5 Trends For 2018: The Year Of The Dog

By Debra Tan 14 February, 2018

We could be heading for dog days this year, so stay on top of our 5 trends to keep leading the pack

We are in puppy love with China prioritising protection over GDP; watchdogs with teeth bring tough enforcement
New paradigm of water-nomics = disruption & biz models have to go circular; trade war possible but China is ready
China is top dog on climate change & waterproofing risks for basins; no water means dog-eat-dog world so plan on

We called a new pecking order last year and events (the likes of which the world has never seen) have certainly pointed to a shift in the mantle of global leadership. US foreign policy attitudes towards Pakistan, Palestine plus the entire African continent and other “$h!thole countries” have meant more countries now turn towards China to drive growth, stability, infrastructure and trade. The Fire Rooster definitely stood up to its name. Who would have thought the change would be so drastic, yet … here we are.
As we move from the Fire Rooster to the one of the Earth Dog, we can almost hear an audible sigh of relief. It sounds less fiery but will the Dog roll over or be barking mad?
Here are our 5 trends for the Year of the Dog:

1. And they call it puppy love … regulations & laws we like!

This year, we are in love. We believe the Year of the Dog heralds a new beginning for water.  In a year of flip-flops, China has stuck to its guns in walking the path of a Beautiful China. What’s not to love when 1 January 2018 kicked off with the new “Water Ten Law” coming into effect.

We said that China would have to slowdown GDP growth to tackle its environmental issues…
… indeed Xi made no mention of a specific GDP target for 2020

We have long argued that limited water means tough measures; that economic planning needs to consider water resource use and pollution. We called this water-nomics. We also said in “5 Trends for the Year of various animals” that China would one-day realign the economy and the environment: that GDP would take a backseat; that China would have to slowdown GDP growth to tackle its environmental issues. We sounded like a broken record and everyone thought we were barking mad. Well, the government has put the environment ahead of the GDP by de-emphasising the need to achieve GDP growth by all costs. Indeed, Xi’s speech during the 19th National Congress last November made no mention of a specific GDP target for 2020.
Recently, we have also seen a revision of fake and over-inflated GDP figures across various cities, counties and provinces. These point to slower economic growth and a cool down across sectors including dealing with overcapacity in heavy industries such as coal, steel and cement – these are all positive for the environment.

The future is all about prioritising “great protection” over “great development”

President Xi’s consolidation of power also bodes well for a Beautiful China and the Chinese government looks like it is on track to deliver efficient and responsible use of water resources to ensure water for all in China (which incidentally happens to be in line with China Water Risk’s vision). The future is all about prioritising “great protection” over “great development” – more here.
2017 also saw a new Environmental Protection Tax Law, Reform Plan for Ecological Environmental Damage Compensation System and a Nuclear Safety Law – all have been put in force on 1 January 2018. In case you have missed out on these laws and regulations catch up with “5 Laws to Watch Out For in 2018”. There was also a ban on 24 types of waste imports followed by a plan to clean-up China’s own recycling sectors – Love it all!
Xi's thought & Water      Green Development For A Beautiful China      5 Laws For 2018
However, implementing water-nomics means tough trade-offs ahead and we will likely see action on this carried out along the Yangtze.  Why do we think water-nomics has legs? Because we have just finished our second joint policy brief for the Foreign Economic Cooperation Office of the Ministry of Environmental Protection (MEP-FECO). Two things of note here: first, is that this new brief expands on an earlier brief published in 2016; it deep dives into more GDP on less water and pollution for provinces along the river; not just sections of the river. The second is that the brief was initiated by MEP-FECO. This second water-nomics policy brief is currently being reviewed and so watch out for it in 2018. In short, a new era has begun and it’s going to be beautiful.

