Because the mechanisms behind ecological processes are complex and poorly understood, it is currently impossible to attempt a full monetary valuation of them^[47]. However, the combined contributions to the national economy, both actual and potential, are immense. This Annex discusses the various functions of natural vegetation and their values, which are estimated, where possible, either as economic productivity or financial costs due to the loss of such functions.

A.1 Water and soil conservation
The water and soil balance of land is inextricably linked to land use. Of the range of severe environmental problems connected with water and soil, most can be traced directly to the disturbance of natural vegetation. Vegetation contributes to water retention, flood and drought prevention, soil conservation and the prevention of desertification.
A.1.1 Water retention
The most important function of natural vegetation is to provide the water "sponge effect" which reduces surface runoff in wet seasons by intercepting rainfall in canopies, holding much of the rainfall on the plant surfaces and in the litter layer, soil and living tissues. At the same time, forests and grasslands increase underground flow, thereby extending the duration of stream flow in dry seasons. As such, forests and grasslands are able to reduce flood surges and conserve water by regulating water flow.
The water sponge effect of forests has four main components.
1) The foliage and branches intercept and retain some of the rain falling on the canopy. A small percentage of this water is absorbed by the plant body, while a little evaporates back to the atmosphere. The volume of rain intercepted by forest canopy varies with forest type and rainfall, but the percentage interception can be as high as 15 and 40%^[48]. The remainder of the rain is channelled down the leaves, branches, trunks and further down into the soil through root systems.
2) The shrub and herbaceous layers on the forest floor intercept and retain more of the rainwater. Apart from retaining some of the rainfall on the plant surfaces, dense forest floor vegetation can significantly reduce the direct impact of rainfall on the soil surface.
3) The most important component of the forest sponge effect is the litter layer on the forest floor which has several functions:

• forming a protective layer at the soil surface, maintaining the stability of the soil structure so as to eliminate the eroding effects of rainfall;
  
• absorbing rain water;
  
• increasing the roughness of the ground surface, and thus filtering, breaking and slowing down surface runoff;
  
• increasing the organic content of the soil and improving soil structure and fertility, and therefore increasing the water holding capacity.
  

Litter thicker than 10mm has been found to retard water loss by over 80%^[49].

4) The extensive and deep root systems in forests, plus the activities of the diverse soil invertebrates and microbes, significantly improve the soil's physical ability to reduce surface runoff. These factors facilitate penetration of moisture into deeper layers of soil and thereby increase the water holding capacity. Dead roots and animal burrows continue to contribute to this effect ^[49].
Grasslands play a similar but quantitatively less effective role in soil and water conservation in comparison with forests. Grass cover can reduce the erosive power of rainfall. However, the initial amount of rainfall that can trigger surface runoff differs significantly between forests and grasslands. For China Fir and Quercus forests, the initial rainfall required to trigger surface runoff was found to be between 15.8 to 17.9 mm. For grasslands, it was only 4.8 mm. The water accumulation capacity of mixed shrubland and grassland is about 250,000 tonnes per ha, about 1.4 times that of barren land^[50].

A.1.2 Water shortage prevention
Water shortages are very serious in many areas of China. Presently, the water supply per capita in China is 2,275 m per year, which is only about one quarter of the world average, and below the world slight-water-shortage level of 3,000 m per year [48].
Water shortages limit economic development. Even in 1997, when there was so much catastrophic flooding in eastern China, water shortages in northern China cities caused a direct economic loss of RMB 200 billion in industry and agriculture, equivalent to 3% of the local GDP that year^[54].
Water shortages also lead to degradation of ecosystems, especially vegetation in river watersheds. The number of 'dry-up' days on the lower reaches of the Yellow River has risen from an average of about 20 days per year (1970 - 1990) to over 150 days per year since 1995 with a peak of 226 days in 1997^[51]. In 1999 and 2000, there were also water shortages in the lower reaches of the Yangtze River. In addition, owing to water shortages, the ground surface of cities in seven or eight provinces subsided seriously. For example, 66% of the ground area of Tianjing city was affected by subsidence^[51]. River dry-up in dry seasons was exacerbated by the loss of vegetation cover in catchments.
However, the problem of wastage and inefficient usage of water resources is nearly as serious as water shortage. Irrigation for agriculture, which accounts for more than 70% of national water use, is still basically a flooding technique. Most industrial users fail to recycle water. Leakages due to poor-quality and badly-maintained pipes, and lack of awareness of the need to save water, also cause serious wastage in cities^[51].
To put a value on this function we can extrapolate from the Hong Kong figures a similar proportional willingness to pay for water across the whole of China. This would result in a figure of RMB 8,900 billion per year (1.2 billion people x 2,275 m/yr. x RMB 3.27 per m) x China per capita income/Hong Kong per capita income. At least 10% of this figure, or c. RMB 180 billion could be attributed to the added value generated by the sponge function of vegetation cover. This figure will rise towards RMB 890 billion as per capita income in China approaches that already enjoyed in Hong Kong.
A.1.3 Prevention of flooding
Flooding is an annual phenomenon in China but the floods in 1998 and 1999 were particularly disastrous. These were attributable to high rainfall exacerbated by reduced capacity of rivers and lakes due to siltation, and deforestation. Excessive logging and destruction of vegetation cover in upper catchments have not only reduced the effects of vegetation in regulating water flow, but have led to serious soil erosion, silting up rivers and streams.

