MW_ArticlePageView
Will water shortages end China's economic boom?
By
Editorial staff
Simon Wilson
Jan 16, 2006
A recent pollution scandal has once again drawn attention to China’s water shortages. Could this derail the economic juggernaut?
Why is China so worried about water?
Its northern regions are historically vulnerable to drought – a problem that is set to worsen as climate change leads to more desertification and retreating glaciers. The north has 45% of China’s population and 60% of the cropland, but less than 15% of the water. As a result, China depends on irrigation for 75% of its crops, something that is both expensive and inefficient (every ton of rice requires about 2,000 tons of water to grow). The second big worry is that China’s rapid industrialisation over the past three decades has put huge pressure on its water resources, thanks to the rise of vital but water-intensive industries (metals, chemicals, oil refining and food processing). Since 1980, China’s population has grown by 320 million, and its urban population, which uses twice as much water per household, has swelled to 340 million. As China keeps growing, there just isn’t going to be enough water to go around.
Are people already short of water?
Yes. In China taken as a whole, the situation is grave but not yet disastrous. Currently, mainland China’s annual water availability per person stands at 2,200 tonnes – less than a third of the global average. Long-term projections by the Beijing government show that the peak water shortage is expected in 2030, when a population of 1.6 billion will have just 1,760 tonnes each, a level defined by the UN as at ‘the threshold of concern’. However, the situation in the densely populated north China plain – from Beijing in the north to Jiangsu province in the Yangtze basin – is already desperate. Here, the average water per head is just 710 tonnes, well below the UN’s ‘danger threshold’ of 1,000 tonnes. But shortages extend far beyond the northern plain: overall, of China’s 660 cities, more than 400 have insufficient water, and 110 suffer serious shortages. As the minister of water, Wang Shucheng, warned recently: “To fight for every drop of water or die – that is the challenge facing China.”
Is the water well managed?
No. In November, this fact briefly received international attention when a chemical factory spilt 100 metric tonnes of carcinogenic compounds into the Songhua River, causing panic among the three million-plus residents of Harbin, a few hundred kilometres downstream. Water supplies were cut off for days. However, according to Vaclav Smil, writing in the Far Eastern Economic Review, the Harbin incident was minor in the great scheme of things. “Inadequate, wastefully used, continuously polluted, and grossly underpriced, China’s water resources present a host of problems that could coalesce to clog the country’s economic growth.” Last year, government officials admitted that more than 70% of China’s rivers and lakes were contaminated, and that 300 million people lacked access to clean drinking water. More than half of China’s industrial waste water does not receive even the simplest treatment; instead, it is just dumped into the nearest stream or lake. The other problem is waste. China uses about six times as much water per unit of GDP as South Korea, and ten times as much as Japan. Its rate of industrial water reusage is only 55%, compared to an average for advanced countries of 80%. And its irrigation systems are so inefficient that only about 40%-45% of the water used actually ends up on crops.
What are the solutions?
The possible solutions to China’s water problem come under three main categories: giant engineering projects to get water from the south to the north, more realistic (ie, market-based) pricing of water to promote efficiency and cut waste, and more efficient use of water in agriculture. But none of these will be straightforward or inexpensive to implement. The grandiose, decades-long project to transfer water from the Yangtze in the south to the arid northern plains (part of the Three Gorges Project) is likely to far exceed its projected cost of US $60m. And while it may make a difference in Beijing by as early as 2010, the benefits to the northern plains will not be felt until the later stages of the project are completed – in 30 or 40 years. It will also consume huge amounts of energy and require the resettlement of half a million people.
What about prices and efficiency?
Water pricing is a politically sensitive issue in a country that was used to state-supplied ‘free’ water until 1985. The government knows higher prices are needed to help cut waste, but won’t introduce them for fear of causing unrest. The most feasible large-scale solution is to cut the amount of water used in agriculture (now 65% of the total). Switching more irrigated grain-growing lands to vegetable production and importing more grain would save vast amounts. There has been some progress here, but given food self-sufficiency is one of China’s core policies, much more would require a huge shift in thinking.
The firms tackling China’s water crisis
Forbes magazine recently interviewed US fund manager John Dickerson, head of Summit Global Management. He has specialised in water stocks since 1980, and today puts together water portfolios for wealthy clients, with a bias towards stocks set to benefit from China’s growth and water-related problems. He suggests six stocks to look at. Three are based principally in the US – Watts Water Technologies (WTS, $32), ITT Industries (ITT, $106) and Pentair (PNR, $37) – and three are from Europe – Veolia Environnement (VVD, e39), RWE AG (RWW, 4,230p) and Suez (012052, e27). Two other China-related plays previously suggested by MoneyWeek are Consolidated Water (CWCO, $21) and agribusiness giant Bunge (BG, $58).
Published in Economics
| More
articles
by
Simon Wilson
MW_RelatedArticlesFooter
MW_MoneyMorningSubscribeFooter.ascx
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Deputy Editor, John Stepek, and guest contributors.
Sign up, FREE, to Money Morning here.
