Two Sessions, Five Highlights For Water

By Yuanchao Xu, Debra Tan, Woody Chan 16 March, 2018

What will reforms from China's Two Sessions mean for water? Find out in our takeaways or risk being blindsided!

China’s “Two Sessions” (两会, lianghui) are coming to an end. Headlines have focused on making Xi “president for life” but there have been other major constitutional changes that are pro-environment and water. For starters, the ideology of establishing an “ecological civilisation” is also now embedded in the constitution.

What’s more, the long-awaited restructuring of the Ministry of Environmental Protection (MEP) and other key environmental departments, including the Ministry of Water Resources (MWR), seem to finally be happening. These signal important strides in delivering, as Xi puts it, “people’s longing for a beautiful life” (人民对美好生活的向往).

There are many takeaways from the meetings but we want to highlight five. Pay attention or risk being blindsided!

1. MEP & MWR reform: the pollution ‘war machine’ is gearing up

Back in 2014, we stressed that too many government departments were in charge of water and the environment, causing overlaps in responsibilities and silo-ed management (九龙治水). On top of that, ministries lacked the power to enact tough laws and policies against pollution.

There was a need for holistic management of water resources from mountaintop to ocean. Plus, the toothless ‘war machine’ that is the MEP need more power in order to go to “War on Pollution”. Finally, the government is launching reform to fix these.

According to draft proposals from the “Two Sessions” (which are highly likely to be passed), a new Ministry of Natural Resources (MNR) will be created, which will absorb the Ministry of Land and Resources (MLR) and take on certain responsibilities from the MWR, Ministry of Housing and Urban-Rural Development (MoHURD) and the National Development and Reform Commission (NDRC).

…water & forests are just as important as mined ores

Notably, the management of land resources and minerals has also been assigned to the MNR. We believe this signals China giving equal priority to environmental and economic resources, (imagine water and forests are just as important as mined ores) and both will now be planned holistically.

As for the MEP, it is supersized to be the “Ministry of Ecological Environment” (MEE). This new MEE/ “Super MEP” is expected to not only replace the functions of the MEP, it will also take over from the MLR in monitoring and preventing groundwater pollution. Plus, it will plan water function areas, manage wastewater discharge points and protect river basin water resources instead of the MWR. Tackling climate change and reducing carbon emissions will also be under the MEE. Given the complex linkages between environmental issues, this allows a more comprehensive way of protecting it.

Expect even more cohesive action & enforcement against pollution as the MEE (“Super MEP”) & MNR gear up for “war”

So now instead of the MLR, MWR, MEP, SFA, SOA etc., we will have the MEE and MNR. Uniting the responsibilities of various departments into two clearly defined ministries means the end of overlapped and unclear management. This restructuring plus the new laws and an enshrined target of an “ecological civilisation” will likely mean continued crackdown on pollution and more power to clamp down on resource exploitation & enforce pollution violations.

2017-2018 has already seen a gamut of groundbreaking water and water-related policies (see our review here), expect even more cohesive action and enforcement against pollution as the MEE (“Super MEP”) and MNR gear up for “war”.

2. Upgrading the economy is crucial: quality >quantity

During the meetings, Premier Li Keqiang announced an annual economic growth target of 6.5% for 2018. While this is unchanged from the target for 2017, it is a slowdown from last year’s expansion of 6.9%. We have previously estimated (unless China outperforms the targets) that China’s water use quotas set an upper bound of 7.6% of annual growth between 2014 and 2020, and 5.7% between 2020 and 2030.
The 6.5% target falls within with our estimate and is consistent with China’s move away from a sole focus on GDP growth. As President Xi stressed at the 19^th National Congress of the Communist Party of China last year , China is aiming for ‘sound development’ that is “innovative, coordinated, green, and open” and “is for everyone”.

Economic growth can no longer be at the expense of the environment and Xi reiterated this shift again at the “Two Sessions”. He called for “firm determination and great courage in phasing out industries and companies with high levels of pollution and emissions, which reserves space for the development of new industries”.