2.  Who let the dogs out? … watchdogs with teeth 

Expect the MEP to be like a pitbull with lots of teeth…

We may be in love but it’s not all labradors and poodles. Like the shift in music from Paul Anka/Donny Osmond’s Puppy Love to Baha Men/Nine Inch Nails’ Who Let the Dogs Out With Teeth, expect the MEP to be like a pitbull. Enforcement and fines have been steadily rising over the last few years but now the rules have changed. With the Water Ten Law in place in 2018, we expect to see much more action and fines on the water front. The MEP is also reviewing monitoring regulations to prevent officials from interfering or falsifying pollution data, which has become an issue.  Last month, officials in Jiangxi and Henan were dismissed or punished for tampering with smog reading equipment. 
But it is not just the MEP, the all-powerful Ministry of Finance (MoF) and China’s State Administration of Taxation (SAT) are also stepping up. Last year saw an expansion of the Water Resource Tax beyond the successful pilot province of Hebei into nine other provinces.
China's Water Tax Expansion
Why is this important? Because water resources fees, previously wholly managed by the Ministry of Water Resources (MWR), are now managed as a “tax” which means it will also come under the auspices of the MoF with the structural tax collection backing of the SAT.
A stronger collection system meant that after a year of piloting the tax, Hebei collected RMB1.82 billion in water taxes. This increase in the cost of water has provided the impetus for companies in Hebei to invest in tech upgrades to improve their water use efficiencies. More on this in “China’s Water Tax Expansion”.

…this teeth is not just in the format of laws but support from multiple govt departments

In short, both the MWR and MEP have been given “more teeth” to rein in water use and pollution respectively. Note that this teeth is not just in the format of laws but support from multiple government departments. This is a clear sign of more comprehensive and cohesive policy action – perhaps finally the reform is here. For 2018, watch out for more action ahead from the MWR and MEP on water use and discharge permit trading to help manage water through a water-nomic lens.
Basically, we expect China to use everything in its arsenal to step up monitoring and action; even the public is playing an increasingly larger role as a watchdog. Firstly, there is the new River Chief system where the public can now complain to a party official directly, holding him/her directly accountable. Recently, Hubei even appointed “police chiefs” to help river chiefs combat pollution, destruction of resources and resistance to law enforcement. This should yield improvements in river quality across China. Separately, watchdogs like IPE are also stepping up their game with new features in their real-time emissions map. For textiles, this includes matching fashion brands with their manufacturers (denoted by the brand logo on the map).

Public participation is also officially being actively embedded into China’s legal framework

The use of social media plays a large part in facilitating this but public participation is also officially being actively embedded into China’s legal framework. According to a study by Pacific Environment, pilot cities with higher local GDP were more active in engaging the public with environmental information disclosure, public opinion solicitation and handling of public reporting of pollution issues. Hear from Pacific Environment directly in “Increasing Public Participation In China’s Environment”.
China's river chiefs who are they v3      Real-Time Monitoring - Cleaning Up Textiles      Public Participation China's environment
It’s not just the government using the public as a watchdog, publically available environmental data (PAED) can also be used by commercial banks and other bodies to limit or end lending to polluting firms. As mentioned before in “8 Game-Changing Policy Paths” published in 2015, China wants to embed environmental risks into credit lending under the ‘Enterprise Environmental Credit Evaluation Scheme’.
Using Public Environmental Data
Jiangsu is leading the pilot in this. It uses a corporate environmental rating system where companies are rated as green, blue, yellow, red or black. Basically, lend to companies rated green or blue, place loans to yellow firms on the watchlist, and call in loans to those which are rated red or black. Already in Jiangsu, a company’s rating on the five-colour scale directly affects the price it pays for water and power, with firms classed as red or black paying 0.6 yuan or one yuan more per tonne of water – more from Syntao’s founder Dr. Guo on this here.
The big clean-up is here – it’s all happening, for real. This means that transitions could be accelerated. As watchdogs become more powerful, environmental disclosure will be on the rise and become increasingly accurate. More importantly, current leaders of the pack may be toppled and new underdogs and top dogs will emerge.

3. That dog won’t hunt … old paths likely blocked; even new paths have obstacles

We have argued previously that water savings is not enough and that China will have to revamp its industries to ensure enough water to drive growth. It will have to push new Strategic Emerging Industries and Made in China 2025 as well as transition heavily polluting industries toward circular economies – more on this here. Enforcement and re-organising industries and crops to find the optimal mix of industry or crops to extract more GDP on less water and less pollution will cause massive disruptions.

