Looking for water in China’s 14FYP

By Yuanchao Xu, Debra Tan 26 March, 2021

The new China is not the old China. CWR's Xu & Tan share what the future of water is in China according to the 14FYP

The 14 Five Year Plan (FYP) outlined in China’s Two Sessions this March, marks the start of the next “100-year” phase of China’s dream to build “a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious and beautiful.” This next phase builds on the last “100-year” target to “build a moderately prosperous society in all respects”.

Because China is all about plans, five year plans and even longer term plans, these words which set the long direction of travel, was not uttered by President Xi but by President Jiang Zemin way back in 2002.

We went looking for water in the 14FYP and are left feeling optimistic

And here we are now at the next phase – what happens in the 14FYP is of great interest as it will set the tone for China’s future. Moreover, a longer range 15-year plan to 2035 was also outlined which indicated China’s “direction of travel” in the medium term.

We have been looking for water in the 14FYP and reading the tea leaves to decipher what this means for the future of water and are left feeling optimistic. Here’s why…

Direction of travel = all-in on building an ecological civilisation

Ecological civilisation is here to stay – this is what China is building for the foreseeable future. Besides “dual circulation”, ecological protection, ecological red lines, sustainable growth, carbon neutrality, human-nature harmony, green transitioning of industries, greening supply chains, green development and green finance are also key buzzwords for this phase.

China is all-in on ecological civilisation & “high quality development”…

…the new China is not the old China

As President Xi Jinping stated in the Two Sessions, on China’s road to high-quality development, ecological and environmental protection must be prioritised. By 2035, China aims to be an open economy while pursuing green development. While there is much talk of a doubling of GDP by then, do note that this is NOT a target. President Xi did say that China will likely double its GDP by 2035, however the complex international environment means that China should focus on the quality of the development instead.

So, it’s clear … China does not want the “high-speed growth” of its yesteryears, it wants “high quality growth” instead – the building of an ecological civilisation where “human-nature harmony” prevails. Premier Li Keqiang reiterated this commitment in the government work report: China is going “to strengthen pollution control and ecological civilisation construction, to continuously improve environmental quality”.

The top brass has signalled that it will continue its restructuring to get there with the 14FYP. In a way you could look at the 12FYP & 13FYP as the periods in which systems were changing/reformed (government reform, new environmental laws etc) – “turning a whale in a tight space”; in the 14FYP, it’s time to test the new systems and swim in the new direction.

Trading rights schemes & eco-comp schemes will play a big role

The property trading rights system implemented in the 13FYP will play a big role in delivering this. Here, we see the environmental rights trading systems being constantly tweaked to help further improve and create new markets in ecological protection industries, such as the pollutant discharge rights trading system, the water use right trading system, the energy use right trading system and the carbon emission right trading system. Find out more on China’s national carbon market and the 14FYP’s blueprint for good business in SynTao’s “Top 10 CSR trends for 2021”.

Eco-compensation schemes will also be deployed to protect watersheds. According to the Chinese Academy of Environmental Planning, eco-compensation spending from the central government has increased from RMB6bn in 2008 to RMB81.1bn in 2019. We will likely see this number to continue to increase in 14FYP.

The environmental protection inspection system, now under the Ministry of Ecology and Environment (MEE) established during the 13FYP, also has more teeth. And there are signs of its growing confidence with the inspection team criticising the National Energy Association’s sabotage of the top environmental agenda in January 2021. The scathing report released is a clear signal that China’s carbon neutrality pledge is part and parcel of this march toward an ecological civilisation. So, expect during the 14FYP that the inspection system will likely be further improved with the central government playing an increasingly supervisory role.

There’s no turning back. Don’t fixate on what China used to do – the last 100 years is the past, and they do NOT dictate the direction of travel for the next 100 years. This new China is unswervingly all-in on building an ecological civilisation. Like we said in our Year of the Ox five trends … the new China is not the old China.

Environment-first target setting: No GDP growth rate target in 14FYP but the majority of the binding targets are all environmental

It is worth noting here that out of all the 20 KPI targets set in the 14FYP, there are only 8 binding targets. Of the 8 binding targets – 5 pertain to “green ecology”.

