China Water Risk’s 5 Trends for 2016
By Debra Tan 4 February, 2016
The Year of the Monkey brings with it wild swings. Check our our 5 trends for it is better to disrupt than be disrupted
Here we go, swinging into the Year of the Monkey. If you thought 2015 was “happening” for water and the environment, brace yourself, Monkey by nature brings with it more energy, pizazz and playfulness than the surefooted goat.
Brace yourself, Monkey by nature brings with it more energy, pizazz and playfulness than the surefooted goat
Last year, we said the year of the goat was all about … 亡羊补牢literally “mend the fence after a sheep/goat is lost”. In short, it is never too late to make amends. Reform is always difficult and mending fences can be time consuming and costly, but it is better to swallow ‘the medicine’ and pay to clean up/invest in the environment now than to suffer in the long term. As expected in 2015, we saw central government shepherding China to the way of “The Big Clean-up”.
Most market observers would agree that this inflection point has arrived – the masses are grumbling about bad air and water pollution thus are worrying over what is safe to eat. Moreover, continuance of business-as-usual will steer China away from the goal of ever-lasting sustained economic growth. Implementing a framework in 2015 to exercise self-imposed austerity on water use and pollution was imperative.
2016 is still firmly fixed on achieving harmony between the economy & the environment
The 2015 Water Ten Plan saw clear “favourites” amongst industrials with textiles/fashion industry as the most “hit” sector. Target regions in the Water Ten Plan also signal that central government understands both regional pollution and water use stresses. These together with multiple game-changing policies introduced in 2014 and throughout 2015 indicate that the direction in 2016 is still firmly fixed on achieving harmony between the economy & the environment.
Last year, we showed in “China Water-nomics” that limited water and water caps and targets restrict GDP growth to 5.7% between 2020 and 2030. We also explored trade-offs between food, energy and water security: tough decisions will have to be made – should China be growing a quarter of the world’s cotton, making a significant chunk of global shoes, fabrics and the world’s electronics/ mobile phones? Even energy decisions today impact water resources tomorrow and less water in turn restricts long term social and economic prospects in China.
the era of a free ride at the expense of China’s environment is over – fundamental building blocks of that were dismantled last year
In our small interlinked planet, what China does matters and we have all played a part in polluting China. Those of us enjoying cheap “made in China” goods from fashion, electronics to steel have all had a free ride – cheap goods at the expense of China’s environment. Even electronic waste is exported back to China; again China’s environment suffers. One could argue that global consumption-led growth was only possible due to China’s lax/mismatched environmental standards, regulations and enforcement. This era is coming to an end; fundamental building blocks of that lax regulatory environment were dismantled last year.
It’s time to buckle up for some major swings in the year of the monkey – the Fire Monkey no less. Depending on how you are positioned … everything could go up in smoke but then again, a phoenix could rise from the ashes.
Ultimately, ‘Made in China 2025’ and drafts of the 13th Five Year Plan (13FYP) all point towards a brave new world of:
- consolidating & cleaning up the old industries;
- pushing into the new strategic emerging industries;
- looking for growth with limited water; and
- pioneering a new world order in developing circular economies.
Monkeys are highly imaginative …
…expect innovations galore and disruptions plus favourable policy winds are blowing in China
…but beware of 杀鸡儆猴 – “kill a chicken to warn the monkey”
Monkeys are highly imaginative so if you have been dreaming of moving in any of these directions, this is the year to put it all into practice. Expect innovations galore and disruptions to business-as-usual: think big and think disruptive, favourable policy winds are blowing in China; 2016 is the dawn of great potential and opportunity.
But a word of caution – for private investment to pour into grow the projected RMB8 trillion environmental protection sector in the 13FYP, investors are going to have to see the enforcement mechanism working. The fastest way for central government to accelerate capital is to杀鸡儆猴 or “kill a chicken to warn the monkey” – to warn the many by punishing a few. Expect multiple “chickens” will be slaughtered, once the respective environmental laws and plans are approved and effective.
