They already realize that. An internal Party document said that pretty much all major Chinese cities "unlivable" (can't find a source), and Beijing's mayor said the same thing [1].
I'm guessing that part of the problem is that while there are environmental regulations, court decision are strongly influenced by ... things other than perhaps a strictly literal application of the law. This makes enforcement difficult, and I believe the environmental regulations have been widely ignored, even when told point blank a few years ago to clean themselves up.