While there was a binding water pollution target (85% of surface water must be better than Grade III), there were NO GDP targets – either absolute nor growth rates – indicated in the 14FYP KPIs for 2025. It just notes re GDP growth: “Keep it within reasonable interval, each year depends on the situation”.

No GDP targets set & 5/8 binding targets pertain to “green ecology”, one of which is water

Here it is also worth noting that none of the three economic KPIs were binding. So, are we finally convinced that China is prioritising the environment over growth? Anyway, whether you believe it or not, this sends out clear signals that meeting environmental targets in the 14FYP is key.

Indeed, this bias to the environmental vs economic targets was also the case in the 13FYP where despite tough challenges, China still managed to reach all the nine mandatory environmental protection targets by the end of 2020.

Overall, the ecological environment has also improved in terms of air quality, water quality and greenhouse gas (GHG) emission. Want to see how they fared on water? Or the new targets under the 14FYP?  We deep dive into past and future water targets in Water caps & targets – how has China fared and where is it going?.

Holistic waternomic planning by region/zone: Yellow River top priority = focus on mining sectors

We are pleased to see China carve out ecological function zones to protect important watersheds and sources of water in the 14FYP which has identified three types of zones: urbanisation zones, agricultural production zones and ecological function zones; each with its own specific comparative advantages.

Ecological function zones should focus on ecological environmental protection and providing ecological products. Yet, currently how to profit from ecological products is still unclear for upstream regions. Eco-compensation schemes as well as tourism are trailed options, but their success remains to be seen.

14FYP has identified 3 types of zones: urbanisation, agricultural & ecological; each with its own advantages

On a grander scale, China has also been piloting the economic development of regions/zones based on resource and environmental capacity in the 13FYP. On the “waternomic” front, development has been planned around watersheds: President Xi set the tone for holistic green development of Yangtze River from the-mountains-to-the-ocean in 2016 and in 2019, Capital Two Zones was launched to protect Beijing’s upper watershed, Zhangjiakou.

The 14FYP promises more action on the Yellow River. Excessive development will be curbed while ecological protection and high-quality development will be promoted in the river basin. However, unlike the Yangtze, the Yellow will be more challenging as most of the Yellow River Basin is highly water stressed and coal mines located in its tributaries have led to the deterioration of quality and over-extraction of water resources. So, we hope the plans to tackle coal bases in the Yellow River Basin will complement the decarbonisation plans.

The tailings dam of the world’s largest rare earth mine also sits 300km away from the Yellow River. As any dam spillage will severely impact the Yellow River, we hope to see rare earth pollution covered in China’s plan to protect the Yellow River, which should be released during the 14FYP.

Expect more regulations & actions on rare earths

Since the cleaning-up of environmental damage has yet to be factored into the price of rare earths, this could re-raise the issues of environmental challenges brought up by China and concerns over the supply of rare earths minerals could again resurface.

Indeed, the minister of Ministry of Industry and Information Technology (MIIT), Xiao Yaqing, just stated in a press conference at the State Council, China is wasting its precious rare-earth resources by selling them at a very low price  As it is, we projected that China will not have enough to supply itself, let alone the rest of the world – so watch this space.

Higher conservation & quality targets to achieve “human-water harmony”

To attain “human-nature harmony”, water needs to be factored in. 14FYP has a higher “human-water harmony” goal according to Zhai Qing, the Vice Minister of Ecological and Environment and more efforts will be made on restoring the ecological function of water bodies.

On top of simply reaching water quality targets, a healthy ecological environment including aquatic animals and plants is required. Especially for rivers and lakes close to residential communities, water quality should be further improved for leisure activities such as fishing and swimming. Given that 25.1% of water in China is not safe for human touch as per the last MEE report, this is a mammoth task.

Nevertheless, the direction of travel is a beautiful aquatic environment by 2035. Rivers and lakes will still be the focus and their restoration will act as barometers of how well local ecological protection departments are doing. However, it is not clear at the moment how these qualitative targets will be assessed. Suffice to say that big goals come bigger obstacles, so get on top of challenges ahead with CAEP’s Dr Zhanfeng Dong & Yichuan Song.