To recover from the disaster, the State Council formulated a "32 word" policy. This was "to close mountains for forest regeneration; to return farmland to forest; to return farmland to lake; to level dykes to drain flood water; to replace loans with jobs; to build new towns for relocation; to reinforce river embankments; to clear up river channels". Along the middle reaches of the Yangtze these initiatives have already started to level dykes to drain flood water, to return farmland to lake, and to build new towns for relocation ^[53].
According to a questionnaire survey by the World Wide Fund for Nature and the China Youth Development Foundation in the middle reaches of the Yangtze, 2,220 (87%) of the 2,540 farming households surveyed in the Dongting Lake, Jianghan and Poyang Lake plains were affected by the flood in 1998. The average financial loss per household was RMB 10,600^[54].
The floods along the Yangtze River, Songhuajiang and Nenjiang in 1998 were closely associated with deforestation. The Southwest Forest Area in the upper reaches of the Yangtze and the Northeast Forest Area in the upper reaches of the Nenjiang have been the two biggest logging areas since the establishment of the PRC ^[55].
According to the results of the fifth (1994-1998) national forest resources survey, the total forest cover in China is 1.59 million km^[56]. As the water accumulation capacity of forests is 145,000 to 183,000 m per ha more than that of barren land, at full saturation during the wet season, forested lands can hold an extra 2,300 to 2,910 billion m of rain water. This means that existing forests can hold back a one-metre-deep flood covering 2.30 to 2.91 million km of land in the wet season. This is more than ten times the total area affected by floods in 1998 in China. Based on the cost of the damage per ha in 1998 (RMB 255 million in 223,000 km, averaging RMB 11,400 per ha), the existing forests are responsible for a saving of some RMB 2,630 to 3,330 billion per year.
A.1.4 Prevention of soil erosion
The total area of China affected by soil and water erosion is 3.67 million km, (38.2% of the total land area), and the annual increase is 10,000 km; some 5 billion tonnes of soil and sand is washed into reservoirs and lakes each year^[57].
The threats from soil and water erosion lie in 3 main areas ^[44]:
Loss of soil nutrients; .
Silting up of reservoirs, and shortened life span of water works; .
Silting up of lakes and river channels, increasing the risk of flooding.
The land area affected by wind and water erosion in China each year is equivalent to the loss of 7,500 km of farmland each year. The resultant losses of nitrogen, phosphorus and potassium in soil erosion are more than the total chemical fertilizer produced in China each year. This loss is equivalent to about RMB 320 billion per year^[54]. These losses are directly attributable to the loss of natural vegetation cover.

The main causes of soil and water erosion are poor conditions of ecosystems in the watersheds, farming on steep slopes without using terraces and bare land scars. Bare land scars result from engineering works, road construction and mining. Soil losses under good natural vegetation are, by contrast, almost negligible and about 100 times less than on agricultural land.

Natural vegetation prevents the loss of soil and sand, and soil nutrients. One study showed that existing forest cover in Hunan Province helps to reduce soil erosion by 69 million tonnes per year ^[50]. It has been estimated that the value of mountain forests in preventing soil loss is RMB 32 per ha per year [59]. Mountain forests account for 70% of the total forest cover in China, resulting in a total value in preventing soil loss of RMB 3.6 billion per year. The value of mountain forests in preventing the loss of soil nutrients is RMB 3 per ha per year^[59] , and the total value for China is RMB 300 million per year. Combining these two figures, the value of mountainous forests in soil erosion control in China is about RMB 3.9 billion per year.

A.1.5 Maintenance of soil fertility
Natural vegetation improves soil fertility by improving the chemical, physical and biological structure of soil. In physical terms, forest is able to increase soil porosity, thereby increasing soil water retention and aeration. In biological terms, forest is able to enrich soil microbes and increase the soil humus content. In chemical terms, leaf litter decomposition on forest floors is the main source of nutrient input to the soil. In addition, forest is able to transfer certain elements from the air to the soil, e.g. through nitrogen fixation. A study in Shaanxi Province indicated that forest litter decomposition returns, on average, 3,990 kg of nitrate per hectare per year in the soil ^[50]. It is estimated that forest can fix 5 to 10 kg of nitrogen per ha per year from the air^[60] . Thus, forest can transfer about 4,000 kilograms of nitrate to the soil per ha per year. According to the results of the fifth (1994-1998) national forest resources survey, the total forest cover in China is 1.59 million km^{2 2}, that is to say China forests transfer 636 million tonnes of nitrate to the soil per year. Based on the export price of urea in 1999 in China (RMB 1,050 per tonne), the annual nitrate input to the forest soils in China is worth RMB 66.5 billion.
Agroforestry experiences can be used to illustrate the value of forest in improving soil fertility. In the Populus tomentosa (a poplar tree) crop field network in Chaolutu, Henan Province, litter fall is 55,500 kg per ha per year and the amount of nutrients returned to the soil is 23,400 kg per ha per year [48]. In comparison with conventional agricultural land, the rate of nutrient recycling in the P. tomentosa crop field network is 9.53% higher; humus content 19.2% higher; total nitrogen 8.3% higher, total abundance of soil microbes 29.2 to 48.7% higher; and soil biochemical activity 24 to 94% higher ^[48]. These data illustrate the important role of forests in improving soil fertility. Forests of different species composition and ages have different capabilities in improving soil fertility. Based on the reduced production per year and per hectare of farmland (without the addition of fertilizer), a simple estimation indicates that the total contribution of China's forests to increasing land productivity could amount to as much as RMB 144 billion a year^[48] .
A.1.6 Prevention of silting of dams, lakes and water channels
Loss of vegetation cover results in severe soil erosion. Much of the silt, sand, gravel and rocks is washed off by rains and deposited in the bottom of water channels, reservoirs, rivers and lakes. It is estimated that around 24% of all soil eroded from denuded uplands is deposited in reservoirs, rivers and lakes, reducing their storage capacity and therefore increasing the occurrence of droughts and floods. Such sediment reduces the working life and efficiency of hydropower plants, clogs canals and increases the costs of purifying water for industrial and domestic use.
The potential damage if all forests were destroyed is incalculable but would result in collapse of most hydro and irrigation schemes. For realistic purposes we can conservatively estimate that forests reduce hydropower and irrigation losses by 10-20% per annum. The value of 10% of all hydropower in China = about RMB 21 billion; the value of 10% of all irrigated agricultural production = about RMB 130 billion.