In times of such wild swings, know your exposure to such risks and be prepared to act for things can move into place fast. Be warned, the shepherd will move to complete changes to the rules of the game in 2016 with:
- The Soil Pollution Prevention and Control Action Plan;
- Changes in the Water Law to ensure effective implementation of the Water Ten Plan; and
- Provincial water allocation between agriculture, industry and municipal use to stay within the national water use quota
Here are our 5 trends for the year of the Monkey – be sure to swing away from danger and towards prosperity in 2016…
1. No more monkey business: be green and prosper
The year of the Monkey is supposed to herald a new beginning, a new hope. 2016 is the start of the 13FYP -China’s next phase. Gone are the days of endless growth and over-capacity as China puts finishing touches on the “no more monkey business” framework this year with an updated water law and the much anticipated plan to tackle soil pollution. It is time to stop monkeying around and get serious with cleaning up pollution on all fronts – air, water and soil.
Structural revamp and more data are key …
…water use and discharge trading markets will be built on data/IT upgrades & innovations
As mentioned, China has to show it’s serious about delivering the promise. Only with proof of enforcement will private capital rush in. “Sacrificing chickens” by punishing violating companies and corrupt officials is but a part of the puzzle; the other is the pursuit of more data to reflect the real state of China’s environment. A comprehensive and cohesive monitoring system of water use and pollution with central responsibility is needed. Moreover, measuring & monitoring methods need to be standardized across the country and ministries. The revamping of these structural differences alone is a monumental task. We believe this will be realized in the 13FYP.
Naturally, wastewater and solid waste treatment/sludge will benefit but 2016-2020 should see a hotbed of IT innovations (hardware & software) to facilitate enforcement and monitoring. Clear winners here are equipment monitoring, remote sensing, drones and big data platforms, which are all in line with China’s Internet Plus and advance IT services push.
These data/IT innovations will be the essential foundation on which the carbon trading markets and water rights trading markets for both water use and wastewater discharge will be built. See why our wish for more data will come true in the 13FYP here.
monitoring a few is easier than monitoring many … Beijing will move to consolidate industries
When it comes to monitoring, monitoring a few is easier than monitoring many. For this reason alone, we see Beijing moving to consolidate some industries – textiles, cement, steel, coal and fertiliser to name a few. All pollute China’s air, water and/or soil. SOEs may be forced to perform national service by absorbing smaller more polluting mines/factories and for sectors where SOEs do not dominate ie textiles, factories will have to work together to meet the new tough standards or risk shutdown.
We choose to see these in a “glass is half full” way – the silver lining: addressing over-capacity issues thereby allowing markets to stabilize. The price of goods will finally reflect the cost of environmental regulation. Tariff reform, while important, is only a small component of the larger re-haul.
Action will also be concentrated in the pollution hotspot areas identified in the Water Ten Plan … the Yangtze River Delta (YRD), the Pearl River Delta (PRD) and Jing-Jin-Ji (Beijing, Tianjin, Hebei). Industries that are on the “most polluting list” and in these regions and earmarked for consolidation will feel the most heat.
Industrial China will be overhauled to favour the rise of the services industry. For the first time, in 2015 more than 50% of GDP was derived from services. Environmental services are expected to drive this in the future. The 13FYP is just the start.
The risks are great; the opportunities are greater – no more monkey business means 2016 brings new hope for China’s environment. We cover what this could look like in “Be Green & Prosper”. As for quantifying water risks, read on.
Still doubting the do-over? China’s leadership issued an open declaration of war on pollution. You don’t declare war if you don’t think you can win – I leave you to ponder one of Monkey’s quips from the Chinese classic “Journey to the West” … “What you must do,” said Monkey, “is lure the monster from its hiding place, but be certain it is a fight you can survive.”
2. Monkey Go West: shuffling the resource deck
天下太平or “Peace under the Heavens” is the time-honoured ultimate goal of multiple dynasties in China. To achieve this, the people need to feel safe – access to clean water, abundance of food and fuel were essential. These basics still apply today. While tackling pollution and delivering safe drinking water and food safety is of utmost importance, so is making sure there is enough water to grow food, generate power and fuel the economy for long term prosperity.
The difficulty here is that China has to do all this with limited water. What’s worse is that water in China is not where it is needed, amplifying scarcity and adding to water stress on China’s aquifers, lakes and rivers. Also, the availability of water is becoming less predictable with droughts and floods. Melting glaciers, which provide a steady flow of meltwater, are vanishing at an alarming pace, making the management of water, all the more important.
