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8 Reasons to Invest in Irrigation in China.jpg

8 Reasons to Invest in Irrigation in China

Irrigation has played an important role in human civilization. China, along with ancient Egypt, India and Mesopotamia, is considered a ‘hydraulic civilization’. The Dujiangyan Irrigation System (都江堰) in Sichuan built over 2,200 years ago is still providing water for over half a million hectare of land, 5x the size of Hong Kong.

Rice terrace in Guangxi with over 650 years old irrigation system

Around half of China’s farmland is irrigated, more than double of the global average of 21%. Irrigation is the biggest usage of water in China, accounting for about 55% of the national total, and hence pivotal in holding the water ‘Red Lines’. Securing water for irrigation will likely become more challenging due to increase of irrigated areas, relatively low irrigation efficiency, unchecked industrialization and urbanization as well as climate change.

HSBC report “No Water, More Trade-offs” suggested that, China could reduce its domestic water demand by importing more water-intensive products. However, it is unlikely that Chinese government will reply on import to secure its food supply, especially for edible grains. Lessons learned from other countries like Egypt have shown the risk of high reliance on foreign grains.

Irrigated farmlands produce 75% of China’s grain and over 90% of cash crops such as cotton & vegetables

China will thus strive to ensure its grain self-sufficiency and security. This is reiterated in the 13 Five Year Plan, and has even become one of the performance evaluation indicators for provincial governors. 75% of China’s total grain and over 90% of cash crops such as cotton and vegetables are now grown on irrigated farmlands. This part of water demand is almost inevitable, and irrigation matters for both food & water security in China.

Here are 8 reasons why business and investors should invest in irrigation in China:

1. China’s irrigated area is 3x that of the US & needs water equivalent to the Pearl River flow

Since 2010, China has become the country with the largest irrigated area. In 2015, its irrigated areas reached 66.1 million hectare. This is more than 3x the size of irrigated areas in the US (20.2 million hectare).

China’s annual irrigation water use capped at 373bn m3 by 2030…the next 5-10 yrs is key to up efficiency

According to the latest available data, China’s total irrigation water use stood at 340 billion m3 in 2013. This is equivalent to the average annual flow of the Pearl River, China’s third longest river. China has already set its national target of total irrigation water use at 372 billion m3 by 2020 and 373 billion m3 by 2030, according to a national plan. This means an average annual increase of 5 billion m3 by 2020 and only 0.1 billion m3 annually from 2020 to 2030.

In order to control the total water use for irrigation, improving irrigation efficiency and reducing irrigation water quota will be key for the next 5 to 10 years. Indeed, this has been clearly indicated in newly issued Regulations on Irrigation and Water Conservancy.

2. Additional >18 million hectares of land will adopt water-saving irrigation technologies by 2030

Despite differences in calculation, in general, irrigation efficiency is used to measure the percentage of water that is actually used by the plants. China’s current average irrigation efficiency is 0.532, already a significant improvement from its 2004 level at 0.44. It is expected to reach 0.55 by 2020 and above 0.6 by 2030. But, even at the 2030 level, it will still be lower than the current level of developed countries at around 0.7-0.8.

China's Annual Average Unit Irrigation Water Use

The actual irrigation water use is affected by factors such as geographical and climate conditions, irrigation measures as well as crop types. The average water use per hectare of irrigated farmland in China has dropped from 6,750m3/ha in 2004 to 6,030m3/ha in 2015 (see above left chart). This, however, is still nearly a quarter more than the US average.

Water-saving technologies can significantly reduce irrigation water needs

Since 1999, many provinces have set irrigation water quota (defined as cubic meters of water per unit irrigated area). For instance, Xinjiang is divided into 16 different irrigation zones and water quotas are set based on crop types as well as a multi-year probability of irrigation water supply satisfaction rate (50% and 75%). As shown in the above right chart, the irrigation water quota for growing cotton in Hami city ranges from 4,500m3/ha to 7,125m3/ha.

