situation is made worse by the fact that state firms like Zijin were carved out of mining bureaus and never quite lost their role as arms of the government, maintaining old relationships and channels of communication as well as running hospitals, schools or retirement homes. For many residents seeking to complain about pollution, it is often difficult to see where the company ends and the state begins.
"The problem tends to involve the capture of the government by various interests - these problems are exacerbated when the company actually is the government," said Alex Wang, professor at Berkeley and an expert in China's environmental legislation.
At the time of the 2010 accident, the head of Zijin's supervisory board was Lin Shuiqing, formerly the local Shanghang government boss, and he remains in position. Other top company officials, including those on Zijin's Communist Party committee, also served as local bureaucrats or legislators. Zijin's largest shareholder is an arm of Shanghang's state-owned assets bureau.
All of which, in Shanghang and elsewhere, makes it tough for a relatively low-status environmental official to call a huge and powerful company to account.
"I sense that local environmental agencies are very sincere and really want to clean up, but then they get a call from the vice-mayor and are told the company is very important and shouldn't be touched," said Ma at the IPE.
Two months after the Shanghang spill, another dam burst at a Zijin mine in Guangdong province. The authorities eventually stepped in, firing and prosecuting company officials and imposing punitive fines. The Ministry of Environmental Protection has since used those punishments to show its ability to enforce its laws has been strengthened, but experts say that while Beijing is often forced to response to catastrophes, chronic, day-to-day pollution continues unabated.
"Job one is economic growth, and if the side-effects of that create some sort of crisis, then the system is designed to react, but not before," said Berkeley's Wang.
After apologizing for the 2010 incidents, "which not only caused social disputes but also tarnished our brand and damaged our reputation," Zijin chairman Chen said the company's "good deeds" should also be recognized.
The company has spent 80 million yuan ($12.9 million)rehabilitating and landscaping parts of the old mine and has built a "national mining park", opened late last year. Reuters was not given permission to see the park during a visit, but Zijin said it also set up a botanical garden and a golf course.
Zijin has also contributed 114 million yuan to a local water project and donated to flood relief in Fujian. But it is its overall contribution to the local economy that demonstrate how indispensable it has become to the government.
The rugged, mountainous county of Shanghang is undergoing a transformation, largely on the back of the high commodity prices that have driven up Zijin Mining's profits and boosted tax revenues. Huge cranes bow over the horizon, and new concrete blocks dominate the skyline. Immaculate high-speed roads connect Shanghang to the rest of Fujian, and Zijin says it has invested billions of yuan in local business start-ups, creating thousands of new jobs.
Shen, the Fudan professor, said a local official's prospects tend to depend on short-term achievements, including bursts of spectacular growth or a big infrastructure project, while long-term problems like pollution tend to be ignored.
While the overriding focus remains on economic growth, local officials are marked down if they fail to improve the environment, but they have tended to try to have it both ways, encouraging big companies like Zijin to spend heavily on high-profile environmental projects such as parks and land reclamation without risking disruption to economic activity.
"Local cities and government officials have been able to channel more investment money towards environmental infrastructure," said Wang. "But we've not seen any significant improvements in basic bread-and-butter environmental regulation - the business of monitoring facilities and making sure they comply with pollution standards."
Zijin has had no major incident since 2010, and has worked to regain public trust, though local residents remain wary.
"The river - we wouldn't drink from that because there is pollution and you have to go to higher ground," said one elderly resident at a convenience store near the foot of Zijin Mountain who would only give his surname, Lin. "We heard rumors of more pollution recently," he added. "We don't know what goes into the water - they don't tell us, so it's safer not to drink it."
Last December, Zijin was forced to deny rumors of another pollution crisis, admitting that cracks in one of its pits had allowed a small amount of slurry to enter an emergency reservoir. But the company is still allowed to pollute with relative impunity, mainly because it is under no pressure from Beijing to disclose what it is discharging.
Less than a year after the Fujian spill, Zijin was lobbying for more lenient treatment during talks with the government on proposed amendments to China's environmental laws, people attending those meetings told Reuters. "There was no sign of any environmental awakening - they were up to their old tricks, lobbying for looser standards," said an NGO representative.
In remote and impoverished Guizhou province, another broken tailings dam at Zijin's Shuiyin gold mine in Zhenfeng in 2006 sent around 200,000 cubic meters of waste into two downstream reservoirs. Six years later, residents said one of the reservoirs remained out of bounds.
Calls to the local government in Zhenfeng went unanswered.
Experts - and central government - agree that if China wants to enforce its environmental rules, it first needs to establish a monitoring system that will at least put big firms under pressure to mend their ways.
"We must improve our legal system and raise environmental standards, and prevent pollution and environmental damage," vice-environmental minister Wu Xiaoqing told reporters in mid-March. "Only through measures such as laws, standards, policies and so on can we solve the problem (caused by) the low cost of breaking the law and the high cost of complying with it."
Like other big state-owned industrial enterprises, Zijin Mining is not yet under any pressure to disclose its emissions, and there is no real-time monitoring system that will allow Beijing to enforce national standards.
"We have created more than 20 laws on the environment, but still there is not a single one that requires a corporation to tell people what type of pollutants, toxins and metals they discharge, and what the volume is," said the IPE's Ma.
"The best way to change this situation is to put it under sunlight," he said. "It would be difficult for local governments (to protect big firms) if it was all made public."
($1 = 6.2140 Chinese yuan)
Editing by Ian Geoghegan