Financial gap threatens to sink Beijing's ambitious water goal

PUBLISHED : Friday, 01 April, 2011, 12:00am
UPDATED : Friday, 01 April, 2011, 12:00am

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Earlier this week, China's government announced new targets for energy and water use.

The energy target got all the attention. This year, Beijing aims to reduce the amount of energy China burns to generate each unit of economic output by 4 per cent.

But Beijing's new target for water efficiency is more impressive. This year, the government hopes to cut the volume of water the country consumes to produce each yuan of gross domestic product by 7 per cent.

That's an ambitious goal, and one that the economy may struggle to achieve. But even if China doesn't manage to attain its desired reduction this year, the simple fact that officials are now prepared to set targets for water efficiency is both significant and encouraging.

It means they recognise that China has a big problem on its hands - a really big one. 'I'm a confirmed China bull,' declares Michael Komesaroff, head of Urandaline Investments, a specialist company researching China's resources and heavy industrial sectors, 'but if there's one thing that can destroy the China story, it's water.'

For years, China has been a wildly inefficient user of water. Last year, for example, the country consumed four times as much water to produce each unit of GDP than the average among its G20 peer group.

That's not just extravagant, it's crazy, considering that China has the most meagre water resources of any major industrial economy. As the first chart below shows, the country can boast only around 2,000 tonnes of fresh water for each inhabitant, compared with 25,000 tonnes in drought-parched Australia.

Worse, the distribution of supply and demand is grossly uneven. By far the biggest user of water is the agricultural sector, which swallows up 62 per cent of the country's total water supply. Four-fifths of that is used to produce China's grain crop, much of which is grown on the plains bordering the Yellow River in the country's arid north.

The north's summer rainfall only provides around a quarter of the water the crop needs, which means the rest - around 330 billion tonnes each year, according to the Ministry of Agriculture - has to be supplied from rivers and groundwater sources via irrigation systems.

That's more than China's water resources can support. With a third of the country's rivers so polluted that their water is unfit for agricultural use, groundwater is being used up far more quickly than it can be replenished.

Across much of northern China, water tables are dropping at a rate of one metre a year. In Hebei, the water table fell by an average three metres last year, with the decline as great as six metres in parts of the province.

With Beijing pressing for a 10 per cent increase in grain production, things simply cannot go on as they are. As Ministry of Agriculture researcher Peng Shiqi admits: 'The water resources used for agriculture are not sustainable.'

In the past, Beijing has sought to deal with shortages through grandiose engineering projects like the giant South-North Water Transfer project, which aim to increase supplies by diverting river water from the wet south to the dry north.

Now, the imposition of a water efficiency target is an encouraging sign that the government is aiming less at raising supplies and more at reducing demand.

It has plenty of scope to succeed. China's irrigation systems are desperately inefficient. The Ministry of Agriculture estimates that 55 per cent of the water flowing through irrigation channels is lost to leakage. Meanwhile, fields are watered mainly by wasteful flood irrigation methods. The adoption of modern drip irrigation systems, which apply small quantities of water directly to crop roots, could produce enormous savings.

Part of the problem is that water is simply too cheap. Although China is a dry country, as the chart below shows, water tariffs are set at around a fifth of the level of those in water-rich Canada.

But raising tariffs wouldn't be enough by itself to encourage more efficient water use. Although drip irrigation systems are not especially expensive to install, they are beyond the financial means of most ordinary farmers. With no access to small-scale lending facilities, farmers simply can't afford to invest in the equipment they need to improve the efficiency of their water use.

So although it is encouraging that Beijing now recognises efficiency gains are essential, unless the government acts to allow farmers access to the sort of microfinance facilities that have funded the installation of drip irrigation systems in other countries, China is unlikely to meet the government's ambitious new target for water use.