2014 Investments in Chinese Waters

By Dawn McGregor 10 December, 2014

Water is high not only on the government's agenda but also the private sector's. See how they spent on water in 2014

China has ‘wasted’ USD6.8 trillion in investments since 2009 (mainly stimulus related & in hyperactive construction), according to Xu Ce of the National Development and Reform Commission (NDRC) and Wang Yuan from the Academy of Macroeconomic Research. Now it wants to spend RMB 3.7 trillion on combatting pollution, RMB2 trillion for water and RMB1.7 trillion for air. To try and ensure this and other investments are not ‘wasted’ a new policy co-ordination pilot is under way between four government bodies: the NDRC, Ministry of Land Resources, the Ministry of Housing and Urban-Rural Development and the Ministry of Environmental Protection.

To try and ensure RMB3.7 trillion to combat pollution is not ‘wasted’, a new policy co-ordination pilot is under way between 4 government bodies

Obviously, China wants to make its investments more effective and it needs to rapidly, especially given recent reports of 1,500 times the level of heavy metal commination in soil in Hunan.

Indeed, both central and provincial governments have been busy with water investments. Private capital, domestic & foreign, has supplemented these investments, as well as financing from global development banks. But it’s not all to do with money. China’s government has also been streamlining investment procedures.

Below is a selection of 8 interesting water “investments” this year:

1. NDRC sets aside RMB70 billion in agricultural water resource infrastructure for 2014

Food security is paramount to China but agricultural development still lags behind and needs further fiscal support, according to Li Guoxiang, a researcher at the Rural Development Institute under the Chinese Academy of Social Sciences.  Part of this investment, announced in April 2014, will also go to improving food safety, which is a significant concern in China (more on this here).

2. NDRC budgets RMB5.5 billion for key watershed pollution control in 2014

Protecting watersheds from pollution is key to improving water quality and part and parcel of China’s Three Red Lines policy. This investment, announced in November, does this by channelling capital to sewage treatment plants, waste disposal site and water environment management projects. It is not possible to tell if this is part of the RMB2 trillion mentioned previously for the Water Prevention & Pollution Control Action Plan.

3. Provinces using a combination of conservation projects & fines to manage water resources

Provinces need to manage their own water. This is split in two parts, urban and rural management:

• Chongqing: RMB1.14 billion for water & environment protection of rural areas (January 2014)
• Heilongjiang: RMB20.9 billion for water-conservation projects (May 2014)
• Zhejiang: RMB20 million fine, largest ever in the province, given to Huidelong Dyeing Chemical Co. after it was found guilty of conspiring with another chemical company to discharge more than 5,000 tonnes of wastewater without proper treatment (July 2014). This may not be an obvious form of investing in water but enforcing environmental laws is crucial as the dereliction of officials in ecological & environmental protection resulted in RMB3.1 billion in economic losses in 2013.

More facts on rural & urban wastewater in China here.

4. CITIC & KKR USD930 million joint bid for United Envirotech

The bid for United Envirotech, a membrane-based water & wastewater treatment provider, comes as no surprise as many see China’s water clean-up and wastewater sectors as exciting markets with space for exponential growth (more here). CITIC (state-owned investment company) obviously agrees, “Our investment in United Envirotech provides us a strong platform to develop in China’s water and wastewater treatment sector. Environmental protection is a top priority for China and CITIC foresees not only commercial opportunity but also societal benefit from this investment,” said Wang Jiong, CITIC’s vice chairman and president. KKR (global private equity firm) would appear to agree given its joint bid and is obviously not deterred from entering the Chinese market (see more on foreign & local membrane investments here).

5. Sinopec investing RMB28 billion on its pipelines

This November, two of Sinopec’s short crude oil pipelines were temporarily shut down by the authorities due to worries over safety. The group plans to spend RMB28.1 billion over three years to handle pipeline safety problems. One of China’s notable pipeline safety incidents this year was the water contamination in Lanzhou in April. Benzene, a cancer inducing chemical, was found in the city’s tap water. The government blamed a crude oil leak from a pipeline owned by China National Petroleum Corp. Sinopec’s investment in its pipes is to avoid an incident like Lanzhou, which exposes a firm to intense reputational damage.

6. Coca-Cola’s charitable water brand, “Chun Yue”

The money collected from sales of Coca-Cola’s new water brand “Chun Yue” (Ice Dew) will fund projects providing safe drinking water in rural areas across China. It’s the first-ever product for Coca-Cola not only in China but globally. Coca-Cola teamed up with local Chinese NGO, One Foundation, for the project. This is primarily a corporate social responsibility effort but MNC’s have experienced criticism for their water use in water scarce countries, so strong community engagement is important for continued operation.

