Turning off the tap

Guangdong’s new deal with Hong Kong comes at an awkward time

Faucet w

Hong Kong needs China’s water

Water was once Hong Kong’s priciest import, owing to a chronic lack of it. The import bill peaked in 1929 when the territory suffered its worst drought – with only 90 millimetres of rain falling between January and April. The colonial government resorted to shipping water from Shanghai and even Japan, while the Royal Air Force experimented – in vain – at seeding rain clouds by dispersing chemicals above reservoirs.

Rationing measures were also imposed. Each person was permitted just two 18-litre buckets from public standpipes. The queues were horrendous. According to government records, more than 70,000 people, or 7% of the population, left Hong Kong that year.

Water security wasn’t improved until 1963 when the territory signed its first water supply arrangement with the Guangdong authorities. The price was largely symbolic (it equated to about HK$1 for each 1,000 gallons). Many Hong Kong people were impressed by the mainland’s generosity, and with the water problem solved, the territory’s era of industrialisation and urbanisation began in earnest.

Guangdong still supplies 80% of Hong Kong’s fresh water. But once a reason for amity, the arrangement has recently become a source of tension. Why so? The firm that now pipes the water – controlled by a state firm that’s listed in Hong Kong – wants to make higher profits.

The company in question is Guangdong Investment (or GDI). The Hong Kong government said last week it would renew its contract with GDI. But under the new proposals, the territory will pay a total of HK$13.4 billion ($1.7 billion) over the next three years for water that GDI pumps from the Dongjiang, or East River. That translates into an annual price rise of about 6.6% through 2017, meaning that the water will be about 20% more expensive by the end of the period.

The price hike is inevitable, the South China Morning Post admits, because of rising costs and a stronger Chinese currency. The water scheme also accounts for more than half of GDI’s revenue – having become part of its portfolio in 2000 after the default of GITIC, the investment vehicle then used (and it turns out, abused) by the Guangdong government. Given that painful lesson, GDI’s management has long stressed that it is obliged to improve returns and reward its investors.

Certainly, shareholders cheered GDI’s new improved deal with the Hong Kong authorities and its share price rose more than 5% in the trading session that followed the announcement. GDI’s market value stands at HK$60 billion ($7.73 billion), or 12 times its 2013 net profit. Its market capitalisation is 10 times higher than in 2000.

But the new agreement comes at a sensitive time. For more than a month, pro-democracy protesters have been occupying some of Hong Kong’s busiest roads. One of the causes of these demonstrations, according to local newspaper Singtao Daily, is the fraying relations between Hong Kong and the mainland (see WiC244).

That may mean that GDI’s new deal runs into a local resistance, since it needs the approval of Hong Kong legislators. Singtao Daily notes that pro-democracy lawmakers, albeit only a minority, might resort to filibustering tactics to delay or even derail the agreement.

GDI will find out later this month if the proposal will receive all the requisite approvals. But as Oriental Daily points out, the water supply arrangement has come to carry a symbolic meaning too, emphasising yet again how Hong Kong depends on the mainland for its very survival.

“Whether one likes it or not, both are in the same boat and drink from the same river. Peaceful coexistence and seeking a win-win situation is the only way out for Hong Kong, and the only future for the territory,” the pro-Beijing newspaper argues.

The not-so-subtle subtext? It’s time for the pro-democracy activists to end their five-week occupation of some of Hong Kong’s key roads…

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