Volatility ahead plus a break up of old ways

This means even more volatility ahead plus a break up of old ways. Old ways and business models won’t work and we will have to shift from a linear to circular economy for some sectors. Take fashion for example.
Status of Fashions Redesign
As we’ve been saying, the fast fashion industry is facing fundamental changes to its business model from raw material availability to cost margins and what to do when consumers are done with the product. The industry has recognised it needs to change and is making efforts. However, as highlighted by our survey of 85 Chinese manufacturers last year, there is now an opportunity to accelerate this shift to a circular and clean business model by working with these manufacturers.  See key findings in our article “85 Voices: Insights From Chinese Textile Manufacturers”. There is no simple answer or any models to copy and paste in this transition but it is vital that it happens and innovation will be key.
China is looking through a water-nomic lens and will make policy and strategic decisions accordingly. So when looking at future China trends, others should also follow suit. Water is a local risk and water-nomics means that risks along a river basin must be considered. Large scale inspection campaigns which have started along the Yangtze will thus likely hurt multiple industries located along this river not just in China but globally. In particular, the basin is a key supplier of critical raw materials and fashion raw materials to the world. Check out our hopes and fears for various industries … here.
Hopes and fears      Electronic Brands Sustainable Or Not      Fast Fashion Sucking Aquifiers Dry

China has also found itself on the brink of a trade war with the US along with Russia. Will China prevail?…

However, this does not mean that new paths are smooth. China has encountered many stumbling blocks on its path towards its Strategic Emerging Industries from renewables, advanced manufacturing to growing an environmental services industry. Shutting down overcapacity and building a circular economy have also been slow. Much of these are due to current vested interests, mis-aligned policies and laws as well as the need to re-train and create new jobs. Although these are being addressed domestically, China also faces obstacles internationally: its attempts to leapfrog by buying advance tech companies overseas have been blocked. China has also found itself on the brink of a trade war with the global top dog, the US, which accused it of “attempting to erode American security and prosperity” along with Russia. Will China prevail?

…China’s ability to plan for the long term under one party has stood it in good stead

The answer is unclear. The path will depend on actions taken today. China’s ability to plan for the long term under one party has stood it in good stead here, allowing it to make tough long term decisions which benefit the environment instead of pandering to the electorate. Meanwhile, the US is going back to coal and relaxing its EPA regulations. Does this mean we could see pollution shift to the US along with re-shoring?
Water in HK's diet
Trump will also likely see his wish of more exports to China come true as China moves to import more water intensive goods. Beef is just the start … the China diet is far behind that of Hong Kong’s. According to paper published last year by Davy Vanham, “Hong Kong’s water footprint is almost double the Chinese water footprint of 2,413 litres/ capita/day” … more from Vanham in “The Water Footprint of Hong Kong’s Diet”
That said, China has a plan to reduce water use in food by controlling the Chinese diet!

In the Year of the Dog, remember past actions will no longer dictate future actions

In the Year of the Dog, it is prudent to remember past actions will no longer dictate future actions. We can expect environmental innovations in finance to Blockchain. Silly ideas like meatless meat and waterless toilets/tech and leather from pineapples may move from fringe to mainstream.
The path to prosperity is “unusual”.
Toxic Phones
Finally, in a future of Beautiful China it is paramount to face the ugly truth that clean and hi-tech is simply not clean. It is reliant on toxic rare earths and other dirty critical raw materials (CRMs), primarily sourced from China, which means the pollution is left in China.
Fed up with the global black market for some CRMs and the lack of interest from the rest of the world, China could use its hold on these CRMs to hijack the entire global industries from electronics, ICT, robotics, clean energy to defense and leapfrog ahead – more here in the 2017 report we co-authored for CLSA. This adds an interesting dynamic to the looming US-China trade war.
All in all, China’s move to protect its limited water resources could leave the world in a very different place at the tail end of the Dog year.

4. Climate change … top dog China leads the pack 

Extreme weather was all the rage in the Year of the Rooster. Monsoon rains last summer caused devastating floods in India, Bangladesh and Nepal, affecting over 40 million people. In Europe there were record rains and floods in Paris and the US and the Caribbean faced multiple devastating hurricanes. The tail end of the Rooster even shooed in a bomb cyclone on the East Coast and parts of North America is experiencing a record-breaking freeze.  Yet in the year of the Rooster, the US pulled out from the Paris Agreement.

Whether you are a climate denier or believer does not matter…
…China believes in climate change

Whether you are a climate denier or believer does not matter. China believes in climate change. Why? Because it projects that temperatures in China will continue to rise by 1.3-5oC by the end of the century, it will also face significant sea level rise and changes in rainfall patterns. Droughts and floods are also expected to be on the rise. All of these will impact not just its food production but also its water resources, exacerbating scarcity. China has no choice but to de-carbonise and add power that does not require water to generate on a daily basis. In short green development is here to stay.
Green development needs green financing and here, China also leads the pack. In 2017, China was the largest issuer of green bonds at RMB249 billion. However, it has far to go: the International Institute of Green Finance of the University Central of Finance estimates that China’s annual climate finance needs are RMB2.5 trillion by 2020.
As we highlighted previously, much of climate finance globally is skewed towards mitigation rather than adaptation. In China, adaptation strategies cover a wide range of activities (see diagram below).

