Water caps & targets – how has China fared and where is it going?

By Yuanchao Xu, Debra Tan 26 March, 2021

China has set a 2025 water reduction per unit of GDP target - is it aggressive enough? CWR's Xu & Tan take a look

China introduced its 'waternomic' target in the 13FYP & allocated water targets to provinces/watersheds pushing them to generate more money on less water & pollution
It worked - in 2019 water use was 10% ahead of the 2020 target & even lower than the 2015 cap; mainly thanks to the aggressive water savings in the agricultural sector
Its 14FYP targets in water use & GDP signal China is in favour of quality growth rather than just rapid growth; expect tweaks as China tai-chi’s towards its ecological civilisation

This year, China announced that the 14FYP water usage target per unit of GDP is to reduce by 16% by 2025 and that total water use will be capped at 670bnm3 in 2025. Are these targets aggressive enough? We take a closer look; but to really see where China is heading, it pays to see how it has fared on past targets …

Both these “dual control” targets are not new – introduced in the 12FYP…

Rapid expansion in the early 2000s put China on a perilous trajectory of water demand outstripping supply by 2030. So China introduced the strict “dual control” of total water use and water use intensity in 2012 under the “Most Stringent Water Management System”, more fondly known as the  Three Red Lines (3RL).

Hard targets were set for total water use for 2015, 2020 and 2030 at 635bn m3, 670bn m3 and 700bn m3 respectively. In addition, a water use per RMB10,000 VAI (Value Added of Industry) for 2015 was set to reduce by 30% compared to 2010.

It’s worth noting that at the time of setting these targets, total water use was 610.7bn m3 as at 2011 and had been growing at a rate of 1.4% from 2004-2011 – see chart below:

China planned to spend RMB4trn between 2011 & 2020 on water infrastructure … it ended up spending more

At that time, China also announced that it would spend RMB4trn between 2011 and 2020 on water infrastructure to ensure supply. It ended up spending more – RMB2trn in the 12FYP (2011-2015) and RMB3.58trn in the 13FYP(2016-2020). But did it manage to control its water use?

New waternomic target – water user per unit of GDP – introduced in 13FYP…

But before we get to whether China stayed within its water caps, it is worth noting that a new target indicator to measure water use was introduced in the 13FYP’s Action Plan for the Control of Total Water Use and Water Use Intensity in November 2016. This additional intensity control target – water use per unit of GDP or “waternomic” target was to help conserve water.

We were clearly excited when this came out … you can read our 13FYP review here. But as those of you with beady eyes have already spotted, the current target to reduce water use per unit of GDP of 16% for 2020-2025 is less aggressive than that set for 2015-2020 – more on this later in “‘Dual control’ delivered outperformance: reining in water use whilst growing the economy.”

National targets are broken down by province & regional watershed …

These national targets were further allocated to provinces in the ‘Assessment Measures for the Implementation of the Most Stringent Water Resources Management System’ in 2013. Since water is needed for growth, water was allocated to each province depended on their development trajectory. In general, poorer provinces had more room to increase their water use whereas rich provinces like Guangdong had to consecutively reduce their water use until 2030.

Provinces were pushed to favour sectors that would generate more money on less water & pollution

Each province then allocated the water by sector. Clearly if urbanisation rates were rising fast, municipal water will also rise accordingly. Allocation for water to ensure food security was also taken into account. So, to meet the water targets as well as GDP and pollution targets, provinces were pushed to not only upgrade water use efficiency across sectors but to favour sectors that would generate more money on less water and less pollution.

Water use permit trading and wastewater discharge permit trading were also used as supplemental tools by provinces to fine tune and manage water use across sectors.

Dual control waternomic targets were also set by watershed such as in the YREB…

…& in total RMB81.1bn was spent on eco-compensation in 2019

On top of this, dual control waternomic targets were also set by watershed. An example of this in action is in the Yangtze River Economic Belt (YREB) where targets are set to manage the entire river from the mountain-to-the-ocean. Upstream/downstream considerations were also considered in setting targets. Here, eco-compensation pilots were also trialled to help protect water resources while earning some form of income. These are not to be scoffed at … RMB81.1bn was spent on eco-compensation in 2019 according to Chinese Academy of Environmental Planning. We will likely see such spending continue to rise in 14FYP.

As it was a key national focus region, whether or not provinces met the water targets could also indicate more aggressive action on sectors to meet/outperform targets. In the YREB, it was the chemicals sector. Check out how this works or read our report “Yangtze River Water Risks, Hotspots & Growth”.

With the YREB pilot under its belt, China is now turning toward managing the Yellow River – see possible risk sector here.

Has China met these targets so far?

The MWR publishes assessment results of provinces each year and as you can see from our YREB analysis as of 2019, some had already met the targets whilst others were behind. However, on a national level, the total water use in 2015 came in at 610bn m3 beating the cap of 635bn m3 by 3.9%.

2019 water use amount was 602bn m3

…10% ahead of the 2020 target & even lower than the 2015 cap…

Fast forward to today… the 2020 water use number has not come out yet but the amount was 602bn m3 in 2019, 10% ahead of the 2020 target of 670bn m3. This is even lower than the 2015 cap. We believe that China will meet the caps given the current water use trends – as can be seen from the chart below, total water use (black line) has been declining steadily since 2013. This is mainly thanks to the aggressive water savings in the agricultural sector (green line). Note that industrial water use (brown line) has also fallen whilst municipal water (blue) and water for ecological use (yellow) are both rising.

