Trade-offs Could Help China Manage Water

By Wai-Shin Chan 15 September, 2015

HSBC's Wai-Shin Chan on how food security & energy security may cause China to consider tough trade-offs

Shifting production of cotton/coal from the NCP to areas with more water (Xinjiang) may free up more water
Not growing cotton in the North China Plan can free-up 9.5bn cum of water and sown land to grow more food
However, water stress in Xinjiang may mean that coal & cotton maybe headed for a clash for water in long term

Balancing food security and energy security may cause China to reconsider how it manages its water resources. For example, China dominates the global cotton industry, accounting for around a quarter of global cotton lint output. Cotton is not edible, of course. It is water-intensive compared to other key grains and is highly polluting. In effect it “consumes” a vast amount of China’s water resources and occupies sown land that might be used to grow other – edible – crops, which would help more to ensure food security.

Balancing food security and energy security may cause China to reconsider how it manages its water resources

Similarly, coal mining uses water for cooling mining equipment, reducing dust levels, washing tunnels and extinguishing fires. But China is mining coal from water-scarce regions to fuel its industrial growth.

Given the importance of energy security, China already has plans in place to divert 17bn m3 of water from the south to the north via the Western Route of the South-North Water Diversion Project.

China already has plans in place to divert 17bn m3 of water from the south to the north via the Western Route

Although this is expensive, it does potentially cover the water needs of the coal provinces along the Yellow River (in the north).

We think water diversion is a risky strategy since climate change alters historical patterns of water availability. For example, droughts in southern China may leave less water available for diversion to the north.

Cotton trade-offs

There are significant differences in the availability of water across China’s provinces; therefore, shifting production of either cotton or coal to areas where water is more abundant could “free up” more water for other uses. The water-scarce North China Plain (NCP), which covers the four provinces of Henan, Hebei, Shandong, Jiangsu, and parts of Anhui, generates over a quarter of China’s GDP but has less than 4% of its renewable water resources.

“Shifting cotton production from the NCP could “free up” ~9.5bn m3 of water, equivalent to a fifth of the entire South-to-North Water Diversion Project”

Shifting cotton production from the NCP could “free up” around 9.5bn m3 of water, equivalent to a fifth of the entire South-to-North Water Diversion Project.

It would also “free up” 1.5 million ha of sown land area, which could be used to plant edible crops and improve food security.

For example, the water freed up from one tonne of cotton in China could be used to grow over three tonnes of wheat instead.

China seems to be planning a large restructuring of its cotton and apparel industry – by shifting production to Xinjiang. The State Council has issued favourable policies towards this autonomous region in the north west of China, earmarking it for development in a number of areas. Xinjiang already accounts for half of national cotton output as production has grown rapidly since 2000. Compared to the NCP, it has more water resources (in per capita terms) and generates higher cotton yields.

 Land to grow cotton could be used to grow edible, less water-intensive crops to further enhance China’s food security…

However, the virtual water embedded in cotton is still significant. The sheer volume of cotton grown in Xinjiang (over 3.5 million tonnes) makes the potential virtual water that would be “freed up” by not growing cotton in the region attractive. The virtual water footprint of Xinjiang’s cotton production is over 23bn m3, more than both the completed phases of the Eastern and Middle Routes of the South-to-North Water Diversion Project. Again, this water (and freed up sown land area) could be used to grow edible, less water-intensive crops, which would further enhance China’s food security.

… such changes would likely impact the global cotton trade

Shifting away from growing cotton in water-scarce regions is another option for China to manage its limited water resources. However, China’s dominance of the global industry means any domestic change in cotton production, or textile and apparel policies, would likely impact the global cotton trade.

Coal trade-offs

China has also been consolidating its coal production into coal bases in 12 provinces and is managing the water resources in these areas under a ‘Water-for-Coal Plan’ published in 2013. Coal mining is a major polluter of groundwater (a major source of drinking water in China) and coal consumption can cause air pollution. Under various development plans, China is set to maintain high levels of coal consumption over the short term.

