Water and Growth: China’s illiquid assets

There is nothing new to warnings about China’s shortage of water. With 20 per cent of the world’s population and 7 per cent of renewable water resources, there has long been a mismatch between supply and demand, exacerbated by the imbalance between the wet south and the dry north, by the demands of industry and urbanization and by low pricing which encourages wasteful use. Still, when a government official warns of “an extremely serious situation in many areas” one has to take notice.

The annual water shortage is put at more than 50 million cubic metres and Hu Jintao warned last year that water shortages were having a negative impact on the country’s “economic security, ecological security and national security”. The supply problem has been worsened in the north by drought in some places this winter. This adds to the pressures on Chinese agriculture which we highlighted in a report on the sector and which is likely to force China to buy more farm produce in international markets if the trend continues.

Drought in the north and south

Fifty million acres of farmland are currently affected by drought in Jilin, a major corn- producing province. A repeat of the big harvest enjoyed in 2011 looks unlikely, raising pressure to import corn. Another northern farming province, Heilongjiang, has had the thinnest snowfall for 45 years this winter, leaving the land dry. The growth of Beijing and Tianjin has added to the depletion of the northern water table, with aquifers drying up and wells being driven ever deeper. Villages on the Great Wall near Beijing which used to enjoy abundant supply now have to have water piped in. There has been no significant snowfall round the capital this winter. At the other end of China, Yunnan has been affected by drought for a year, and the provincial capital of Kunming has rationed water since last spring.

The central government has budgeted Rmb4,000 billion (US$5.5 billion) for water projects over the next 10 years, but policy still remains fragmented with nine ministries involved and implementation has been slow. Government guidelines issued this month set a limit of annual water use at 700 billion cubic metres – but only in 2030. Beijing aims to cut water consumption per unit of GDP by 50 per cent – but not till 2020. The giant South-North Water Diversion Project − which has seen hundreds of thousands of people relocated − is due to start going into operation next year, state media have reported, but only in the eastern leg of its three routes which is much the easiest from an engineering viewpoint. The central route is not due to be operational until 2014 and work has not begun on the western section though the project was approved 10 years ago. Even when it goes into operation, there are questions about how much water will be available from southern rivers, the quality of the water and the effect on provinces from which supplies will be taken.

The pricing trap

Though water rates have increased by 67 per cent since 2002, they are still well below the proper level for a country at China’s stage of development. Low pricing means that there is little incentive for farmers to install more efficient irrigation systems while the cost of water from pilot desalination schemes being tried out at Tianjin using Israeli technology is two to three times the permitted market level. Industry accounts for a fifth of water use, and its demands have grown as the pulp, textile dyeing and coal washing industries have expanded. Nor should one overlook the water sprayed on golf courses which have shown an extraordinary ability to withstand government attempts to cut their growth as middle-class and wealthy Chinese take up the game for both pleasure and business. Suggestions that the Beijing municipality might cut back on supply to bathhouses have got nowhere.

As a result, two-thirds of cities are short of water. Some 300 million rural dwellers do not have access to safe drinking water. When there is water, it is often undrinkable – 40 per cent of the country’s rivers are badly polluted with discharges of 75 billion tonnes of sewage and waste water a year. There are recurrent spills from petrochemical plants, and the threat to drinking water supplies is heightened by the lack of monitoring.

“The constraints of our available water resources become more apparent day by day,” Hu Siyi, Vice-Minister of Water Resources, warned at a press conference. “With overdevelopment, water use has already surpassed what our natural resources can bear. If we don’t take strong and firm measures, it will be hard to reverse the severe shortages and daily exacerbation of the water situation.”

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