2016 No. 1 Document says …
…hold the Three Red Lines on water – dual control action on water use and intensity
As if on cue, the 2016 No. 1 Document released last week, includes water as China’s top priority, in particular specifying that State Council aims:
“To implement the most stringent water management system to strengthen the management of water resources by holding the “Three Red Line” rigid constraints through dual-control action of water use volume and intensity. To strengthen groundwater monitoring and carry out comprehensive management in regions experiencing groundwater over-exploitation. To implement the management of shoreline usage of river and lakes.”
China is no stranger to the shuffling of resources on a grand-scale, be it diverting water from the South-to-the-North or shifting polluting industries as part of the Go West policies. Shoring up GRP per capita from western regions helps close the income-gap but have these developments from rare-earth mining to bottling glacial water compromised China’s upper watersheds? We will continue to explore these trade-offs in 2016.
Yet not going west is not an option. With limited room to maneuver, it comes down to getting smarter about industrial mix in the West and throughout China. We are in store for a grand shuffle of the deck towards Made in China 2025. Sectoral water allocation by province expected to be introduced this year will signal what’s hot and what’s not.
In the parched North, food and energy (coal) will get their share of water but watch out for trade-offs between coal and non-edible agricultural products such as cotton in the North China Plain, between vegetables and meat and the rise of water rights trading market pilots in Ningxia.
Solving the water-energy-food nexus is a priority but there is the added complexity of the constraints of climate change and China’s global commitments. At COP21, water was recognized as the most vulnerable sector: China faces an assault of glacial melt and sea-level rise at both ends of its rivers, plus unpredictable snow and rainfall in between.
China’s own 3rd National Assessment Report highlights the country’s freshwater resource exposure to climate risks plus implications for agriculture in both the North and the South. Expect cross-sector solutions like using renewables to power irrigation and more efforts to secure food supply that simultaneously save water and lower carbon emissions – we explore more in “More Food in a Changing Climate”.
Also, expect mismatched central and provincial policies to be realigned in 2016. Provinces that still believe in the old way are in denial.
With the disappearance of freshwater lakes in China, expect more conversation and action on China’s two key rivers: Yellow & Yangtze. The Hai River will also be a hotspot as per the Paris Water Pact.
This and other provinces may well feel the heat in 2016 with the upcoming soil plan. President Xi’s recent announcement that no large-scale development projects are allowed along the Yangtze River is just the start. It is worth remembering here that “three-fifths of China’s sown area is exposed to 85% of the nation’s heavy metal discharge” as per HSBC’s “No Water, No Food” report.
Let’s also not forget that rivers can change course. Water is essential for survival and everyone is deserving but in a future of trade-offs, it is better to understand which sector(s) the water gods are favouring. Don’t let the new water allocation policies make a monkey out of you – start by finding out how you access water in China.
3. Monkey Go Overseas: use other people’s water
Exploiting other people’s resources has been how countries have gotten rich in the past. But gone are the days of the British Empire and European colonies across Asia & Africa so it’s down to overseas investment, mergers and acquisitions. To this end, the 13FYP supports Chinese companies’ overseas investment “to deepen their integration with the global supply chain” – a nicer way of saying: (1) move polluting supply chains out of China and (2) it’s time to use other people’s water to grow China’s economy.
Managing China’s Water-nomics mean that 2016 should see continued Chinese acquisitions/ investment overseas from buying mines, reshoring cotton mills, shifting dyeing factories, building hydropower dams, nuclear power plants to milk/beef/pork production and farmland.
Donald Trump may see his wish come true: Apple’s supply chain could be reshoring to the US sooner rather than later and perhaps the vast amounts of e-waste the US generates can also stay in the US.
Speaking of Apple…
Back in 2010 it took a group of Chinese NGOs a year and a half to persuade Apple to be at the table alongside other brands to start addressing supplier’s violations cited by their reports. Apple joined China’s Green Choice Alliance’s call to green their supply chain in late 2011 only after a special report titled “The Other Side of Apple” documented evidence that Apple’s suppliers were indeed responsible for numerous environmental pollution violations that resulted in the poisoning of workers at supplier factories. CCTV even aired a 40 minute documentary on Apple’s polluting supply chain. Now, years later, Apple is the leader of the pack in greening its supply chain.