Building a “Safe China”

Natural disasters have always been a problem in China; seven out of ten worst global floods have been in China. Just last June, severe floods in South China resulted in a direct economic loss of RMB225.6bn – Yangtze river floods alone costs RMB132.2bn.

It wants to build a “Safe China” to improve its capability against natural disasters, especially floods which cost the country many lives & a lot of money…

In the 14FYP, China plans to further improve its capability against natural disasters such as floods, droughts, forest fires and earthquakes. Existing infrastructures based on old records will likely face more challenges as climate change exacerbates impacts and we expect adaptation to be stepped up and the construction standards for defence projects against these natural disasters are expected to be improved.

We also expect that coastal defences in key coastal regions such as the Greater Bay Area, Yangtze River Delta as well as the Yellow River Delta will be prioritised. Critical infrastructure such as ports and airports must also be protected. Indeed, a recent survey of 18 Chinese port organisations from Bohai Rim and Yangtze River Delta indicated that they believe the consequences of climate change will have at least a “major” impact on their ports – see what they have been up to in “Chinese Port Organisations on Adaptation”

Sponge cities will continue to be promoted to strengthen cities’ capability against urban floods and new technologies such as AI, big data and internet of things will also play an important role in China’s smart water-net. We are also expecting nature-based solutions such as mangroves to be a part of China’s climate change arsenal.

However, more key water diversion projects to alleviate the water stress in developed and highly urbanised regions may also surface. While this will improve resilience against water shortages, it could compromise the watershed; but hopefully the ecological carrying capacity of the watershed will be considered when making any diversion plans. Balancing such trades-offs between development and protecting the environment is key in the 14FYP.

Such fine balancing acts including the allocation of precious water resources to industries that generate more value on less water and pollution will inevitably have spill-over impacts on corporates that may face higher hurdles in securing access to good quality water. As we have analysed, companies such as Nongfu Springs will likely face increasing competition at its key water source.

…a “Safe China” also includes a resilient financial system against climate shocks

A “Safe China” also includes a financial system that is resilient to climate shocks. Financial stability is of utmost importance. To alleviate the impact of climate change on financial stability and monetary policy, financial innovations and entire ESG eco-systems are taking shape.

Green finance is set to be a priority of 2021 and in the 14FYP,  said Yigang, the governor of PBoC while  Dr Ma Jun is still leading the global charge on how to incorporate climate and environmental risk within central banks’ supervisory framework through NGFS Supervisory Workstream 1. Also in the 14FYP, Responsible investors are expected to have better regulatory support and stricter disclosure – more on this in SynTao Green Finance’s “Top 10 Trends for Responsible Investment”.

Carbon neutrality = good for China’s water resources

Reigning in emissions and China’s carbon neutrality target by 2060 are also good for water as water is the resource most vulnerable to climate change. However, there is a long way to go to reach carbon neutrality and many systemic changes will have to be put in place.

China still lacks a climate change law

For example, China still lacks a superordinate law for climate change, as pointed out by Li Yonglin, Deputy General Manager of Sinope, in the Two Sessions. While there is an “Environmental Protection Law” for ecological and environmental protection; and an “Energy Conservation Law” for energy conservation; there is currently no “Climate Change Law”. Such a superordinate law will provide legal basis for China’s climate change adaptation actions, as well as the carbon trading system.

Globally, almost 20 countries have finalised the legislation of climate change laws such as the UK, Switzerland, Germany and Japan. As China plans to actively participate and lead international collaborations on climate change adaptation and ecological protection, we will likely see China facilitate such legislation during the 14FYP.

Aside from legislation, a detailed roadmap and clear timetable for carbon neutrality will also need to be drawn up and there have been concerns voiced over the absence of a carbon emissions cap, although there are carbon intensity targets and coal caps in place. Nevertheless, the direction of travel toward net zero is clear.

The transition towards a low carbon economy will not be easy but rewards reaped will be worth it

The transition towards a low carbon economy will not be easy but rewards reaped will be worth it, not just from a save-the-world perspective – Goldman Sachs’ Carbonomics report expects China’s decarbonisation to catalyse US$16trn of clean tech infrastructure investment opportunity by 2060 and create around 40mn new jobs.

