Thirsty And Underwater: Rising Risks In Greater Bay Area
By Dharisha Mirando, Debra Tan 20 September, 2019
How will water & climate risks threaten the already water-stressed Greater Bay Area (GBA)? CWR's Mirando & Tan explain in their latest CLSA report
CLSA U recently launched a report “Thirsty and Underwater” which China Water Risk (CWR) co-authored. The report is unfortunately only available to professional investors – contact CLSA to access this report. However, below is a quick review of the report’s findings. We recommend you to read this article in tandem with “No-sense Climate Strategies: From DSD to HSBC” to get a better understanding of the issues facing the Greater Bay Area (GBA).
As early as 2030, rising water & climate risks could threaten key sectors that drive GBA’s GDP (US$1.6trn in 2018)
The GBA is slated for ambitious growth in China’s 13th Five Year Plan (2016-2020) yet water risks and climate threats could sink its dreams. As early as 2030, these rising risks could threaten key sectors that drive the region’s GDP, which was US$1.6trn in 2018 – they are logistics & trade, real estate, finance and entertainment. With the GBA’s GDP estimated to grow to US$4.6trn by 2030, the report warns that careful water-nomic planning and cohesive resilience strategies are needed for a “thirsty & underwater” future.
“The problem with water and climate risks is that they feel far in the future, but evidently, these risks are here today. They are material and disruptive, which means we need to factor them in now, not later” warns CWR’s head Debra Tan, who co-authored the report.
Is there enough water for growth when 8 of the 11 cities in the GBA are as dry as the Middle East?
Too little water to grow will present too much risk, unless it is managed. Already, 8 of the 11 GBA cities are as dry as the Middle East (GBA Dry 8). These 8 cities’ per capita water resources fall well below the World Bank’s Water Poverty Mark, yet they account for 92% of the GBA’s 2018 GDP. The 4 Core GBA Cities of Guangzhou, Shenzhen, Hong Kong and Macao are part of this “dry” group, driving 68% of the region’s GDP.
GBA Dry 8 accounts for 92% of the GBA’s 2018 GDP
Moreover, the GBA’s population of 71 million people is set to explode with an influx of 17 million more people by 2030. This is the equivalent to the population of two more New York cities, thus putting more pressure on already stressed water resources. See infographic below – click on it to expand.
The region is also almost entirely at risk from “extremely high” flood occurrences. The Hong Kong Observatory has warned that the frequency of an extreme rainfall event (>200mm within 3 hours) increased to a once in 21 year event in 2000 from a once in 41 year event back in 1900. Changing weather patterns and high pollution levels in the Dongjiang River which provides water to 5 cities in the GBA including Hong Kong, will also impact the availability of freshwater.
Scenarios must be adjusted for the new base case of 3°C-4°C of warming instead of 1.5°C-2°C
CWR was commissioned by CLSA to write this report to also explore the impact of climate threats brought on by storm surges and sea level rise to key sectors as we are on track for warming of 2.9°C-3.4°C by 2100. The report finds that almost three quarters of Hong Kong’s GDP comes from sectors that could face disruptions from extreme storm tides as early as 2030. This would clearly devastate its economy, unless action is taken by the government to build resilience.
Had Mangkhut hit during high tide & taken a slightly different path, storm tides of 5.65m would have inundated Central, HK
As the map below shows, so far Hong Kong has been lucky. In 2018, when Super Typhoon Mangkhut, a T10 typhoon, hit the region, it brought storm tides of 3.88m in Victoria Harbour. Had it hit during high tide and taken a slightly different path, storm tides of 5.65m would have inundated Central, Hong Kong’s financial district. The storm tide would have reached past IFC and Exchange Square, all the way to the headquarters of HSBC and Standard Chartered.
Clearly, this would have been extremely costly and disruptive. Unfortunately, typhoons over the summer months will become more frequent. The report highlights that typhoon intensity has also been trending up – Hong Kong saw three T10 typhoons in the past six years compared to 12 in the previous 65 years.
Beyond Hong Kong, the GBA’s economic and population hubs are also clustered in low lying areas that are vulnerable. The report’s geospatial mapping shows that the GBA’s key sectors of logistics, real estate finance and entertainment will not be left unscathed.