A.1.7 Prevention of desertification
Desertification is one of the most serious environmental problems in China today. The main causes are the population explosion in the last century, over-cultivation of poor soils, over-grazing, uncontrolled mining, excessive firewood collection, logging and deforestation, and inappropriate irrigation practices, which result in the salinization or alkalization of agricultural land. Desertification in China can be classified into four types - wind erosion, water erosion, freeze-thawing and salinization - and covers three climatic zones: arid, semi-arid and sub-humid. The National Desertification Report states that a total of 2.62 million km of land is suffering from desertification. Of the desertified land, 1.61 million km is created by wind erosion; 205,000 km by water erosion; 363,000 km by freeze-thawing; and 233,000 km by salinization. In addition, 214,000 km of desert land is created by other factors^[61]. Desertified land is spreading at 2,460 km a year in China^[56] .
Much of the land around the origins and upper and middle reaches of the Yangtze and Yellow Rivers is desertified. Due to inappropriate human activities over a prolonged period of time in this region, forests and grasslands are severely degraded. The desertified region is also the least developed area of China and much of the population lives in poverty. Desertification not only limits economic development of the region; it also has a strong influence on the economic development in the middle and lower reaches of Yangtze River and Yellow River.

It is estimated that the direct economic loss caused by desertification is RMB 54 billion per year - three times the total financial income of the five provinces/autonomous regions in Northwest China in 1996^[61] . Food production in areas suffering from desertification in China is reduced by over 3 billion kg a year, equivalent to the annual food consumption of 7.5 million people. Since 1949, over 6,670 km of farmland has been degraded to form desert. The average rate of farmland desertification is 150 km per year. About 23,500 km of grassland has been degraded to form desert, an average rate of 520 km per year.

Desertification not only reduces the amount of usable land, but also reduces the quality of the land. According to calculations from experiments of the Chinese Academy of Science, wind erosion in areas affected by desertification causes an annual loss of 55.9 million tonnes of soil organic matter, nitrogen, phosphorus, potassium etc., equivalent to 270 million tonnes of standard chemical fertilizers^[61]. This would have a value of RMB 280 billion. At the end of the 20^thcentury, sandstorms had become more and more frequent in North China and desertification had aggravated poverty in this region. A quarter of the poverty-stricken rural population in the country lives in areas that are subject to desertification. The per capita productivity in rural villages in these areas in 1995 was RMB 1,100, only 34.2% of the country's average ^[61]. Desertification is restricting local economic development. A sandstorm on 10 April 1979 interrupted the Nanjiang Railway for 20 days, leading to a direct economic loss of more than RMB20 million. Up to 31.3 million m of mud and sand is deposited in Longyang Gorge Reservoir each year as a result of desertification, causing an economic loss of over RMB 47 million ^[61].

A.1.8 Coastal stabilization
Coastal forests and shrubs protect the coastline from erosion and fixes coastal sands, preventing them from being blown onto nearby agricultural areas.
Mangroves can also serve an important function in trapping river silt and bonding it together within the mass of root systems, creating new alluvial lands, which can eventually be developed as farmland or fishponds. By trapping the silt the mangroves also serve to protect fringing coral reefs from being smothered. The reefs in turn add stability and strength to the coastline, preventing land erosion by storms and high tides. Even the delicate Spinifex grasses that colonise coastal sand dunes perform a valuable role, in consolidating and fixing the loose sand dunes.
The area affected is quite small, but coastal development is some of the most valuable real estate in the country. Assuming a reduction in annual losses of 10km per annum of prime land valued at 200,000 RMB /km, we can put a value of RMB 2 billion per annum on this function.