It is clear that by adopting water-saving technologies such as spray and micro irrigation, it can significantly reduce irrigation water needs, by up to 30% in the case of cotton in Hami.

75% of China’s irrigated areas to be water-efficient by 2030

Currently, 48% or 31.6 million hectare of irrigated areas in China adopted water saving technologies. The share is expected to reach 64% by 2020 and 75% by 2030. Even if the irrigated areas remain the same, it would mean transforming at least 18 million hectare of land to be more water efficient by 2030.

3. Promoting highly efficient water-saving irrigation requires >RMB139 bn investment

Since 12FYP, China has been promoting agriculture water-saving projects in four key regions: Northeast China, North China Plain, Northwest China and South China (see map below). For northern regions, almost all projects will be highly efficient water-saving measures, including low pressure pipe irrigation, spray irrigation and micro irrigation.

>RMB139 bn to equip 7.5 mn ha land with highly efficient water-saving irrigation

In total, these projects aim to invest over RMB139 billion and equip up to 7.5 million hectare farmland with highly efficient water-saving irrigation by 2017/2018. Three major types of irrigation technology, pipe-irrigation, spray irrigation and micro irrigation are expected to account for 31%, 23% and 46% respectively, in terms of area.

RMB139 bn investment to promote highly efficient water-saving irrigation

4. Private sector can play a bigger role in water infrastructure investment including irrigation

During 2005 and 2014, China spent RMB2.3 trillion on water infrastructure projects, 44.7% of which or over RMB1 trillion were spent on construction of water resource projects (mostly related to water diversion and irrigation), RMB793 billion on flood control, and RMB84.9 billion on soil conservation and ecological restoration.

The financing of these types of water infrastructure projects have been heavily reliant on government funding. In 2014, government budgets and funding accounted for two thirds of the year-end investment. It is followed by internal funding (8.3%) and domestic loans (7.3%). Private investment only accounts for a very small portion (2.2%).

Private funding can play a bigger role in water projects through third-party irrigation services and PPP

However, the private sector should play a bigger role through third-party services or public–private partnership (PPP). China Development Bank just announced that it will provide RMB500 billion loan to water resources projects during 13FYP. We have also seen more PPP projects targeting irrigation efficiency. For instance, one recent project in a county in Hebei is expected to invest RMB2 billion to achieve annual agricultural water savings of 40 million m3.

Moreover, irrigation is not only the business of farmers and the government, it is also vital to ensuring raw material production that is essential for industries such as textile and food & beverages. The on-going water tariff reform and water rights trading also expect to provide more incentives for financing irrigation improvement.

5. Water tariff reform and water rights trading set to incentivise irrigation finance

In China, agricultural water tariff is often too low to cover the infrastructure investment cost, nor to encourage water-saving practices of the farmers. A government survey in Hubei in 2014 found that water supply projects for agriculture use (mainly irrigation) could only recover 21% of their cost through water tariffs: the average agriculture water tariff to cover investment and operation cost should be around RMB0.116/m3, but the actual approved tariff was only RMB0.039/m3; moreover, only 62% of the water fees are effectively collected in Hubei.

Agricultural water tariff is expected to cover at least O&M costs of water supply

This January, the State Council rolled out a 10-year plan to reform the agricultural water tariff. One target is to ensure the tariffs reach at least the level of covering operational and maintenance (O&M) costs; for water scarce regions, it could increase to cover the full project cost. This should also encourage more efficient and responsible water use in irrigation.

Another on-going initiative is water rights trading. Although the new scheme is still being piloted in several provinces, a national-level Water Rights Exchange has already been established on 28 June 2016.

Water rights trading between power plants & irrigation….

….trading prince much higher than local water resource fee & irrigation tariff

Under the new Water Rights Exchange, trading of water use permits between farmer (for irrigation) and other water users is one of the three key types of trading.

