Magazine issues » Spring 2013

INSIDE VIEW: Coping with pollution and shortages in China

SplashThe emergence of ‘cancer villages’ in China has raised concerns over the purity and supply of water. Junwei Hafner-Cai of RobecoSAM discusses how an environmental policy shift could translate into investment opportunities.

Despite China’s strong economic growth over the past decades, its progress in managing and protecting its water resources has not kept up.

The World Bank estimates that the water crisis costs China about 2.3% of its GDP: 1.3% of which is because of scarcity and the rest from impacts of pollution.

China is reportedly confronted with an average of 1,700 water pollution accidents per year, reflecting the seriousness of this in the country.

The number of cases continued to increase throughout last year, leading to growing public discontent and more frequent demonstrations protesting against unsafe supplies.

The Ministry of Environmental Protection recently admitted the severity of China’s environment issues by acknowledging the existence of “cancer villages”.

It says that toxic and hazardous chemical pollution has resulted in many environmental disasters, cutting off drinking water supplies and even leading to severe health and social problems, such as cancer villages.

Water scarcity is also an issue. China’s available water resource per person is at 2,113 cubic meters, which is one-third of the global average.

The United Nations has declared that China is one of 13 countries experiencing extreme water shortages. This is particularly true in the more arid north of the country, where the concentration of heavy industries such as steel and petrochemicals places disproportionate pressures on the limited water resources in the region.

Intense industrial production is depleting China’s groundwater at a rapid rate.

In the 1970s, China extracted 20 cubic kilometers of groundwater a year, compared with 112 cubic kilometer a year today.

This heavy exploitation is worsened with poor environmental management practices. For instance, the North China Plain is suffering from severe groundwater pollution with more than 70% of overall groundwater quality classified as Grade IV, which means it is not suitable for human consumption.

This level of pollution of groundwater is particularly worrying as the North China Plain is one China’s most important agricultural region, producing corn, sorghum, winter wheat, vegetables and cotton. This has given rise to many cases of “poisoned” agricultural products from using contaminated groundwater.

Besides inadequate investments in wastewater infrastructure and poor management practices, water efficiency is low in China, which has resulted in massive wastage.

In terms of irrigation efficiency, China uses 15 times more water for agriculture than Israel, and 30 times more than the developed world in industrial production. Its thirst for this commodity is set to grow because water is a basic input for economic development.

No water would mean no energy, no production and, ultimately, no food.  

By 2025, China will have 221 cities with more than a million people and 15 mega cities with populations of more than 10 million. In comparison, Europe has 35 cities with more than a million people. To create theses cities, infrastructure such as adequate waste treatment facilities and clean water supply are crucial.

The formula for sustainable growth in China will lie in balancing economic growth and urbanisation, with a good quality of life and environment for its people.

The government recognises the severity of the crisis and has kicked off the year with a series of enhanced guidelines addressing usage, efficiency ratios and quality.

For instance, to encourage water efficiency, consumption targets have been set for each province. In Jiangsu – one of the most industrialised – consumption must be reduced by about 2% compound annual growth rate over the next five years amid economic growth.

This will require business solutions enabling the more efficient use of water resources.  

Also, more stringent targets for pollutant emissions have been set and water resource fees in some water scarce regions like Beijing and Tianjin will likely to see an increase of 20% to 60% over current levels by 2015.

Hence water-intensive or polluting businesses will have to reconsider how water-related impacts may affect their operations.

And, based on the recent guidance issued by China’s Ministry of Environmental Protection regarding the 12th Five Year Plan (2011–2015), revenues from the environmental protection sector, which includes solid waste, wastewater and sludge treatment, should grow at an annual rate of 30% over the next five years.

Given the Chinese government’s favourable policies supporting waste management, water and environmental protection, coupled with intensifying public awareness of these issues, we expect to see more investments flowing towards water efficiency and waste treatment. This creates a positive outlook for the sector.

Besides, according to ancient Chinese beliefs, the year of the snake always has money flowing its way. ­

Junwei Hafner-Cai is an analyst at RobecoSAM

©2013 funds global asia

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