“Dual control” delivered outperformance: reining in water use whilst growing the economy

China also looks set to beat its water use per unit of GDP target. In last five years, China’s water use per unit of GDP has been declining. The target reduction for water use intensity is 23% in the 13FYP and so far, China has managed to reduce the water use per RMB10,000 GDP of 88.6m3 in 2015 to 67.5m3 in 2019. As this is already a reduction of almost 24%, it is fair to say that it has already met the 13FYP targets.

China’s water use per unit of GDP has been declining in last five years

So with these national, provincial, sectoral and regional dual control caps, China has managed to rein in water use whilst growing the economy – this is an impressive feat. Credit should be given where credit is due – China should be applauded for managing its tight liquidity constraint.

China was transitioning away from “old polluting industries” toward “higher quality GDP industries”

Can this continue? It should be noted that this was likely only possible because China was improving water use efficiencies as well as transitioning away from “old polluting industries” toward “higher quality GDP industries”. As this transition matures, there will be diminishing returns on both water use efficiencies as well as water use per unit of GDP, so a fall of this reduction from 23% in the 13FYP to 16% in the 14FYP is in line with expectations.

We also said back in 2015 that these water targets would limit GDP growth to no more than a CAGR of 5.7% between 2020 and 2030 unless China beats its water targets. Well, China has clearly beaten its water targets so it does have room to grow GDP at an even greater CAGR.

China is in favour of quality growth rather than just rapid growth

However, as our projections under the new 14FYP water cap and intensity targets show, the maximum GDP CAGR is 5.1% for the 14FYP period, unless China outperforms its targets. Since this is lower than the previous limit, we can conclude that China is indeed in favour of quality growth rather than just rapid growth.

Looking forward … are 14FYP dual control targets tough enough?

In January 2021, E Jingping, the Minister of MWR, announced new targets for water conservation in 14FYP – the total water use cap for 2020 of 670bn m3 was pushed back to 2025. We were pleasantly surprised as this was more aggressive than expected – the National Water Conservation Action Plan released in April 2019 by the NDRC and MWR had signalled new long-term goals for 2022 and 2035 of 670bn m3 and 700bn m3 respectively.

As there has been no mention of a new 2035 number this year, it looks like both the water use caps for 2020 and 2030 have been pushed back by 5 years to 2025 and 2035 respectively as shown in the chart below:

 

Although upped, some say that these targets could be even more aggressive. We feel that these current levels are fair and will give the government enough leeway to manage China’s transition to a low carbon economy as well as maintain economic growth.

China currently has no hard GDP target but it is signalling confidence in doubling its GDP by 2035. This implies a CAGR of 4.7% for the next 15 years. Since this is in the same ball park as the maximum GDP CAGR of 5.1% in the 14FYP allowed by the water targets, we believe that China’s water targets are fairly set.

China’s economic growth should not be detrimental to China’s water resources, as long as water use control measures and pollution plans are in place. Also, remember that China is now planning economic growth based on its ecological boundaries and watersheds.

Plus, given China’s stellar outperformance on water targets, this “new Beautiful China” will likely not just meet the targets but strive to beat them. After all, most of the binding KPIs in the 14FYP are all ecological indicators whereas economic indicators are only indicative – more here.

What such target setting has shown us for sure is that water & economic growth are no longer managed in silos

The 3RL have worked so far and should stand China in good stead going forward. What such target setting has shown us for sure is that water and economic growth are no longer managed in silos. As China’s water policies mature, they will no doubt become even more comprehensive, cutting across multiple sectors and regions.

These targets will not be static, they are and will be constantly tweaked as China tai-chi’s towards its ecological civilisation.


Further Reading

  • 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
  • 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
  • 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
  • Beautiful China 2020: Water & The 13 FYP – China wants to exert tireless efforts to build a Beautiful China where the sky is blue, the land is green and the water runs clear. Find out what this means for water, the environment and the economy in the next five years in the upcoming 13th Five Year Plan
  • 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

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Yuanchao Xu
Author: Yuanchao Xu
Yuanchao uses his analytical proficiencies towards the assessment and visualization of water risks for China Water Risk. Prior to joining, Yuanchao was based in Europe completing the Erasmus Mundus Master Program where he specialsed in hydro-informatics and water management. He applied his skills in climate forecasting and water resource modelling to the EUPORIAS project with DHI (Danish Hydraulic Institute) which resulted in a conference paper on seasonal climate forecasting. Building on this work, he went on to develop hyfo, an open-source R programme for climate scientists and modellers to analyse and visualize data. Yuanchao’s bachelor degree was from the China Agricultural University where he specialized in heat energy and power engineering. During his time there, he also patented a testing instrument for hydraulic machinery. He has studied and worked in Beijing, Nice, Newcastle and Copenhagen.
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Debra Tan
Author: Debra Tan
Debra heads the CWR team and has steered the CWR brand from idea to a leader in the water risk conversation globally. Reports she has written for and with financial institutions analyzing the impact of water risks on the Power, Mining, Agricultural and Textiles industries have been considered groundbreaking and instrumental in understanding not just China’s but future global water challenges. One of these led the fashion industry to nominate CWR as a finalist for the Global Leadership Awards in Sustainable Apparel; another is helping to build consensus toward water risk valuation. Debra is a prolific speaker on water risk delivering keynotes, participating in panel discussions at water prize seminars, numerous investor & industry conferences as well as G2G and academic forums. Before venturing into “water”, she worked in finance, spending over a decade as a chartered accountant and investment banker specializing in M&A and strategic advisory. Debra left banking to pursue her interest in photography and also ran and organized philanthropic and luxury holidays for a small but global private members travel network She has lived and worked in Beijing, HK, KL, London, New York and Singapore and spends her spare time exploring glaciers in Asia.
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