Already, on the first day of the new Exchange, one such deal was made between an irrigation unit in Ningxia and a power plant with a trading price at RMB0.93/m3 (US$0.14/m3). This is higher than the minimum water resource fees in Ningxia (RMB0.3/m3 for surface water and RMB0.7/m3 for groundwater), and much higher than irrigation tariff for water from the Yellow River (RMB0.0305/m3).  

6. Powering irrigation with renewables brings dual benefit on climate and water

Climate change will have impacts on the water supply and demand for irrigation, but irrigation itself could also contribute to climate change from use of fossil fuels. Modern day irrigation needs power to pump and divert water. The number of motors for irrigation and draining, either electric or diesel, deployed in the fields in China has nearly doubled over the past two decades.

Renewables could power motors for irrigation 1

According to the latest available data, the total power capacity of the two types of motors were both 71.6GW in 2012, both higher than the total installed capacity of solar PV in 2015 (see chart). This does not include power required for water diversion for irrigation purpose.

Wouldn’t it be great if the irrigation systems were powered by solar PV or wind? Not only will GHG emissions from using fossil-fuel energy sources fall, but water efficiency will also improve with the use of highly-efficient irrigation technologies. We have seen pilot projects in several provinces from Xinjiang to Hainan. A listed Chinese company even supplied solar-power irrigation system to a cotton farm in Australia.

Such projects with dual benefit on climate and water, could become more attractive once China’s national emission trading market kick-starts next year.

7. Growing more cash crops & meeting grains needs bring uncertainty in irrigation water

Water needs of different crops can vary widely for the total growing period. For instance, growing sugarcane can use up to 5x more water than growing wheat, according to FAO estimates.

Crop mix optimization needs to consider local water resources

Going forward, China has set the Red Line of arable land to be 124.3 mn ha by 2020, according to the recently adjusted National Land Use Plan. The first priority will be given to grain production and then high value crops. In another new plan to optimize crop mix by 2020, strategies are laid out for different regions based on their individual climate conditions, water resources and technological levels.

2004-2014 China's Sown Area By Crop Type

Over two thirds of China’s sown areas are used to grow grains, which have steadily increased by 11% since 2004 (see left chart). In terms of sown area, corn has overtaken rice and wheat, accounting for 33% of sown area for grains in 2014 whilst 27% and 21% for the latter two, respectively. Moreover, sown areas for high value crops such as sugar crops and vegetables rose by 21% and 22% respectively, during the same period.

For the agriculture sector as a whole, improved water efficiency, together with increase in high values crops and fast growth in forestry & fishery, helped triple China’s average agricultural value-added per unit of water use from RMB20.5/m3 in 2004 to RMB70.3/m3 in 2015.

8. Cutting grain losses from farm to fork can also save water

In addition to adopting more efficient irrigation technologies, we could also “save” irrigation water by reducing crop failures as well as grain losses and waste in the supply chain (see chart below).

Grain Loss Due to Drought & in Supply Chain (2005-2014)

This is at a similar scale as the grain losses in the supply chain (such as long-distance transportation, processing and storage), which is over 35 million tonnes annually. China plans to save at least 13 million tonnes of such losses every year by 2020, which can be translated into 10 billion m3 of water saving every year, equivalent to around 3% of China’s current annual irrigation water use.

In 2014 alone, 12.27 million hectares of arable land were affected by droughts, and another 5.92 million hectares were flooded, which together accounted for 13.5% of China’s total arable land. During 2005-2014, China’s total grain loss due to drought amounted to 242 million tonnes, according to MWR. This is equivalent to 4.4% of the total grain production over the same period.

Moreover, genetics also play an important part: seeds with climate-resilient characteristics could help reduce food loss due to extreme weather. According to a research project in China, technological measures such as hazardous-resistant seeds can save 5-10 million tonnes of grain losses every year. In addition, crop failure could also occur due to fake and substandard seeds. Such illegal practices will face tighter regulation under the newly revised national Seed Law, which requires more stringent approval procedures targeting five key crops (rice, wheat, corn, cotton and soybean).