Achieving “human-nature harmony” – pieces of the jigsaw puzzle fall in place …

While the 14FYP outlined in the Two Sessions sets out targets for the next five years and the 2035 plan sets the tone for longer-range goals, expect plans, plans and more plans issued in the coming years to support these outlines. As these pieces of the jigsaw puzzle fall into place, a Beautiful China will emerge.

As these pieces of the jigsaw puzzle fall into place, a Beautiful China will emerge

Dual circulation may provide China some shelter, but globalisation and the increasingly complex international environment will make this already extremely difficult journey perilous. Here, we are of course rooting that China will deliver on its climate targets as well as its water targets – the former would benefit the planet and the latter downstream riparian countries.

For now, although plans on how to get there still remain murky, what’s clear is that long term good often comes with short term pain. Some domestic and global industries will suffer while others will surge ahead as a result of this shift. Uncertainty is bound to pervade in periods of transition; and this is a mother of all transitions – as the next century is also when climate impacts will be the norm.

Given its past efforts, we feel assured that China will no doubt work hard to ensure a future with water; it is also clear on where it is now heading and how its tackling future climate challenges. So where does the rest of the world fit in?

China’s size matters, working with it is a must on the climate front

Here, it is worth remembering that size matters – China’s net zero carbon pledge by 2060 is a sizeable chunk (66%) of emissions from countries that have pledged net zero; plus its efforts could shift global temperatures by 0.25ºC. So, working with China, not alienating it is a must on the climate front.

Also, by 2028, experts say China will likely surpass the US in GDP; and by 2030 some project that it’ll have a 600mn strong middle class. Given these trajectories, surely it is in everyone’s interest to work with China? As we have said before “sure it’ll be hard work but you could plough yourself a plentiful harvest” plus together could all save the planet and have “human-water harmony” … now who wouldn’t want that!

Further Reading

• Two Sessions 2020 – Ecological Roadmap – China’s still sticking to the ecological roadmap despite COVID-19. CWR’s Xu runs us through three key takeaways from this year’s Two Sessions that give clear signals of this direction
• Deeper Ecological & Environmental Policy Reforms In 14 FYP – Dr Dong from the Chinese Academy for Environmental Planning shares his views on how to overcome unprecedented challenges of environmental protection during the 14FYP
• Too Big To Fail! Protect At All Costs – Multiple policy innovations have been unleashed to protect the Yangtze River as it is too big to fail – corporates and investors need to get on top of the YREB to avoid regulatory shocks
• Green Development For A Beautiful China – The Minister of Environmental Protection Ganjie Li outlined the MEP’s achievements and future plans at the 19th People’s Congress. What are the key takeaways? China Water Risk’s Yuanchao Xu reviews
• What ‘Xi’s Thought’ Means For Water – One key message from Xi Jinping at the 19th National Congress was harmony between environment & economic growth, surely this bodes well for water? China Water Risk’s Feng Hu reviews
• 2019 State Of Ecology & Environment Report Review – Has groundwater quality recovered from the drastic deterioration in 2018? Can the major rivers meet their Water Ten targets? Read our review of the latest 2019 report to catch up on China’s water quality

More on Latest

• Water caps & targets – how has China fared and where is it going? – China has set a 2025 water reduction per unit of GDP target. Is it aggressive enough? To answer this we take a close look on how China has fared on its past targets
• 14FYP – Promote Ecological Conservation – China’s 14FYP has bullish environmental goals but transformative potential is met with challenges, explains CAEPs Dr Dong & Song
• Top 10 CSR Trends in China 2021 – What does China’s 14 Five Year Plan mean for CSR? And what about Covid? Find out and more as SynTao shares their Top 10 CSR trends for China in 2021
• Chinese Port Organisations on Adaptation – Ports are a key economic drivers but rising sea levels are putting them at risk. Are Chinese ports taking action? Find out in our review
• 2021 Top 10 Trends in Responsible Investment in China – Thanks to China’s carbon targets, the country’s low carbon transition is in full swing. SynTao Green Finance shares their top 10 trends for responsible investment in China for 2021