By 2030, extreme storm tides of 5.87m would also disrupt 4 out of 7 GBA’s airports, 43 of its 50 ports, & half of Macao’s casinos
As Charles Yonts of CLSA points out, we “expect thermal expansion and glacial melt to add 22cm to sea levels by 2030. For Victoria Harbour in Hong Kong, this translates to a maximum storm tide of 5.87m, which would swamp large swathes of the city’s financial district.” Yonts also warns that “It would also disrupt four of the GBA’s seven airports, and 43 of its 50 ports. And half of Macao’s casinos would face flooding.” These surely curtail the region’s plans to be a major finance, trade and entertainment hub. The GBA’s plans to become a technology hub could also be hampered as ICT and electronic sectors are water intensive. For more on the impacts on ports and airports see “No-sense Climate Strategies: From DSD to HSBC”
Despite significant exposure, strategies to combat water and climate risks remain uncoordinated across the GBA
Government action can help alleviate these risks, but in the GBA actions are not yet cohesive, comprehensive or efficient, cautions the report. To address a thirsty future, governments should be reducing water use and wastage. Analysis finds Hong Kong to be extremely wasteful – it has a leakage rate of 25% compared to 11% for GBA mainland cities and 9% for Macao.
Hong Kong’s water use has also increased by almost 10% since 2011. Meanwhile, despite GDP growth, Guangdong has managed to reduce water use by 4.3bn m³ – this is 4x Hong Kong’s freshwater use. Significant water diversions projects have also been launched to alleviate stress in the Pearl River Delta.
HK’s water use has increased by ~10% since 2011…
…Meanwhile Guangdong water use down by 4.bn m³ – 4x of HK’s freshwater use
Hong Kong also lags in concrete plans for coastal flooding from storm tides and sea level rise. A 6.5m sea wall to protect the runways at the airport is being built but is this enough? CWR’s 2100 extreme storm tide projection is 7.81m and recently Singapore announced that its airport will be built 5m above sea level to be climate resilient. Singapore is not even in the path of typhoons. More on this in “No-sense Climate Strategies: From DSD to HSBC”.
Macao’s sea walls will leave large swathes of its territory & Vegas brands unprotected from typhoons
The report also shows that Macao’s sea walls to protect against typhoons may not be enough, leaving large swathes of its territory and Vegas brands unprotected. The mainland on the other hand, is building sea walls of various heights to heavily protect coastlines along high GDP regions such as Shenzehn and Guangzhou. Targets set to reinforce walls are also in the 13th Five Year Plan, but it is not clear if this will be enough without more detailed analysis.
Given Hong Kong’s laissez-faire attitude to a “thirsty & underwater” future, the report examines the exposure of four companies that have significant operations in Hong Kong – Hongkong Land, Hong Kong Exchanges & Clearing, Cathay Pacific Airways and Hutchison Port Holdings. The analysis shows that they can be materially impacted by storm tides as early as 2030. “Given the unmistakeable risks, it was shocking to see that the companies had no real disclosure on the risks faced nor adaptation plans to mitigate such water and climate threats” said Dharisha Mirando of CWR, a co-author of the report.
“Clearly such omissions on material risks disclosure may trigger systemic shocks to the financial system”
Mirando worries that these material risks are being overlooked. “These companies are clearly omitting to disclose imminent and material financial risks, but the SGX and HKEX consider them “to be in compliance” with reporting rules. Does this mean that companies listed on these exchanges and indices linked to them are at risk?” Clearly such omissions may trigger systemic shocks to the financial system.
Heading for 3°C-4°C, but planning for 1.5°C-2°C = sure to fail
Aside from companies and banks, governments also may not have a grip on the magnitude of the risks faced. The report cites Hong Kong as an example: Hong Kong’s own decarbonisation actions puts the world on a path of 3°C-4°C, yet it is building resilience to protect against a 1.5°C-2°C future. This is clearly not sensible.
“If you are not aggressively decarbonising, adaptation must be seriously stepped up; otherwise you are planning to fail”
“It doesn’t matter whether you are a government, a company or an investor, you must have climate strategies that make sense. If you are not aggressively decarbonising, adaptation must be seriously stepped up; otherwise you are planning to fail” cautions Tan. She adds that “if neither happens, then going concern issues surface and prudence dictates a write down of assets and investments with no adaptation plans.”
The risk landscape is changing and challenges ahead are plenty. Although by no means a comprehensive guide to water risks, the report was written to serve as a quick threat assessment to catalyse urgent action.
To succeed in a changing climate, the GBA watershed must be managed & planned cohesively together
To succeed in a changing climate, the GBA watershed must be managed and planned cohesively together. Companies, governments and banks are still not doing this. We need to stop making climate strategies that make no sense. If you want to learn more about water risks on the GBA and what we are working on, please contact us.
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