Too Big To Fail! Protect At All Costs
By China Water Risk 20 September, 2019
How will the march to a beautiful Yangtze River bring shocks & opportunities globally? CWR's new report explains
Rampant pollution due to rapid development in China’s socio-economic powerhouse, the Yangtze River Economic Belt (YREB), has led the nation to unleash multiple policy innovations to green the river that could bring shocks and opportunities globally, said CWR’s new report “Yangtze Water Risks, Hotspots & Growth” launched on September 3, 2019.
What happens on this river matters globally as impacts can be significant. Not only is the YREB China’s industrial heartland, it is also key to global supply chains. According to the report, if the YREB region was treated as a country, it would be the third largest economy with RMB37.4 trillion of GDP (after the US & China) and rank #3 in terms of population with 595 million people (after China & India).
If treated as a country, YREB would be the third largest economy with RMB37.4trn GDP
Actions taken by the Chinese government to protect the river thus results in unique business and investment opportunities. Yet, many have never even heard of the region, let alone the policies, targets and pilots specific to the region.
The directive from the top is clear. “We must not allow the ecological environment of the Yangtze River to continue deteriorating in the hands of our generation” said President Xi Jinping at a YREB conference in Wuhan last year. “We must leave our descendants a clean and beautiful Yangtze River” he added. At stake is 45% of China’s GDP generated in the YREB. The region is also important for national food and energy security, producing almost two-thirds of China’s rice and over three-quarters of the nation’s hydropower generation. As the report iterated, the YREB is simply “too big to fail and must be protected at all costs.”
|“We must not allow the ecological environment of the Yangtze River to continue deteriorating in the hands of our generation”|
President Xi, January 2018
At stake is 45% of China’s GDP generated in the YREB plus 2/3 of rice production & >3/4 of hydropower generation…
…the YREB is too big to fail & must be protected at all costs
It is not hard to see why China would want to protect the YREB, but it is also important to note that the 11 provinces and municipalities along the river which make up the YREB, from Sichuan to Shanghai are also key manufacturing hubs to the global fashion and electronics supply chains. Plus the region is a significant producer of some global critical raw materials essential for a smart and high tech future.
“Less obvious are the rising regulatory risks from policies & targets set to achieve more economic growth per drop of water used and per unit of wastewater discharged”
YREB-specific regulations and policies to protect the river have resulted in a new risk landscape warned the report. As co-author Feng Hu highlighted, “less obvious are the rising regulatory risks from policies & targets set to achieve more economic growth per drop of water used and per unit of wastewater discharged.” The report’s Yangtze Report Card, analysing the water-nomic performance of each province since 2005 signaled higher risk exposure for Jiangsu, Anhui and Shanghai as they currently lag on various water use and pollution targets.
Special attention should be paid to polluting & water intensive industries…
…e.g. 195 industrial parks will be reorganised into five world-class manufacturing clusters
The report also cautioned that special attention should be paid to polluting and water intensive industries as they will likely face aggressive action. Global and domestic investors and businesses are urged to get on top of provincial hotspots plus YREB specific “favoured” and “not favoured” industry lists. The magnitude of “industry reshuffling” is far reaching – for example, 47 hazardous chemicals plants along the river will be relocated and retrofitted and the YREB’s 195 industrial parks reorganised into five world-class manufacturing clusters.
“Regulations to deliver a Beautiful China are here to stay,” said Debra Tan, the head of CWR and an author of the report. Structural reform including changing industry mix and even reshuffling ministries are all part of China’s pursuit of sustainable growth. “The commitment is serious; the nation has even deprioritized growth in favour of the environment, but this path is not new” added Tan.
As early as 2011, China set water use caps and targets that already pointed to a slowdown of its economy. “Back then, we projected that China would slow GDP growth to ensure water security to no more than 7.6% by 2020 and 5.7% by 2030 unless it beats its own water targets. These projections were outlandish then, but a reality now” she reflected.
China has introduced pilot policy innovations such as water & wastewater trading + inter-provincial eco-compensation
In a bid to green the Yangtze River from its source in the mountains to its mega-cities by the coast, pilot policy innovations such as water and wastewater trading plus inter-provincial eco-compensation have been introduced. Already, the market value of permits traded in pilot provinces like Zhejiang reached RMB2.5bn in 2014. More recently, RMB5bn has been set aside from the central budget for YREB eco-compensation in 2018 and core protection zones the size of the Czech Republic are being created in the Yangtze source region. On top of these, the region has 12 sponge city pilots to deal with more rain ahead.
Tackling grave environmental risk can bring great green opportunities – there are now >1.2mn river chiefs across China
According to the report, tackling grave environmental risk can bring great green opportunities. A YREB clean-up is urgent – it cited that large shares of China‟s polluting industries sit in the YREB: chemical fiber (78%); pesticides (77%) and fertiliser (44%) as do heavy metals discharged – Arsenic (70%) Cadmium (70%) and Mercury (60%). Such levels of pollution gave rise to the appointment of river chiefs to safeguard the river. This concept has since been nationalised and there are now over 1.2 million river chiefs across China.
Money has been set aside to clean up. A sizeable RMB15bn has been allocated to incentivize & promote YREB ecological protection and recovery by The Ministry of Finance for 2018 to 2020. All in all, the report estimated that private, provincial and multi-lateral funding could bring this to at least RMB2.1trn of green investment to be deployed in YREB. “This amount is greater than the defence budget of Europe. There is clearly much at stake to warrant such investment” says Tan.
Private, provincial & multilateral funding could bring at least RMB2.1trn green investment to the YREB…
…= 1.35x the total defense expenditure of the EU in 2016
Lessons learned along the Yangtze can be applied to other basins across Asia. Beyond helping investors and businesses avoid regulatory shocks to catalyze green growth and fast track business unusual, the report hopes to also help policy makers and governments rethink development in the face of mounting water challenges exacerbated by climate change.
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