Energy & Resources

Tapped out

The biggest threat to China’s growth is water

Water price needs to rise, says Tan

Hu Siyi held a press conference last week and he had grim news. Although China’s economy was growing, he queried how sustainable growth was likely to be. His particular focus was water, where Hu said that usage had “already surpassed what our natural resources can bear”. For the Financial Times, it was a “stark warning”, all the more so because of Hu’s job: he’s China’s vice-minister of water resources.

This week WiC spoke to Debra Tan, a director with China Water Risk, a non-profit initiative dedicated to addressing the business and environmental challenges arising from China’s water crisis.

Here Tan explains why she thinks that probably the biggest problem facing the Chinese economy is a shortage of water.

Were you surprised at the frank comments of China’s vice minister of water resources?

Not really – the central government has been focused on water issues for a long time. I was more surprised that last year’s Zhongyang Yihao Wenjian (a blueprint on policy priorities usually translated as the ‘number one central document’) focused on water. That was significant as this document highlights topics of overarching concern to the government. In previous years it had been agriculture related. But last year, for the first time, it focused on water. In doing so the government was saying the number one worry was water. That policy document put caps on water usage, saying that by 2020 China shouldn’t be using more than 670 billion cubic metres of water. It also set new water efficiency targets, particularly in agriculture, and committed to spend of Rm4 trillion over the next decade on water infrastructure.

The announcement last week really just expand on that and set out guidelines for how targets might be achieved.

Nor was Hu Suyi the first senior government figure to admit that China has a water issue. As early as 2005, his predecessor was publicly stating that water issues would affect China’s development, if they weren’t handled effectively.

With the economy still growing at a rapid pace, when does this become a crisis for the business community?

The first sentence of the State Council’s statement last week said “China is facing severe water shortage, pollution and environmental degradation, posing a major bottleneck for economic and social sustainable development.” So this is happening already.

Around 96% of China’s electric power requires water to produce. So if you’re facing a water shortage, you are also facing an electricity shortage. The fact that we are seeing more brownouts is ultimately a problem related to climate change and water.

In fact, water risk is already affecting businesses. The textile industry has seen profits fall by up to 22%. Why? Because China is the largest producer of cotton globally and droughts have forced cotton prices to go up. Lots of people then switched to synthetics, and polyester prices rose almost 200% too. That hit the industry’s entire bottom line.

How bad could shortages get?

The 2030 Water Resource Group – a consortium including the IFC, the World Bank and McKinsey – did a projection on China’s water usage. Based on a business-as-usual scenario, China will need 818 billion cubic metres annually by 2030 – that’s primarily driven by a doubling of demand for municipal and industrial water. But China’s projected supply at that date was just over 600 billion cubic metres, suggesting a very large shortage.

They are worrying numbers…

You need to break them down to provincial level to get a measure of the real seriousness. China has 11 regions with water availability comparable to the Middle East. For instance, Palestine has annual renewable water resources of 202 cubic metres per capita, and so too does Hebei province. That tells you that when you look at it on a per capita basis, many of China’s provinces have to really manage their water very carefully. The World Bank says if you have renewable water resources of less than 1,000 cubic metres per person per year you are below the water poverty line. Water shortages then become a severe constraint on economic development, hitting food production and threatening social stability.

But the scariest thing is that these 11 regions in China are not only the more remote ones like Gansu. Many are the economic powerhouses like Jiangsu, Shandong as well the municipalities of Shanghai, Tianjin and Beijing. The ‘water-short’ provinces and municipalities account for 45% of the national GDP.

Aquifers have been depleted too…

Yes, they have been run down badly in the northern provinces in particular. At the moment northern China is drawing around 8.8 billion cubic metres per year from aquifers in the Hai River Basin, which is lowering water tables and risking salt intrusion. That’s bad for agriculture and creates subsidence too.

On top of that 50% of groundwater in China is not fit for human contact because of pollution. The government knows this is all very bad news which is why a new national groundwater plan has been formulated.

Accordingly, no new aquifers are supposed to be tapped; anyone proposing to do so will have their business permits refused.

Are you more confident the problems will be tackled now than they were a few years ago?

Well, at least we finally have policymakers acknowledging the problem. The latest five year plan also added six water pollution targets. The goal: to regulate against the industrial dumping of heavy metals and to prevent eutrophication.

Researchers are now focusing on industrial parks by looking at their discharge mix. They are doing cost-benefit analysis, seeking to address questions like ‘if we need to get ammonium nitrate levels down to targets as per the new five-year plan, which industries do you need to close or clamp down on?’

Of course, ultimately you need to see an increase in water prices too.

Is that part of the plan? Putting up prices?

The country’s economic planner, the NDRC, has indicated that water prices will go up, but it has not been specific. The difficulty is that prices have to go up a lot to reflect water scarcity and to make technologies like desalination and fuller recycling viable. Chinese households currently spend about 0.8% of their income on water versus 2%-2.5% in developed markets. Given the water scarcity in China, that should be closer to 3%, which means more than triple the current price. This is politically and economically challenging.

The previous mentality was that China’s water shortages could be solved by grand projects, like the south-north water diversion. Now the view is changing?

I do believe they are thinking differently. The grand scheme of moving the water from the southern rivers to the north began a long time ago. But now the south is experiencing droughts and river levels are also falling. Climate change has probably rendered the south-north project unviable. Desalination in northern coastal cities may offer a more cost-effective option, especially if this is paired with a rise in water tariffs.

Is there tension between what Beijing wants and what local governments are prepared to implement?

There is. Getting the provincial governments to execute national policy is difficult, particularly in water management where so many ministries are involved. The Zhongyang Yihao Wenjian called for tighter coordination between departments and says provincial governments must “strictly enforce” all national water policies. But yes, it’s a challenge.

For more information about China’s water problems, visit www.chinawaterrisk.org


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