For decades, coal mining has been the lifeline for residents of Shizuishan City in the north of Ningxia Hui Autonomous Region. But reckless extraction of coal resources has given rise to a pollution nightmare. In 2008, the National Development and Reform Commission listed the city as one of China's resource-exhausted cities.

The dire situation is providing a powerful catalyst for the city to curb environmental degradation and separate the economy from polluting industries.

Simply digging coal out of the ground does not create much added value or the jobs most needed for a nascent economy. Since 2005, the local government in Shizuishan has handed out a string of generous incentives to recycling industries, including tax breaks and favorable policies in terms of land and electricity.

Starting in 2006, the city allocated more than 60 million yuan ($9.2 million) annually to subsidize environmental-friendly companies. One of the biggest beneficiaries was the solar photovoltaic industry.

Drawing strength from rich solar and quartz stone resources, the industry is taking off in Shizuishan, offering relief from its reliance on coal. Output value of the sector is expected to surge from 120 million yuan ($18.5 million) in 2008 to at least 40 billion yuan ($6.2 billion) in 2015.

Shizuishan also moved downstream along the industrial chain into a series of chemical industries such as polyvinyl alcohol (PVA). PVA is commonly used in construction and production of food, clothes and pharmaceuticals. It is fully degradable and dissolves quickly. Most importantly, its manufacturing results are of no serious consequence to the environment.

The Ningxia Dadi Chemical Co. Ltd., based in Shizuishan, put its first PVA production line, with an annual capacity of 50,000 tons, into operation on April 22, 2011. After years of research, the company has developed advanced technologies that could produce quality cement out of carbide residue left by PVA production. The company aims to build 330,000 tons of PVA capacity in three years.

The company shut down a series of profitable but energy-depleting and polluting coke-manufacturing plants last year.

"This move may require a compromise on the company's profits, but it is well worth the effort given its far-reaching impact," said Yang Lixian, Deputy General Manager of Ningxia Dadi Chemical Co. Ltd.

Meanwhile, the company use advanced facilities to remove impurities from the waste gas left by PVA production, making it reusable for ethylic acid production. Waste water is also purified for re-circulation.

The recycling model has delivered a strong boost to operational efficiency and profitability of the company, cushioning the impact of soaring coal prices, said Yang.

Energy efficiency at Ningxia Dadi more than doubled in 2010 from five years ago and the recovery utilization rate of waste gas increased to 99 percent by the end of 2010.

Shizuishan's "going-green" transition has also added to its overall attraction.

"Many coastal manufacturers are moving westward to cash in on lower land and labor costs," said Zhang. "Shizuishan, with resource advantages and transport network, is bound to benefit from that relocation."

As it rebalances the economy, the city spares no effort to propel tourism, modern agriculture and service sector, said Shizuishan Mayor Zhang Zuoli. Its forest coverage rate was 12 percent in 2010, up from 8.1 percent in 2000.

But efforts are still needed to improve infrastructure and services to lure more investors," said Zhang.

In its 12th Five-Year Plan (2011-15), the Central Government has pledged stronger support for Ningxia's Economic Zone Along the Yellow River. As part of the economic zone, Shizuishan is also set to gain momentum from the zone, and play a vanguard role in its industrial development, said Mayor Zhang.