A.2 Climate and weather moderation
Forest is the deepest vegetation cover on earth. In comparison with the ocean, the effect of forest on global climate is relatively small. However, the effects of forest on microclimate and local climate are prominent. Forests also play an important role in balancing the level of atmospheric carbon dioxide, which is the main gas leading to global warming.
The area affected is quite small, but coastal development is some of the most valuable real estate in the country. Assuming a reduction in annual losses of 10km per annum of prime land valued at 200,000 RMB /km, we can put a value of RMB 2 billion per annum on this function.
A.2.1 Microclimate and local climate
Forests, to a certain extent, regulate local temperature changes. The dense forest canopy forms a green thermostat between the earth's surface and the atmosphere. It not only contributes to a special microclimate within the forest, but also greatly influences the temperature of the surrounding areas. In the summer, solar radiation inside the forest is very weak because of canopy shading. Thus, the mean annual temperature in forested areas is lower than that of non-forest areas. Forests have a cooling effect when temperature is high; the higher the ambient temperature, the stronger is the cooling effect. In the winter, the canopy cover slows down the release of heat trapped in the forest, making the temperature in forested areas higher than that of non-forested areas. Thus, forest is able to conserve heat in low temperatures. The lower the winter temperature, the greater the heat conservation effect. Over the course of a year, the cooling effect of forest is stronger than the heat conservation effect ^[48].
Forest is also able to reduce wind speed at ground level, forming an obvious sheltered zone on the leeward side of forest belts that can protect crops from wind damage. In addition, forest evapo-transpiration maintains a higher humidity level in forested areas than non-forested areas. By protecting the soil from direct sunlight, forest reduces ground temperature and the generation of thermals. Thus the presence of forest increases cloud cover and the incidence of fog and rainfall, while also lessening the loss of heat into the sky at night and during winter. It is generally agreed that forest, to a certain extent, is able to increase local rainfall but its contribution to regional rainfall needs further research^[48]. Loss of natural vegetation leads to higher summer temperatures, cooler winters, more frost, less rainfall in the dry season and more water loss. In some marginal areas where the unique climate enables the production of particular crops, such changes in local climate due to vegetation destruction will significantly reduce productivity, in addition to causing losses of local biodiversity.