Do Chinese companies fare better? How do Chinese dam builders fare as the world’s #1 builder of dams – do their actions match their words?
International Rivers recently surveyed the actions of China’s biggest builders of dams globally – you can read about their findings in “Comparisons of China Hydro Overseas”. Interestingly, six of the seven companies surveyed responded and engaged with the NGO before the publication of the benchmarking report.
The only company to not actively participate was Huaneng Lancang which immediately engaged after faring badly in the report. In contrast, only 9 out of 29 global IT/electronic brands responded to China’s first call to green their supply chain.
Does it mean that China Huadian or China Three Gorges are more responsible? Or perhaps they are more sensitive about reputation risk and/or are better at public relations? Let’s see… laggards in green supply chain in China still contain “respectable brands” that we assume are clean such as Victoria’s Secret, DKNY, RIM (Blackberry) and SingTel.
Basically, it comes down to the company, and not where they come from. Some companies are doing good and some lag behind, but we can all do better. Many more Chinese companies are now disclosing CSR practices – check out the good work of Syntao here.
Separately, are pleased to see businesses in China embrace the AWS International Water Stewardship Standard as the first step towards being benchmarked globally. The Alliance for Water Stewardship (AWS) expands on this in “Developing a Global Water Stewardship System”. We also take comfort that the 13FYP also sets out guidelines on how Chinese companies should behave overseas. As to who will play the enforcement role, this remains to be seen.
If we don’t want China to shift a significant part of the global supply chain out of China, we are going to have to help China transition towards a circular economy.
Indeed, in a resource constrained world, we should all be trying to make this transition. Apparently, according to stargazers, “humanity’s quest for knowledge will be greatly advanced this year”. Perhaps the stars are finally aligned for the global economy to break from its linear path.
Regardless, 2016 should see China playing a dominant role overseas with AIIB, One Road, One Belt and more trade. While a potential Central Asia economic boom could see capital rushing in, it is important to remember that Central Asia also faces water issues with a shrinking Aral Sea.
He who controls water also controls the world…
we should all be rooting for Beijing to successfully steer China to a “long-landing” and a circular economy
Although the Amu Darya, a key river feeding the Aral Sea doesn’t start in China, the Indus, Brahmaputra, Mekong and Salween rivers do. A recent ICIMOD report warns of substantial glacier mass loss – glaciers within the Mekong river basin are projected to lose 39% to 68% of their mass.
He who controls water also controls the world. China, as the upper riparian, holds the key. We should all be rooting for Beijing to successfully steer China in its “long-landing” towards meeting climate goals on the back of a circular economy.
The “or else” is too depressing to consider … fingers crossed.
4. Avoid monkey-see, monkey-do: think disruptive but think comprehensive
The future is business unusual but, so far, China’s been good at copying-and-pasting business-as-usual models. It is clear that the past will not predict the future, so it is best to avoid monkey-see, monkey-do in the 13FYP period.
trade-offs within the water-energy-food-climate nexus mean hard choices …
…policy & tech innovations can disrupt
As discussed above, trade-offs within the water-energy-food-climate nexus mean hard choices. Policy decisions made at this nexus are disruptive across multiple industries. Separately, technological breakthroughs from gas fracking and new batteries to petri-dish hamburgers or 3D printed fashion can also disrupt.
Check out Li Ka Shing’s disruptive Horizon Venture’s recent investments … beefless burgers, eggless mayo (that can’t be called mayo), cowless milk and vending machines that deliver flavoured drinks without bottles. Too far out there? Horizon did after all invest in Facebook, Skype, Wazo, Spotify before we had even heard of them.
The next five years are about spotting and capitalizing on counter-intuitive trends like cows are thirsty and bad for climate change; fashion is dirtier than coal; or solving grain lost via transportation saves more water than irrigation efficiency. Un-siloing forces us to find comprehensive solutions. Often these are disruptive and trigger unintended consequences across industries, possibly even catalysing their collapse. Not so long ago cheap oil at USD30/barrel was unthinkable, but here we are – dwindling resource does not always mean that prices will rise nor stay high.