7. Israeli cleantech hotting up in China

This year marks the third year of the China-Israel High-Tech Investment Summit. Interest in Israeli water products and services in China is growing and many want in. Last year, Horizon Ventures (Li Ka-shing’s private investment vehicle) & Swire Group acquired a stake in Israeli-based NanoSpun Technologies, water treatment technology. This year Tsing Capital (among the first cleantech investors in China) plans to make at least one or two investments (each around tens of millions of dollars) in Israeli cleantech by the end of the year. Tsing Capital founding managing partner Don Ye says that the fund has currently noted dozens of interesting projects for investment in Israel. Moreover, Shaoguan in Guangdong province will be the pilot city for Israel’s “Water City” project, which will showcase Israeli technology such as desalination, wastewater treatment and irrigation solutions. Again, this points to a growing interest in China’s clean-up market amidst a war on pollution.

8. Foreign development banks financing water projects in China

Whilst China has a high GDP, access to resources and development varies greatly across the country and foreign development banks are provide financing for this development:

• Asian Development Bank in July agreed to loan USD200 million to the China Water Affairs Group – The loan is to improve the delivery of treated water to households and businesses in fast-growing small- and medium-sized cities in China. It is also to drive private sector participation in water distribution.

• World Bank approved in September three loans totalling USD500 million to improve people’s health & welfare through improved environmental services:
  • Qinhai Xining Water Environment Project (USD150 million) – Reduce water pollution from municipal sources and increasing reuse of wastewater in the Huangshui River basin;
  • Shaanxi Small Towns Infrastructure Project (USD150 million) – New construction and rehabilitation of urban infrastructure (water supply, wastewater collection & more)
  • Zhejiang Rural Water Supply and Sanitation Project (USD200 million) – Construction or rehabilitation of raw water mains,  water treatment plants & more

China  supplement central budgets with reduced barriers to investment

China’s government signaled a shift in economic growth sources with the new 7 Strategic Emerging Industries (SEI) in the 12 FYP. SEI #1, “Energy saving and environmental protection” is expected to be a RMB 4.5 trillion (USD 750 billion) industry; clearly China is working towards this.

China designates ecological and environmental protection as a key area in opening up to the outside world

Central government’s water budget this year is RMB76.7 billion; a 7% increase on last years but it still wants more funding channelled to water projects. The government is thus looking toward public-private partnerships (PPP) and has relaxed rules to make inward investments easier. In addition, in early December, it has supplemented this with guidelines on PPP.

See here for set of policies aimed at encouraging PPP.

Increased foreign investment in this space is also encouraged by the top. Premier Li Keqiang said at the Eco Forum Global Annual Conference in April that China has designated ecological and environmental protection as a key area in opening up to the outside world.

Another way to protect China’s water is through imports (see more here). This is achieved through trade of virtual water – the water embedded in a product, including its full production chain. We said earlier that China will continue to increase imports, in particular for food to ensure food security & safety, in order to manage its increasing water demands. Chinese and Hong Kong-listed firms have already spent USD 12.3 billion abroad on takeovers and investments in food, drink or agriculture in 2013, the most in the past 10 years. We expect this trend to continue as measures are relaxed further. Already in November, State Council removed the government screening procedure for outbound direct investment and replaced it with a registration system.

With China relaxing rules for inward and outward investments, it seems we need to think broader when it comes to water investments. Still not convinced? NDRC and the Ministry of Finance plans to set aside RMB50 billion National Environmental Fund to provide loans for zero or low interest to clean up pollution… now who wouldn’t want “free” money to start a business they can feel good about.

Further Reading

• China Stimulates Investment in Clean Water
• China Water Investments: 3 Thoughts – Investing in the water sector looks attractive with the Chinese government & consumers wanting water tariff hikes. Will water supply or wastewater treatment be the larger market? Debra Tan shares some on-ground views distilled from recent conversations
• Christmas Came Early – Xi’s carbon emission promise, increased regulatory risk are a few reasons why Debra Tan thinks Christmas came early for China’s waters. Industry beware; as China is expected to aggressively enforce some of these new polices
• Pollution: It Doesn’t Pay to be Naughty – State Council wants to use the enforcement of law & regulation “to force the economy to transform and upgrade”. See how violation cost surges with daily fines, new standards & discharge permit trading in a bid to push China to go clean
• China’s Membrane Rush: Foreign vs. Local – Tom Freyberg, Chief Editor at Water & Wastewater International, reviews the oppotunities for Chinese & Foreign companies in China’s membrane technology market
• Bridging Gaps to Water Innovation – Water scarcity & pollution will drive innovation in partnerships and technology but the road to commercialisation remains long. Will Sarni, Partner at Deloittes discusses the barriers to innovation in the water sector
• Desalination: Proceed With Caution! – China is expanding capacity at a furious pace and by end of 2015 daily capacity is expected to be at 2.2mt/day up from 0.9mt/day in 2013, but Tommy Patterson from Kreab Gavin Anderson explains why investors should proceed with caution