A.2.2 Protection against wild fire
Opening the forest canopy in humid tropical areas allows sunlight and dry wind to penetrate into the forest interior. This can cause ground vegetation, formerly almost impossible to burn, to dry up and become fire prone. In many areas of China, lack of protection or careless and irresponsible human activities have led to large wildfires that have destroyed and degraded both forests and grasslands, killing wildlife, reducing carbon sinks and depleting valuable timber and fuel supplies. Natural broadleaf forests prevent the spread of such wildfires.
As an ecological factor, fire has been associated with the formation and succession of grassland vegetation, and is a major influence on the composition and structure of many grassland plant communities. In the grassland areas of China, fire has been regarded and treated as a natural disaster. However in the USA, under certain situations, fire is seen as a means of management in grasslands, and used to regulate and control the composition and structure of grassland plant communities. According to research in China^[65] ,^[66], ^[67],^[68], ^[69],^[70],^[71] , the effects of fire on grassland ecology are very complicated - there are both negative and positive impacts.
Burning can, to a certain extent, increase the amount of available nitrogen in the soil. This is because burning off litter changes the ecological environment of the soil surface, which in turn helps, to a certain extent, the conversion of total nitrogen to available nitrogen in the soil system and hence to increase the supply of available nitrogen in the soil.
The effect of fire varies with the life forms of the plants. Fire could increase the number of branches of the Chinese leymus grass, a rhizomatic grass which is the dominant species in typical grassland, by 100-150%. Fire also facilitates the development of the current-year rhizomes and subsequently the plants become more competitive and grow well, increasing the above-ground biomass. In contrast, excessive burning, such as repeated fires, can damage regenerating buds on the ground surface of giant feather-grass and reduce both the number and dry weight of species.
The ultimate effect of fire on some grassland plant communities is to lower biodiversity. This may be attributed to the increased availability of nitrogen in the soil, which promotes the rapid development of certain grass species (e.g. Chinese leymus grass), in turn suppressing other species. The impacts of fire can last for many years, and annual burning may cause serious negative effects.
According to the 1987, 1988, 1990, 1996 and 1999's Chinese Yearbook of Forestry, during the 37 years from 1950 to 1987, forest fires happened 15,838 times annually with a frequency of 13.9 time per 100,000 ha; the average stricken forest area was 940,000 ha per year and the average forest fire stricken ratio was 8.5%; the average death and injury caused by forest fires were 110 and 690 person per year respectively. From 1988 to 1999, forest fires happened 7495 times annually and struck 54,000 ha of forest; the average death and injury caused by forest fires were 40 and 178 person per year respectively. From these figures we can conclude that better protection of forest cover has reduced forestry losses from fire by an average amount of 886,000 ha to which we could assign an approximate value of 5000 RMB per ha or a total of RMB 4.3 billion.
A.2.3 Protection against storms
Mangroves and coastal forests help to reduce wind speed and the destructive power of severe storms. The northwestern Pacific has about 28 typhoons each year, the highest incidence in the world, and about 10 of them land on the Chinese coast. Their frequency has increased over the last two decades, due to global climatic change. During typhoons the withering gales and accompanying rainstorms result in loss of life and severe economic damage, as buildings, power lines, communication facilities and trees are blown down, and crop harvests diminished or lost. Resultant floods may damage roads, bridges, railways and buildings, while storm tides and waves can destroy sea walls, ports, docks, vessels and sea installations. Each year typhoons cause about 500 deaths and economic damage of about RMB 3 billion in China^[72].
A.2.4 Forest and carbon fixation
Forests are the dominant terrestrial ecosystems on earth. Forests absorb and fix atmospheric carbon dioxide, which is the most important greenhouse gas, through photosynthesis, and store it in forest biomass (including trunks, branches, leaves and roots of plants, and the associated microbes and animals). In the exchanges of carbon dioxide between the atmosphere and terrestrial vegetation, more than 90% is attributable to forests^[48]. Thus, forest is an important storage buffer of atmospheric carbon dioxide. A study on the changes in biomass of several hundred plots of mature tropical trees around the world between 1958 and 1996 has shown that the average forest biomass increased substantially over the study period ^[73]. In the Neotropics alone, the increase amounted to approximately 40% of the terrestrial carbon sink of the whole world. Intact forests are likely helping to buffer the rate of increase in atmospheric carbon dioxide, thereby reducing the impacts of global warming.
Forests need to absorb 1.84 kg of carbon dioxide to produce 1 kg of dry biomass. About 850 kg of carbon dioxide (or 230 kg of carbon) is needed to produce 1 m of timber ^[48]. It is estimated that the carbon fixation rates (based on the weight of carbon) of tropical forest, temperate forest and cold forest are 450-1,600, 270-1,125 and 180-900 g per m per year respectively ^[48]. These rates are considerably higher than those found in grassland ecosystems (around 130 g per m per year). Forests worldwide fix 100 to 120 billion tonnes of carbon per year through photosynthesis. That accounts for 13% to 16% of the total atmospheric carbon content ^[48]. Some crops and marine plants also have a very strong capacity for carbon fixation. They can absorb a large amount of carbon dioxide rapidly, but their effects are transient, as they are unable to keep the carbon dioxide in organic bodies for a long time.
The increase of atmospheric carbon dioxide and other greenhouse gases, such as methane and nitrous oxide, is caused not only by the burning of fossil fuel, but also by deforestation. The large-scale Biosphere-Atmosphere Experiment in Amazonia has shown that 240 million tonnes of carbon were released annually to the atmosphere due to deforestation in tropical America between 1979 and 1989^[74]. The effects of deforestation extend well beyond increasing carbon dioxide emissions. Recycling of atmospheric carbon through the biota and soil is the major control on the lifetime of carbon dioxide in the atmosphere. Decreased productivity due to deforestation causes carbon dioxide to remain longer, reach a higher level in the atmosphere, and absorb more heat than would be the case without deforestation^[75]. According to the frequently cited figure calculated by Frankhauser in 1994, the release of each tonne of carbon into the atmosphere will create a marginal damage of RMB 165 ^[76]. Thus the destruction of vegetation in China costs some RMB 82.7 billion a year.
The total stand growing stock of China's forest resources is 12.5 billion m^[56]. As 230 kg of carbon is needed to produce 1 m of timber (see above), the total stand growing stock stores some 2.88 billion tonnes of carbon. Using a figure of RMB 165 per tonne of carbon, this storage function is worth RMB 475 billion. The existing forest cover in China is 1.59 million km^[56] , fixing some 265 480-1900 million tonnes of carbon dioxide (or 71.7 million tonnes of carbonNo all aborbed CO2 becomes stand stock, such as litters and roots.) per year in forest biomass ^[50], which has a service value of RMB 11.879-314 billion. The current grassland cover ^[2] in China is 4 million km, fixing some 520 million tonnes of carbon ^[2]. This is worth about RMB 8.58 billion.
Restoring the seriously disrupted carbon cycle will call for conserving energy and halting deforestation so as to control carbon emissions. In addition, reforestation is necessary, to increase the rate at which carbon dioxide is removed by photosynthesis and stored in biomass and soils^[75],^[77] , ^[78]. Article 4, 2a of the United Nations Framework Convention on Climate Change (UNFCCC) states that "each party to the Convention shall adopt national policies and take corresponding measures on the mitigation of climate change, by limiting its anthropogenic emissions of greenhouse gases and protecting and enhancing its greenhouse gas sinks and reservoirs". In addition, Article 2 of the Kyoto Protocol of the UNFCCC calls on Parties "to take into account their commitments under relevant international environmental agreements, including promotion of sustainable forest management practices, afforestation and reforestation" ^[79]. Many reforestation projects for carbon sequestration have already been commissioned^[80],^[81]. While it is still too early to say if any of these projects will be successful, scientists generally believe that the combined effort of controlling carbon dioxide emission by conserving energy, controlling deforestation and implementing large scale reforestation is the most logical strategy^[80] , ^[82], ^[83].