Contrary to conventional business wisdom, cheap oil at USD30/barrel could even fuel investment into renewable energy. Need this explained? Read this. Regardless of whether you believe that, we remain bullish on renewables – see why we think China’s renewables market is “Bigger Than You Think”.
Of course, hidden water risks related to renewables arising from water contamination from rare earth mining and processing need to be first addressed. Shutting down the rare earth black market in China that in turn could drive more investments in rare earths production globally could be a good start.
But are there even enough heavy rare earths to meet demand from new battery development or the aggressive pursuit of renewables and energy efficiency? Perhaps we can find a way forward and invent such products without certain rare earths? Or maybe China could pave the way to the end of built-in obsolescence in our electrical & electronic products.
It is time to take a hard look and rethink business models. Internet Plus could lead to water minus as the expanding sector will inevitably suck up more power (unless this is powered by renewables); more e-commerce = more packaging waste; more fast fashion = more clothes thrown away? Or maybe not – check out these collections made from damaged & discarded textiles, cut-and-sew waste and even surplus clothing labels by the eco-chic fashion award finalists.
Conventional wisdom may no longer apply in this brave new world
Conventional wisdom may no longer apply in this brave new world. New homegrown movements that can disrupt global industries are sprouting around Asia. For the Year of the Monkey, it is time to channel the progressive nature and pioneering spirit of monkey and… think disruptive, but also think comprehensive.
5. If you pay peanuts, you get monkeys – show me the exposure!
If you do not take the time/ make proper investments/ cut corners, you will end up with “monkeys”. In some cases, this could come with significant downsides as all the above trends impact the future outlook of multiple sectors. Revocation of water use permits has stranded mining assets in the past; regulatory risks pose real threats.
Clearly, the valuations of companies will be affected; yet compulsory disclosure of the extent of water risk exposure, water use or wastewater discharged is not required by any stock exchange in the world. Also, businesses, corporates, brands and investors have adopted a “minimal effort” approach towards assessing and quantifying water risk. Existing water risk valuation tools are still not widely used.
So why is this? Is it because the tools don’t really work? Or is it that investors don’t have the time – but then again that work could be outsourced – we would be happy to do it! Maybe they need to a range of values quantifying downside risk in order to invest time or money into assessing and quantifying financial exposure to water risk across business streams?
With a pollution clampdown and the rise of water trading rights, this context will likely change. Also, environment is now on par with employment:
|“We are pushing through market reforms to speed the transition to a sustainable growth model markedly more driven by innovation and consumption. Employment, income-levels and the environment are all high on our list of priorities.”
Li Keqiang, Prime Minister of China on ‘China’s Economic Blueprint’, The Economist – The World in 2016
China’s impetus to embrace the power of information may well be driven by the will to fight pollution
Data may be made available sooner than expected. China’s impetus to embrace the power of information may well be driven by the will to fight pollution. With more data, a better picture of the use of water resources and pollution stresses will emerge in 2016. We may see the introduction of pollution indices or even sectoral water risk indices to indicate levels of exposure of companies to physical, regulatory, pollution & reputational risks. Valuations across sectors may well see adjustments to reflect the “new China order”.
Visualisation of data also plays an important role – exposure & mapping tools may spring up
Visualisation of data also plays an important role. Imagine if you could see brand logos tied to factories lying near heavily polluted cities that are also showing water stress. This kind of visualization tool could well catalyse consumer action and jumpstart the rise of “green consumerism” in China. Now imagine all these water risk indices and localized visualization tools tied to credit financing and lending, not just across banks in China but also on e-commerce platforms like Taobao.
Surely, exposure & mapping tools of this kind may be worth more attention in 2016? Take a closer look, a change is coming. For the year of the Monkey, cast aside the peanuts and invest time and money into assessing related risks. Be ready to surf the new tide by suiting up with a bullet proof water risk strategy.
Innovation and “Chinese ingenuity” are the way of the future. A giant is turning around in a tight spot so knocks and bumps are inevitable. Something has to give for all monkeys cannot hang on one branch.
- 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?
- 5 Trends for 2012: The Year of the Dragon Find out what’s happened in the water space in the Year of the Rabbit and check out the five trends we see continuing into 2012, the Year of the Water Dragon
Read more from Debra Tan →