The motto now is “Quality over Quantity”…
…this will bring disruptions to various sectors

The motto now is “Quality over Quantity”. This will bring disruptions to various sectors – for one, the 2018 Work Report calls for low emission production of steel and aluminium sectors. As the US stokes the flames of a trade war over these metals, it seems China is already prepared. Other industries, from electronics to textiles to power, may see tightening of polluting ore/raw material production., especially given that “ecological red lines” have now been approved for 15 provinces. See which sectors will be underdogs and who will lead the pack in our  “5 Trends for 2018”, and for a deeper dive on “high pollution risk” industrial products, check out MEP’s catalogue.

Upgrading the economy while protecting environmental resources is not limited to sectors. China is also targeting key focus regions. Here, we highlight two regions likely to impact water use and pollution and in turn bring disruption to industries.

3. 1^st focus area: Greater Bay Area (GBA)

The focus on development in Guangdong and the Pearl River Delta is not new. However, the “Two Sessions” saw even more ambition. In one of his speeches, Xi named Guangdong as the “vanguard, leader, and laboratory of China’s economic reform” and called for the province to:

• speed up building open economies at a higher level;
• proactively take part in building the Belt and Road, and
• turn the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) into a world-class city cluster.

Xi highlighted the need to “make the resources available for premium enterprises”

But it’s not just development Xi is after. The desire to develop the GBA with an eye on water and environmental resources is again evident. For example, Xi highlighted the need to “make the resources available for premium enterprises”. These “premium enterprises” are not specified but we believe they are the Strategic Emerging Industries (SEIs) listed in the 13FYP and the Made in China 2025 plan (see here).This focus on SEIs will likely drive advance manufacturing in the region while promoting a circular economy.

To figure out which industries will be disrupted and future policies, we can look to the Yangtze River Economic Belt (YREB), which was prioritised by President Xi two years ago over concerns about the region’s ecological carrying capacity  (see our joint report with MEP-FECO here). Although the sectors impacted in the YREB are not the same as those in the GBA, expect similar trends in industrial restructuring and upgrading towards clean and advanced production.

The Pearl River Delta is also a key focus region in the Water Ten plan

It is worth remembering that the Pearl River Delta is also a key focus region in the Water Ten plan along with the Beijing-Tianjin-Hebei (JJJ) region and the Yangtze River Delta. The fact that it is highly water stressed means that so sooner or later China would take action. If you are not up to date on water challenges in the GBA, check out our reviews below. While Hong Kong may be behind on water management, the good news is this integral hub of the GBA recognises the need for sustainable finance to tackle water challenges. Hear more about it from RS Group’s Kelly, Ng & Lui here.

4. 2^nd focus area: Inner Mongolia

During the meetings, Xi also earmarked Inner Mongolia to become an up-and-coming tech hub with high quality growth balanced with the environment.

Xi also earmarked Inner Mongolia to become an up-&-coming tech hub

According to WRI’s Baseline Water Stress Map, most of Inner Mongolia is arid with parts of extremely high water stress. It is however highly important for China’s energy security as China’s largest coal-producing province. Inner Mongolia is also a major contributor to China’s agricultural output. In 2016 it was the 3^rd largest producer of corn in China.

How can Inner Mongolia develop in this water-food-energy nexus? Its water rights trading pilot platform may be the answer. In Ningxia for instance, 80mn m³ of agricultural water savings was transferred to coal projects through water rights trading from 2004 to 2012. More from WRI’s experts here.

Inner Mongolia’s development could also benefit from a shift to wind power generation. As the province with the highest potential for wind power generation, moving away from coal production and dry cooling in power plants would free up water resources for tech and innovation industries e.g. data centres. Shanxi, the 2^nd largest coal province, has already capped and reduced its coal capacity – Inner Mongolia may follow suit.

What’s more, the province is home to the largest rare earths tailings dam for in Baotou. It is a ticking time bomb that could spell disaster for the Yellow River that flows only 10 km away. With China promoting rare earth recycling and companies looking for ways to reduce reliance on mining these minerals, recycling from tailings could soon become economically viable (see more here).

5. Financial reform – time to tackle climate risk?

Financial reform has been on the central government’s agenda for a while and it was again brought up in the meetings.