A.3 Pollution control
Various estimates have been made of the environmental damage of pollution in China. Smil produced a figure of RMB 20-40 billion per year^[84] . More recent studies by Smil and Yoshi^[85], based on the findings of Guang ^[856], calculated a higher figure for pollution-related damage of RMB 98.6 billion per year.
Natural vegetation, especially forest, is able to purify air and water by absorbing some of the pollutants. For every kg of dry-weight production in trees, 3,110 m of air will be filtered^[48]. Forests can remove toxic gases, dust and smoke, by absorption and adhesion. Toxic gases that can thus be removed from the atmosphere are sulphur dioxide, hydrogen fluoride, chlorine and ammonia. Urban forests are able to absorb 3,000 to 6,000 kg of sulphur dioxide per ha per year. One hectare of urban broadleaf forest, with 400 tonnes of leaf mass, can annually absorb 300 to 2,000 kg of fluorine and fluoride compounds, and 3,000 to 5,000 kg of chlorine ^[48].
The ability of forest to trap dust and smoke is attributable to the dense foliage, which intercepts airflow and reduces wind speed, thereby causing smoke and dust particles to settle. In addition, the high rate of evapotranspiration maintains a higher humidity around the forest, increasing the moisture content of dust and smoke and thus helping them settle on the ground and plant surfaces. The respective annual dust trapping capacities of China Fir, pine and Quercus forests are 3,200 tonnes, 3,440 tonnes and 6,800 tonnes per ha^[48]. Although difficult to quantify, the economic value of natural vegetation in dust trapping in China is extremely high. With no natural vegetation in China, the levels of dust in the air would be almost unbearable to humans. If we assume that current vegetation at least halves the potential damage, then we have estimates ranging from a service value of RMB 20 billion up to 99 billion per year.

A.4 Biological disaster prevention
The diverse types of biological disaster caused by pests in China lead to huge losses in agriculture and forestry. It is reported that biological disasters destroy 10 to 15% of cereal production, 15 to 20% of cotton production, and 20 to 30% of fruit and vegetable production, accounting for a total economic loss of several tens of billion RMB^[87] . During the eighth 5-year period (1991-1995), the total area affected by pests was 80,000 km, which was 214 times the area affected by forest fire in the same period. This had an economic cost of RMB 5 billion. In 1998, 400 million trees died from pest attack in China. Pest problems like pine caterpillar, poplar longhorn beetle and pinewood nematode are becoming more serious. Areas affected by East Asia locust (Locusta migratoria manilensis (Mey.)) increased from 9,000 km in 1986 to 16,000 km2 in 1999^[88] .
Such pest outbreaks are the consequence of the simplification of ecosystems, and the introduction of alien invasive species. Healthy ecosystems are diverse in microclimates and species. There are many checks and balances on the populations of each species, in the form of physical conditions, predators, parasites and competitors. As a result, no native species can reach pest status, while only the most invasive of alien species can spread.
These rich biodiversity resources also confer protection on nearby crops; any pests increasing in numbers in agricultural systems typically attract natural enemies from intact ecosystems. When natural vegetation is destroyed, the diversity and quantity of natural enemies also decreases significantly, and pests can proliferate. In areas like Hainan and Guangxi, many forest slopes are cleared for agriculture. The loss of natural vegetation provides the conditions for locust outbreaks^[89] . The degraded vegetation also forms suitable environment to pest outbreak. For example, the bared sand beach is good for locust laying eggs resulted in locust disaster. Recently, Hainan Province has promoted the restoration of natural forests as a major policy to counter the East Asia locust threat.
When natural vegetation is destroyed, due to the instability and fragility of the ecosystem, alien invasive species typically invade and become dominant, thus bringing greater threats to local ecosystems. In Xianhu Botanic Garden in Shenzhen, the exotic plant Mikania micrantha is widespread. Its impact on artificial plantations is particularly serious, as their impaired ecosystem functioning creates favourable conditions for Mikania invasion.
The value of prevention of biological disasters served by natural vegetation cannot be accurately calculated but at a minimum must be equivalent to 5 -10% of the value of all agricultural production in the country i.e. RMB 80-160 billion per year.

A.5 Biodiversity conservation and utilization
China is one of the richest countries in the world in terms of biodiversity. The many thousands of species of plants and animals in China remain totally dependent on the survival of intact patches of natural vegetation and on the functioning of the natural ecosystems of which they form a part, and in which they continue to evolve and diversify.
Humanity derives all of its food, and many medicines and industrial products, from both wild and domesticated components of biodiversity. The variety of distinctive species and habitats influence the productivity and services provided by ecosystems. As the variety of species in an ecosystem changes (e.g. by habitat degradation and destruction), the ecosystem's ability to absorb and break down pollutants, maintain soil fertility and microclimate, cleanse water, and provide other valuable services (e.g. ecotourism) changes too. The values of various ecosystem services have been discussed elsewhere in this annex. The use values of biodiversity and ecotourism are discussed in this section.
Assuming that natural vegetation at least halves the potential losses from biological disasters we can put a figure on this service in the scale of RMB 50-100 billion per year.
A.5.1 Use values of biodiversity
Biodiversity provides us with a wide range of useful raw materials such as pulp, resin, rosin, rubber, and products such as fuel (firewood and charcoal), timber, food, clothing and medicines. The destruction of natural vegetation causes reduction in the harvest of these natural raw materials that could otherwise be harvested on a sustainable basis with high economic value. Since China relies heavily on traditional medicines, and a high proportion of the population uses firewood, the cost of such losses is very high. The destruction of terrestrial vegetation indirectly affects fisheries because silt forms new islands in estuaries and depletes coastal fisheries. In addition coastal vegetation, such as mangroves and seagrasses, provides vital breeding and feeding habitats for many marine organisms, especially fish, thus benefiting coastal fisheries.
When species are driven to extinction, all the potential uses of their genetic diversity are lost. Genetic diversity of wild plants and animals is extremely valuable to their domesticated relatives. They may possess disease-resistant genes and variations that can be selectively crossed into domestic varieties. However, many wild populations, for example of rice, are endangered in China. Genetic diversity also has immense potential use value for research in medicine and genetic engineering. Making use of the abundant resources of wild crop relatives, China bred more than 5,000 new varieties of 41 crops from 1949 to 1992, which contributed significantly to the achievement of high yields, grades and production in Chinese agriculture^[91].