In 2017, China was the largest issuer of green bonds at RMB249bn but it has far to go…
 
…China’s annual climate finance needs are RMB2.5tn by 2020

China's climate change adaptation
Smart Subsidies for Renewables
So although we expect renewables expansion to continue fuelled by Green Power Certificates, there is much to do around adaption. Building resilience against water risks such as stress, scarcity, droughts and floods plays a key role here and water resource management is a large part of adaption spending. UNEP estimates around half of adaption finance is for water & wastewater projects.
Aside from financing opportunities and green bonds issuance, climate & water risks also impact bank loan portfolios. Not just physical but regulatory risks make impact on valuations more tangible and immediate; there is clear credit risk. In China banks have started to stress test their loan books to new environmental regulations. In this regard, we are pleased to say that we are a part of the China Green Finance Working Group on Environmental Risk Assessment (ERA).

Banks will likely have to reassess their loan book from a basin perspective

The group led by ICBC and chaired by Dr Ma Jun, the Co-chair of the G20 Green Finance Study Group has a long term view to embed environmental risks in credit lending policy. Here again, water is a location based risk and banks will likely have to reassess their loan book from a basin perspective; industries clustered in one location increases the size of the risk. For instance, Hurricane Harvey disrupted multiple industries including a third of American chemical production.

ESG, ERA & green finance are here to stay in China

ESG, ERA and green finance are here to stay in China.  Last December at the SIF conference, China launched SynTaoGF–CaiXin ESG 50 Index (SGCX ESG50 Index), the nation’s first equity index incorporating ESG performances of listed companies in the mainland Chinese market – read more here.
Finally, its not just green finance, China is also providing infrastructure finance to developing countries through its ambitious Belt and Road Initiative and the Asia Infrastructure Development Bank (AIIB). With the US and Europe retreating from foreign aid, China may well be the be the top dog here too with a Chinese model for foreign aid.
Risks at a glance      Key Takeaways 5th China SIF      Chinese Model for Foreign Aid

We could be heading for dog days this year, so start waterproofing your water & climate risks now!

All this means … watch out for more literature on ERA from China, new tools to help identify environment risk and we may well see scientists and businesses working together closely in 2018. Make no mistake, China is no longer operating under the premises of the old paradigm. We could be heading for dog days this year, so start waterproofing your water and climate risks now!
 

5. Not enough water … avoiding a dog-eat-dog world  

Dogs are loyal animals, supposedly protectors and our best friends, but they also have a negative side representing scavenging, envy, war and greed. This ugly side of the Dog will likely rear its head in an environment when there is ruthless competition; a dog-eat-dog world can be ruff (sorry couldn’t resist). So when there is not enough water to develop, it is best to plan, plan and plan to avoid such.

Another inconvenient truth is that not just China, but many countries in Asia face water stress

Another inconvenient truth is that not just China, but many countries in Asia face water stress. As if this was not bad enough, 16 countries are reliant on water from 10 rivers, all of which are affected by climate change in some way – from vanishing ice to rivers changing courses. Millions of lives and trillions of dollars invested along these rivers could be affected yet despite the gravity, there is limited action; many are not even aware Asia faces such risks. We are currently working on a report together with the Chinese Academy of Science to attempt to map such water-nomic risks on a macro-level across Asia; the initial results are shocking and worrying. Watch out for this report in 2018.
Water As Leverage Resilient Cities
The challenge we face is “wicked”. As Henk Ovink, the first ever Special Envoy for water appointed by the Dutch Cabinet, succinctly summarises, “we are not even beginning to understand the complexity of water crises”.
Ovink is currently taking lessons learned from the US, where he led President Obama’s Hurricane Sandy’s Rebuilding Task Force, and applying them to Asia – more from him on his project in “Water as Leverage for Resilient Cities”.
 

