Analysis & Reviews

Water Ten - Comply or Else

Water Ten: Comply Or Else

So it is finally here – China’s ‘Water Pollution Prevention & Control Action Plan’ – The “Water Ten Plan”. Aside from the targets, commentary across the board points to the fact that Water Ten Plan is ‘stricter than expected’. The fact that tasks/actions in the plan are designated to different departments from various ministries was also met with positive feedback. Other consensus point to a rise in water treatment and the potential upsides in the wastewater and sludge markets with bullish recommendations in listed companies along the whole environmental and water value chain.

Less obvious is who/which sectors will be hit most by the plan. The English summary masks tough measures outlined within the ten action points. Already Chinese press are saying that this will lead China to the “New Norm”. Indeed a circular economy plan following hot on the heels of the Water Ten Plan might be a not-so-subtle way of telling us where the top brass intends to take China. How serious is China? Very.

Here’s why we think China is serious:

It’s all about un-siloing – Water Ten is an ‘umbrella plan’ that ties in other game-changing policies

If you haven’t caught the drift yet, it is all about un-siloing. To solve water issues effectively, the government has to plan a coordinated strike across the board – to prevent and control pollution from agriculture, industrial sectors, municipal water and rural water. It also needs to rein in water use across these.

The Water Ten Plan is not one plan but an amalgamation of other plans and policies with wide-ranging impact across sectors

The Water Ten Plan was issued when we were in Korea at the tri-annual World Water Forum. Many sessions there lamented over the inability to un-silo to solve interlinked issues such as the water-energy-food-climate nexus as well as the lack of political will. So we were pleasantly surprised and relieved when China came out with that in spades – the Water Ten Plan is not one plan but an amalgamation of other plans and policies with wide-ranging impact across sectors. We are pleased to see it ties in many other policies which we already identified this year as game-changing.

To truly appreciate the full impact of the Water Ten Plan, the implications of these other game-changing policies must first be understood. Only then can the full reach and scale of the plan be appreciated (get the lowdown on these “8 Game-Changing Policy Paths” here).

It is a remarkable vision that will transform China and bring it to the ‘New Norm’

At a fifty-thousand feet view across these policies, it is a remarkable vision that will transform China and bring it to the ‘New Norm’ – an “ecological civilisation” with an ambitious new economic model.

Whether China can get there is another question. For now, at least there is a plan in place.

Recognition of problems in protecting water sources – geographical mismatch & water scarcity recognised

One of the key points to note is that the new plan recognizes the geographical mismatch in water resources and arable land and acts accordingly. Water Ten actions show that the dire situation of groundwater (from severe pollution to over-extraction) in the North is well acknowledged. A series of measures across the board prioritises groundwater protection – albeit setting a longer deadline because it is harder to tackle. More on what these measures mean for agriculture here and coalmine water here.

Tighter deadlines for some regions compared to the rest of the country underscores the urgency of their plight

Since pollution exacerbates water scarcity, water scarce regions are also prioritised. Beijing, Hebei & Tianjin in particular face stricter targets all round from municipal & industrial water as well as wastewater management and reuse. These three also face tighter deadlines compared to the rest of the country underscoring the urgency of their plight. Other geographical areas of focus singled out with tighter deadlines are the Yangtze River and the Pearl River Deltas.

Actions and targets laid out in the Water Ten Plan basically boil down to the protection of water sources – both groundwater and surface water. For surface water, the focus is China’s 7 key rivers: Yangtze, Yellow, Pearl, Songhua, Huai, Hai and Liao Rivers. Why? These rivers as well as groundwater are the key sources of drinking water for the Chinese. For many cities in China, groundwater is their only water source. Protecting drinking water sources (be it ground or surface) is therefore imperative. The plan has tailored action to tackle water pollution in rural areas as well as urban areas.

No doubt that industry and agriculture will be affected – especially those located along the 7 key rivers and in urban areas

There is no doubt that industry and agriculture will be affected but those especially affected will be industries located along the 7 key rivers and in urban areas. Since most of China’s population and industry (and hence industrial pollution) are clustered around (1) Beijing, Tianjin & Hebei, (2) Yangtze River Delta and (3) Pearl River Delta, it comes as no surprise that these areas should face tighter compliance deadlines.

However, given the enormity of the problem, protecting water sources will still remain an uphill struggle despite the new targets set – more on drinking water source protection targets in Can the Water Ten Protect Water Sources?