Box A10 presents rough estimates of the financial losses due to reduced harvest of various natural biodiversity products that will be incurred by the destruction of natural vegetation in China.
Wood products
The average contribution of every 1,000 m of timber to China's GDP is RMB 1.11 million [94]. In recent years, China's annual increase in forest stand has been 46 million m.
According to Zhang et al. (1999) ^[93], the annual commercial log production in China from 1988 to 1996 ranged from 55 to 77 million m, with a mean of 62.3 million m. Using the 1999 imported log price (RMB 1,020 per m) ^[95], this commercial log production is worth about RMB 63.5 billion per year.

It is estimated that China has about 2,000 sawmills, with a total annual production capacity of 24 million m of milled wood; actual production is just below 15 million m per year. In 1996, the plywood, fibreboard and particle board outputs in China were 4.9, 2.1 and 3.4 million m respectively. Taking these other wood products into account, the value of annual wood production in China would be significantly higher. An estimate of RMB 64 to 120 million has been produced^[92].
In addition, the annual consumption of firewood in China has been around 100 million m in the last two decades ^[92]. Using the 1999 firewood export price of RMB 736 per m^[92] , the annual firewood production in China is worth RMB 73.6 billion.
Non-wood products
One of the direct benefits of biodiversity is that it provides wildlife resources. In Chinese society wildlife is traditionally used as food, medicine, and industrial raw material and thus is closely related to human livelihoods. Along with social and economic development, the extent of wildlife use has been expanded dramatically in recent decades.
Non-timber products from forests and grasslands in China include bamboo products, rattans, chemicals and other industrial raw materials, fruits, edible oils, mushrooms, wild vegetables, teas, beverages, traditional Chinese medicinal herbs, spices, and many others.
Bamboo is one of the most important non-wood forest resources in China. In the early 1990s, China produced some 10 million tonnes of bamboo poles and nearly 2 million tonnes of bamboo shoots each year, with a total value of RMB 5.79 billion ^[96]. In addition, China started producing bamboo-based panels in the mid-1970s and by 1994, annual output reached 225,000 m, and valued at RMB 827 million ^[96]. Raw materials from the forest in China include tung oil, Chinese tallow oil, insect wax, raw lacquer, and other types of oil products from trees. However, the most important chemical raw materials from forests are turpentine oil, resin, rosin, tannin and shellac. Rosin output accounts about 40% of total world production. In recent years, annual exports have been over 200,000 tonnes, with a value of RMB 827 million. Apart from bamboo shoots, other important food products from forests include chestnut, walnut, Chinese date, ginkgo, birch sap, seabuckthorn etc. In recent years, the annual total export value of China's non-timber forest products has been about RMB 23 billion^[97].
Wild animals and their products are traditionally consumed in China, for their food and medicinal value. A study of 91 wild animal species in the trade in Guangxi Province, one of the largest consumer markets, found that 39 were consumed as food, 34 as medicinal material, 31 (not including snakes) as industrial raw materials and nine as pets^[98] . The main limits on the economic viability of this wild animal trade are habitat destruction and the over-harvesting of wild populations.

A recent large-scale national survey on traditional Chinese medicine (TCM) indicated there are 12,800 kinds of TCM resources, including over 11,100 plants and 1,550 animals ^[99]. Except for a few sources among domestic animals and plants, most TCM resources come from the wild. Thus traditional Chinese medical practices depend on the existence of healthy natural ecosystems.
Data indicate that the amount of utilised wildlife in China is continuously increasing. Although the numbers of some species have declined due to long-term overuse, the total amount of utilisation has not decreased. During 1981 to 1993, the number of factories producing TCM doubled, while the total production value increased 11 times. Foreign trade in TCM has also increased, from RMB 3.2 billion in 1994 to about 4.8 billion today ^[99].
A.5.2 Recreation and tourism
A major by-product of conserving biodiversity is the earnings from ecotourism. Besides seeing China's outstanding culture, tourism depends upon visiting the scenic and natural beauty and splendours of China. China is one of the richest countries in the world in terms of species and ecosystems. Sites with unique natural treasures, such as giant panda, pheasants, rare trees, flowers and fish, are among the major tourism destinations. Natural vegetation adds to the scenic beauty and attractive environment for tourism and outdoor recreation, as well as to the quality of life and health in China. The autumn season of 'red leaves' is famous as a special time to admire the natural temperate forests and woodlands. The natural scenery has also inspired much cultural development in China, especially by stimulating painting, sculpture and poetry.
Biodiversity also supports tourism and other recreational resource uses that have an important development value. Environmental components such as landscapes and the biodiversity and natural processes contained in ecosystems form the basis of people's recreation and appreciation. Furthermore, ecotourism also has an important function in education.