In light of growing challenges from water availability & groundwater pollution, China could say shut down coal production from Hebei

In light of growing challenges from water availability and groundwater pollution, it could shut down coal production from Hebei province (which surrounds Beijing), or even the whole North China Plain – again shifting this production to Xinjiang.

This autonomous region, which has a considerable share of China’s natural resources, could grow as a coal and energy hub, and alleviate both air and water pollution concerns in more populous areas.

We consider the continued decarbonisation of China’s economy (i.e., using less fossil fuel) to be the best overall strategy to ensure energy and food security since it lowers the possibilities of unpalatable impacts from climate change. These include, for example, changing patterns in average water availability and weather extremes. As such, perhaps the reduction of coal production in water-scarce regions would be in tune with an overall reduction in coal consumption.

“Tough trade-offs could be on the horizon …
…over the longer term, cotton and coal may be headed for a clash as they compete for limited water resources provincially and nationally”

In terms of managing water for economic development and ensuring appropriate levels of food and energy security, tough trade-offs could be on the horizon. Shifting some of the cotton and coal production to Xinjiang would only be an interim solution however.

Over the longer term, cotton and coal may be headed for a clash as they compete for limited water resources provincially and nationally. China may need to consider whether it turns more to imports – and the water embedded in the goods of other countries – to manage its water resources. These trade-offs between regions and commodities could change both domestic and international trade flows.

Further Reading

  • China Water-nomics – Will China’s economic development be hampered by limited water resources?  The very existence of the Three Red Lines signals that China can’t keep developing the way it has. Read on for why GDP will be capped at 5.7% given China’s water-nomics
  • 2015 World Water Week: Key Takeaways – What’s water’s role in sustainable development? How can we ensure water for all? China Water Risk’s McGregor on this, how Asia is fairing, the Sustainable Development Goals & more from World Water Week 2015
  • 2015 GLASA Awards: Key Takeaways – The Global Leadership Award in Sustainable Apparel (GLASA) was launched to inspire bold & courageous sustainability leadership in the apparel sector. China Water Risk was a finalist this year, for which the theme was water. CWR’s McGregor & Hu share their takeaways
  • Still Exposed! Fashion Materials in China -With 32% to 75% of global hides, wool, cotton, chemical fibre and silk either produced in or passing through China via imports, exposure is sky high. Should brands move out of China or should they stay and help factories meet the Water Ten Plan? China Water Risk’s Tan expands on the future of the industry

Water & Trade-offs in China

  • Water Pollution Could Lead to More Trade – Upon publishing “No Water, No Food: ensuring food safety & food security in China”, HSBC’s Wai-Shin Chan tells us why China’s war on pollution & the need for self-sufficiency may result in more agri trade
  • Balancing Water For Agri & Coal -China’s coal mines lie next to its farmlands and it plans to save water used in agriculture to fuel coal growth. In “Towards a Water & Energy Secure China”, China Water Risk explores strategies to control water use between agriculture & coal to ensure both food & energy security
  • China: Not Ready To Move Away From Coal – Professor Xie Kechang, Vice President of the Chinese Academy of Engineering, on the future role of coal, strategies to ensure energy security & challenges ahead for coal-to-chemicals
  • Investors Can No Longer Ignore Water Risks – Ceres warns that water – or lack of it – is becoming a bigger financial issue for investors. Monika Freyman shares key points from their report on how to integrate water analysis into investment decisions
Wai-Shin Chan
Author: Wai-Shin Chan
Wai-Shin joined HSBC in 2011 as the Director for Climate Change Strategy in Asia Pacific. The role involves helping HSBC's clients prepare their portfolios for the effects of climate change, as well as internal consulting for different business functions within the bank. Before HSBC, Wai-Shin worked as a fund manager where he was centrally involved in the integration of Environmental Social Governance issues. He is a former Executive Director of ASrIA (Association for Sustainable and Responsible Investment in Asia) and was an equity analyst for many years. Wai-Shin holds a degree in Mathematics and Physics from Durham University and is a CFA charterholder.
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