Investing in irrigation in China is more than pumps & pipes

All these measure would help ensure more food grown end up at people’s table and also alleviate the pressure of irrigation water demand.  In the face of resource constrains and the changing climate, investing in irrigation in China is more than just pumps and pipes. Any solutions that can help ensure both food and water security will be welcomed.

Further Reading:

  • Flood Insurance in China: Lessons & Opportunities - Only 2% of the RMB147bn of losses from 2016 summer floods are covered by insurance. With various pilots since the 80’s failing, Liu expands on past & future role of flood insurance for CWR
  • Counting the Costs of Floods in China - With China in the midst of one of its worst flood episodes in history, Asit K Biswas & Cecilia Tortajada look at the significant social and economic costs of floods, and what can be done about them
  • Future Fashion & ‘Beautiful China’ – Together Forever? - With fast changing regulatory landscape moving against pollution from the textile industry, is there really room for fast fashion in a ‘Beautiful China’? China Water Risk’s McGregor on why it’s time for fashion to become beautiful inside and out
  • 2015 State of Environment Report Review - China says overall environment quality has worsened in 2015 with groundwater deteriorating for the fifth year straight. It’s mixed news for rivers but lakes & reservoirs see marked improvement. Get the latest pollution status updates from the newly released 2015 State Of Environment Report
  • China’s Soil Ten – With ~1/5 of China’s farmland polluted, the Soil Ten Plan could not come sooner. See impacts to the “Hateful Eight” polluting industries & get the distilled version of the 231 actions in our review
  • 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

Agriculture, climate change & water

  • More Food In A Changing Climate – China’s 120mn hectares of farmland,  equivalent to 2x France, is threatened by urbanisation & rampant pollution. CWRs Hu on challenges to China’s path to food security in a changing climate
  • Less Food Waste From Farm to Fork - China’s new plan on grain supply and storage says saving grain means saving water. CWR’s Hu mulls challenges & opportunities in reducing food waste in a hungry future
  • Water Ten To Revamp Chinese Agriculture - Takeaways from Shanghai’s Global Agriculture Sustainability Forum are reviewed in relation to the new Water Ten Plan. Fertilizer, pesticide, irrigation & product tractability markets look set to change. China Water Risk’s Hu on what the new plan means for the future of Chinese agriculture
  • Balancing Water For Agri & Coal - China’s coal mines lie next to its farmlands and it plans to save water used in agriculture to fuel coal growth. In “Towards a Water & Energy Secure China”, China Water Risk explores strategies to control water use between agriculture & coal to ensure both food & energy security
  • 8 Things You Should Know About Rice & Water - How much of water & farmlands are used to grow rice in China? What about exposure to Cadmium, Mercury, Lead & Arsenic? Can China ensure rice security? Here are 8 things you should know about rice & water in China
Feng Hu

About Feng Hu

Feng is responsible for the development & execution of China Water Risk’s projects and collaborations. Prior to joining China Water Risk, Feng was a qualified senior auditor in an international certification company. He has worked with governments, the private sector & NGOs on various projects from renewable energy, energy efficiency improvement to waste treatment as well as compliance assessment of large hydropower projects with dams. As the project leader, Feng has worked in most of the provinces in China, Vietnam, Nepal as well as several African countries. Aside from auditing, Feng has worked on provincial hazardous waste management and conducted research from urban water ecosystem health assessment to biofuel production from microalgae. He also has co-authored a published research paper on eutrophication in China’s West Lake as part of a collaborative project between Zhejiang University & Michigan State University. Feng holds a MSc degree in Sustainable Resource Management from Technical University of Munich and a BSc degree in Environmental Science from Zhejiang University.

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