By the end of 1999, China had established 1,118 nature reserves, totalling 864,000 km or 8.62% of the national territory. Since the late 1980s, many nature reserves have developed tourism, and such exploitation was increasingly prevalent from the 1990s. So far, over 75% of nature reserves have launched tourist activities in their experimental or buffer zones to various extents. Some of them already have preliminary transport and tourism facilities with accommodation and business services, and can even provide higher quality services for recreation, communication, shopping and accommodation. In 1994, the total tourism income of all Chinese nature reserves was RMB 30-50 million. In 1995, Chinese forest parks received a total of 60.9 million tourists, and the direct income was RMB 521 million^[100] . Beginning in the 1980s, some regions have exploited international hunting activity. Fourteen international hunting grounds have been built in Heilongjiang, Jilin, Hebei, Hunan and Qinghai provinces, and these have already received many overseas hunters^[100].
China is one of the countries with the fastest-developing tourism. The foreign exchange profit from international tourism in China has increased rapidly from RMB 1.65 billion in 1978 (world position 41st) to RMB 103 billion in 1998 (world position 7^th).
In 1999, China had a total tourism revenue of RMB 400 billion. 72.8 million foreign tourists visited the country. The foreign exchange profit accounted for 7.2% of the all export revenue that year ^[101]. International travel organisations forecast that the total tourism revenue of the world in 2020 will be RMB 16,500 billion, and that China will be the largest tourist destination country, with 137 million international tourists^[101].
Currently, China obtains RMB 11.6 billion of revenue from nature-based tourism ^[102]. It is clear that China still has massive potential to expand ecotourism resources both from the international and domestic perspective. If beautiful scenery is protected, it could translate into a multi-billion RMB industry. Areas suffering from severe damage to natural vegetation have lost generally lost this potential without producing comparable returns.

A.6 Renewable energy
Fuelwood and charcoal are energy sources obtainable from natural ecosystems (see above). Hydroelectric power is also dependent on vegetation cover, and does not require direct harvesting; its economic returns increase with greater ecosystem integrity.
The reduction in working life and operating efficiency of hydropower plants caused by sediment blockages causes significant losses in hydropower generation. Increased wet-season river flow and reduced dry-season flow caused by the loss of natural vegetation cover in catchments cause further losses.
River flow figures for 16 river catchments in Sichuan Province^[105] show clearly the importance of forest cover in reducing seasonality of river flow (Fig. 1). A simple index of seasonality may be derived by expressing the river flow during the driest 6-month period of the year as a percentage of the total annual river flow. Plotting this value against the percentage forest cover in the different catchments reveals a close relationship: dry season river flow in totally deforested catchments is about 12%, while dry-season flow in well-forested catchments is about 30%.

These figures can be converted into hydropower generation efficiency. Hydropower plants are able to operate at 100% efficiency when river flow approximates the annual average flow. Efficiency drops gradually in flood periods, when excessive water has to be released through sluices. Efficiency also drops sharply in low-flow periods (Figure 2,)^[58] . The contribution of vegetation cover in catchments to overall hydropower efficiency may be derived by comparing annual rainfall, annual river flow pattern and hydropower efficiency. This analysis shows that forest cover contributes at least 10 to 30% to hydropower efficiency.

Losses of efficiency could cost tens of billions of RMB per year for just one dam. The total extractable hydropower capacity in China is 448 million kilowatts ^[103]. Up to the end of 2000, the total installed hydropower production in China was 82.5 million kilowatts ^[104]. Assuming an average operation efficiency of 60%, total hydropower generation in China is 434 billion KwH per year. Taking a mean potential contribution by forests of 20% efficiency, this would constitute a forest service equivalent to 86.8 billion KwH per year at current levels of hydropower installation, which amounts (at RMB 0.5 per KwH) to RMB 43.4 billion per year. If hydropower capacity were fully utilized, the forest service value would reach RMB 236 billion per year, at current efficiency levels. For the Three Gorges Dam alone, with an 18.2 million kW hydropower capacity and an expected operating efficiency of 66%, the forest service value equates to RMB 10.5 billion per year.
The potential forest service value to hydropower far exceeds the value of timber production, and is fully compatible with forest regeneration. (The forest service value would be still higher if effects of forest on local weather patterns were taken into account.) This highlights the importance of not compromising forest integrity for the sake of timber production.

A.7 Summary of ecological services provided by natural vegetation
Although a full evaluation is not possible, estimates of some of the ecosystem services of natural vegetation together yield a figure exceeding 4,500 billion RMB (US$ 500 billion) per year. Even without estimates for many of the ecosystem services, this is greater than the current GNP. Increased cover of natural vegetation would bring economic benefits far outweighing the costs.