Already, China realises the billions of RMB climate disasters could cost & have set up a new Ministry of Emergency Management

Apart from calls for easier access to China’s banking and finance systems to foreign involvement, China will merge its banking and insurance regulators in a move to plug regulatory loopholes. This could pave the path for climate insurance to be considered alongside credit risk. Already, China realises the billions of RMB climate disasters could cost and have set up a new Ministry of Emergency Management to centralise the management of floods, droughts and other natural or man-made catastrophes. (more on flood insurance in China here and here).

As we have explored in our “5 Trends for 2018”, some banks have already started to stress test their loan books to environmental risks and new environmental regulations. Environmental Risk Assessment (ERA) is here to stay in China and financial reform could accelerate its progression. To help assess of credit risk, China is also set to introduce mandatory environmental disclosure for listed companies, so watch this space. A focus on regions such as the YREB, JJJ and GBA should also help facilitate basin water risk assessment.

Environmental disclosure has to be relevant and mainstream and the social credit system, which has been under development since 2014, is a step in the right direction. This is essentially an 18-digit corporate credibility account, and it enforces various permit systems and improves transparency and monitoring (more on water permit trading here).

Working together in the era of Beautiful China

Underpinning the “Two Sessions” is structural reform to facilitate better collaboration, un-siloing and holistic management. Plus, China continues to show strong commitment to tackle corruption, environmental pollution and strengthen enforcement. From forming the MEE and MNR, to focus areas, and financial reform, the signs are positive for efficient allocation, responsible use of water resources as well as pollution prevention & control  while ensuring economic growth.

These schemes & pilots will one day become the norm…
…it’s essential to pay attention or even invest in them today

China is exploring different paths to get to a Beautiful China. Schemes and pilots lead the way. There are grand schemes such as the YREB, which explores the right industry mix, crop mix and energy mix given water resource constraints. There are also smaller scale pilots, such as the designation of Taiyuan (resource-focus), Shenzhen (large-scale city focus), and Guilin (landscape-focus) as part of National Sustainable Development Pilot Areas. These schemes and pilots will one day become the norm. It’s essential to pay attention or even invest in them today.

Looking globally, these schemes and pilots could even be “exported” and used abroad in the Belt and Road Initiative, where China is already exercising its soft power. This was debated recently at a high level panel discussion hosted by the City University of Hong Kong, which questioned whether China can lead in the environment globally. Only time will tell. Regardless, the era of Beautiful China has “officially” begun.

Further Reading

• Key Water Policies 2017 – 2018 – Missed out on key water and water-related policies in China this past year? Catch up with China Water Risk Woody Chan’s review, including the latest on the new Water Ten Law and environmental tax law
• Is China Taking Over Global Leadership On The Environment? – Top experts, from the founder of TECONET to the Head of Asia-Pacific for Bloomberg New Energy Finance, share their thoughts at a high level panel in City University of Hong Kong. Their Sadhika Nanda reviews
• China Steps Into Soft Power Vacuum – As the US retreats, Asit Biswas and Cecilia Tortajada explore how China is becoming the world’s leading soft power, from infrastructural development to research progress, and hurdles it faces ahead
• Sustainable Finance – Hong Kong Is Ready! – Is Hong Kong ready to embrace sustainable finance? RS Group’s Leonie Kelly, Tze-wei Ng and Alicia Lui share findings from the Sustainable Finance Initiative’s first market-survey
• Water Efficiency Policy: A Technological High-Water Mark? – From biomimicry to data analytics, Singapore is developing new technology to produce clean water without sinking the environment. Lee Kuan Yew School of Public Policy’s Tommy Kevin Lee and Cecilia Tortajada expand
  

• 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
• 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
• Blue Skies & 13FYP Green Development – Air pollution and the battle on “blue skies” was by far the major environmental focus at China’s Two Sessions. Water and soil are no less important but yet softer and more general targets were set for them. See China Water Risk Hongqiao Liu’s review for the key takeaways
• 5 Trends For 2018: The Year Of The Dog – We could be heading for dog days this year and China is getting ready with economic planning that considers water and climate. Check out our 5 trends and stay ahead of the pack
• 5 Laws To Watch Out For In 2018 – From environmental taxes to compensation mechanisms to nuclear safety, China is continuing its regulatory push in the new year. China Water Risk’s Yuanchao Xu reviews 5 key laws to watch out for in 2018