Asia has almost no choice but to rethink development through a water-nomics lens…
 
…again, China can play a leading role & is starting to doing this at a basin level

This means that not just China, but Asia needs to rethink development through a water-nomics lens. Disruptions will thus be deeper and larger. We fear that we have yet to grasp the implications of this. An undeniable way forward will be business unusual; Asia has almost no choice but to rethink development. Here, we agree with Ovink – that going after low-hanging fruits are not good enough and that “the wickedness of the challenge” brings “a huge opportunity to leapfrog and make those connections across interests, scales, sectors and borders.”
Again, China can play a leading role and is starting to doing this at a basin level. Water stressed basins such as the PRD and the YRD are at the forefront of the War on Pollution and building sponge cities; plus industries in these basin must take collective action to mitigate and adapt. We therefore also expect to see more industrial parks in China, like TEDA, to turn to water stewardship. We will hopefully also see MNCs and global brands strive to become better water stewards driven by real water risk exposure in China.
Ultimately, multiple stakeholders need to take action. Science also needs to stop speaking in tongues to counter fake news and much more funding needs to be directed into research of climate impacts on water, the resource most vulnerable to climate change.
5 water must knows - PRD      Parklife water Stewardship - TEDA Pilot      Science Unusual to counter Fake News
In Asia, we need to start reframing the climate conversation in terms of water and not carbon to accelerate building resilience. There are no transboundary agreements on the sharing of common resources across countries in Asia at present, but this does not mean we cannot all work together to tackle a common threat.

We need to understand our fundamental building blocks & there is nothing more basic than water

We need to understand our fundamental building blocks and there is nothing more basic than water. If we understand that we don’t have enough, we would generate power differently, invent different industrial processes, grow different crops and decarbonise so as not to exacerbate scarcity. We need to factor this into our decision making, otherwise we will 画虎类犬(Huà hǔ lèi quǎn) – setting out to draw a tiger but ending up with the likeness of a dog.
It’s time to peel off the blinders and see the whole picture in the Year of the Dog. We can bitch about the unfairness of the situation and the mismatch in geographical resources or we can go fetch ourselves a bright new future.

So plan on… here’s to “prosperity unusual”

When it comes to water, there is no such thing as over-planning but a failure to plan can bring about disaster; case in point is Cape Town. So plan on… and in your plans, be good to the planet; it is the Earth Dog after all. There are daunting challenges ahead but we remain positive. May your glass never run out of water … here’s to “prosperity unusual”. Happy lunar new year!


Further Reading

  • 5 Laws To Watch Out For In 2018 – From environmental taxes to compensation mechanisms to nuclear safety, China is continuing its regulatory push in the new year. China Water Risk’s Yuanchao Xu reviews 5 key laws to watch out for in 2018
  • China’s Water Resource Tax Expansion – China’s water resource tax pilot has expanded to 9 provinces including key ones like Beijing & Tianjin. China Water Risk’s Yuanchao Xu explores the successes of the initial Hebei pilot and why the additional provinces may benefit
  • Increasing Public Participation In China’s Environment – Can the public participate in environmental decision-making in China? Pacific Environment’s Guo Hanyuan, Kristen McDonald & Zhao Zhong expand on results from their 4-city pilot study and identify challenges
  • The Water Footprint Of Hong Kong’s Diet – Urban centres are very much dependent on distant resources and as a result, their populations are unaware of their indirect water footprint. Davy Vanham from the European Commission looks at Hong Kong’s diet’s high water footprint
  • Water As Leverage For Resilient Cities – Water represents man’s most challenging & complex risk but it can be leveraged for catalytic change. China Water Risk asks Henk Ovink, the first Special Envoy for Water in the world, how this can be achieved
  • 5 Trends For The Year Of The Rooster – The Rooster crows a new pecking order as China leads the global climate fight & drives structural changes at home. Stay on top with our 5 trends and make sure you are not walking on eggshells but laying golden eggs
  • 5 Trends for 2016: The Year of the Monkey – Prioritising environment alongside employment signals a reshuffle. To show it’s serious, China will “kill a chicken to warn the monkey”. The Year of the Monkey brings with it wild swings, so check out our top 5 trends in water for 2016 for it is better to be in a position to disrupt than be disrupted
  • 5 Trends for 2015: The Year of the Goat – As China moves to re-balance its economy and environment, Beijing will shepherd the nation towards water, food & security. For the Year of the Goat, it is better to be the surefooted goat than the sacrificial lamb so check out our top 5 trends in water for 2015
  • 5 Trends for 2014: The Year of the Horse – With environmental risk cited as one of the top risks most likely to derail economic growth along with the banking crisis and housing bubble, check out our top 5 trends in water for the year of the Green Horse
  • 5 Trends for 2013: The Year of the Snake – Not sure what happened in 2012? Read our review and find out what our top 5 water trends are for the Year of the Snake. Will we be bogged down or will we slide ahead?

Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
Read more from Debra Tan →