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

The Yangtze River Economic Belt (YREB) generates 45% of China's GDP & houses 595mn people; it is also key to global fashion & electronic supply chains & critical raw materials' production
Due to rampant pollution, China has deprioritized growth in favour of the environment to pursue sustainable growth; therefore polluting & water intensive industries will likely face aggressive action
Also, get on top of policy innovations in the YREB - such as RMB2.5bn water & waste water trading rights, core protection zone with the size of the Czech Republic & over 1.2mn river chiefs

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.

Report Link:

For more information, please contact: [email protected]

Further Reading

  • Yangtze River: Actions Toward Ecological Compensation – With RMB5bn already allocated to supporting ecological compensation along the Yangtze River, what’s next? Chinese Academy for Environmental Planning’s Dr Zhanfeng Dong highlights what needs improving
  • Capital Two Zones: Protecting Beijing’s Upper Watershed – The Capital Two Zones plan is set to protect Zhangjiakou, upstream of water stressed Beijing & host of the 2022 Winter Olympics – how will this impact industry and development? China Water Risk’s Yuanchao Xu explores
  • Blue City Water Quality Index – Building on their successful Blue Map mobile app, IPE takes it up another notch with the new Blue City Water Quality Map. Hear from their Shen Sunan on which cities are leading and which are lagging
  • Thirsty And Underwater: Rising Risks In Greater Bay Area – How will water & climate risks, including rising sea levels & droughts, threaten the already water-stressed Greater Bay Area (GBA)? CWR’s Tan & Mirando explain in their latest CLSA report and highlight companies’ failure in climate risk disclosures
  • No-Sense Climate Strategies: From DSD To HSBC – Hong Kong’s shortsighted & unrealistic climate plans will leave key assets & infrastructure exposed that mean the government, companies, investors and the public are even more exposed. China Water Risk’s Dharisha Mirando & Debra Tan expand
  • Yangtze Flows: Pollution & Heavy Metals: Areas along the Yangtze River dominate Chinese production but at what cost? With Grade V water in its tributaries, rapid growth in upstream wastewater plus concerns over a disproportionately large share of the nation’s heavy metals discharge, can the Yangtze River Economic Belt still flourish? CWR’s Hu takes a closer look
  • Water-nomics: Trade-offs Along The Yangtze – With significant economic, water use and pollution disparities along the Yangtze River, China Water Risk & the Foreign Economic Cooperation Office of the Ministry of Environmental Protection, publish a joint brief to explore strategies to find the right development mix. Check out some of the key findings in this review
  • Two Sessions: Reform – Transform – It has been a tough year but President Xi is staying true to his resolution to build a Beautiful China – what transformations can we expect? Find out in our review of this year’s Two Sessions
  • 2018 State Of Ecology & Environment Report Review – It is one year on since the Ministry of Ecology and Environment (MEE) reform, has it impacted China’s water? What has worsened & what has improved? We review the latest 2018 report
  • New Report: Does Asia Have Enough Water To Develop? – Since our economy runs on water, no water means no growth but there is little conversation on this topic in Asia. To catalyse such conversations, this report provides an overview of the water-nomic challenges facing Asia
China Water Risk
Author: China Water Risk
We believe regardless of whether we care for the environment that water risks affect us all – as investors, businesses and individuals. Water risks are fundamental to future decision making and growth patterns in global economies. Water scarcity has emerged as a critical sustainability issue for China's economy and since water powers the economy, we aim to highlight these risks inherent in each sector. In addition, we write about current trends in the global water industry, analyze changes occurring both regionally and globally, as well as providing explanations on the new technologies that are revolutionizing this industry.
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