Maintaining stability is an even more cherished mantra than food security

Perhaps the question at this point is not ‘can whether China has the political will to stomach a costly clean-up in industrial & agricultural pollution in its drinking water sources’ but ‘what happens if this is not done’. Since maintaining stability is an even more cherished mantra than food security, there is little room to maneuver.

Industries singled out – some more so than others

A nod to rampant pollution exacerbating existing water scarcity is clear in the push to ‘restructure’ both industrial mix and crop mix. As expected, heavily polluting and water intensive industries have been singled out for compliance and upgrade.

Combination of the use of wastewater discharge permits & new stricter industrial standards will hurt some industries even without rate hikes

Combination of the use of wastewater discharge permits and new stricter industrial standards (see below) will hurt some industries even without rate hikes. There is not just upfront capital expenditure in wastewater treatment plant investment but annual operational costs as well. Only those with a long term view of the sector will remain.

Across China, textile, dyeing & finishing and pulp & paper industries will be hardest hit. It is clear from the table below that the textiles, dyeing and finishing sector are in State Council’s crosshairs.

It is the only industry singled out for action across the all key areas. Moreover, new stricter standards and tighter deadlines in the Yangtze River and Pearl River Deltas where the sector is concentrated amount to a triple whammy hit. See why this sector is a key focus sector for China’s State Council in a review of CLSA’s “Dirty Thirsty Fashion: Blindsided by China’s water wars” here.

Across China, textile, dyeing & finishing and pulp & paper industries will be hardest hit

(Please click on the table for an enlarged view)

Water Ten Plan - Implications Across Target Industries

Closing loopholes with new stricter standards, more monitoring, tougher laws and crackdowns

The plan is actually tougher than many had expected. Some loopholes identified earlier in “Rod & staff guidance to pen in pollution” in our “Five Trends for 2015” are now closed by Water Ten Plan. Discharging industrial wastewater to already overloaded municipal treatment plants is a no-no. Under the new plan this type of discharge will be treated as “direct discharge”, which is subjected to the strictest standard.

On top of the impending water & wastewater tariff hikes, new and/or more stringent industrial standards will hurt & parties responsible could go to jail – it no longer pays to pollute

Standards vary across each sector and it is important to note here that some industrial processes were not subjected to any industry specific standards. So previously businesses could be fully compliant despite discharging untreated wastewater into water sources. So on top of the impending water and wastewater tariff hikes, these new and/or more stringent industrial standards will hurt.

Factories will have to treat wastewater to higher standards or face high violation fines under the amended environmental law.  Also, parties responsible for the pollution violations could go to jail for offences. It will mean it no longer pays to pollute.

Smaller factories with thin profit margins may be forced to close or merge with others … the textile sector is particularly vulnerable

… already the price of wastewater discharge permits traded has risen sharply

In reality the high cost of installing and operating wastewater treatment equipment will likely mean that some smaller factories with thin profit margins may be forced to close or merge with others, leading to consolidation within some industries. Also, the price of wastewater discharge permits traded has already risen sharply.

The fact that the textile sector is riddled with SMEs make it particularly vulnerable to such margin pressures – more on the new standards in this sector here

But it is not just the textile sector, six new industrial pollution discharge standards including petroleum refining and petroleum chemistry are in force on 1 July 2015. As we warned, for the year of the goat, corporates, brands and investors beware – the shepherd is still redefining the pen.

Watch out for crackdowns on illegal activities such as secret groundwater discharge, faking it with EIA approvals and monitoring data. The simultaneous anti-corruption campaign mounted by the current administration should go hand-in-hand with pollution crackdown.

Clearing stumbling blocks – setting responsibilities, new financing mechanisms & yellow cards

Someone said recognising a problem is halfway to solving it. The recognition of key stumbling blocks by the plan is another indicator of China’s seriousness in tackling pollution. Overlapping and unclear responsibilities between ministries have resulted in poor enforcement and mismatched standards.

Disparate responsibilities which can hamper clean-up are addressed with tasks designated to different ministries…

…but coordination between departments will still require much effort

These disparate responsibilities which could have hampered pollution prevention and control are addressed in the new plan with tasks designated to different ministries. Now, under the new plan, each action has a ‘lead ministry’ which takes primary responsibility and ‘supporting ministries’ who will have to work with the lead ministry to get the job done. That said, coordination between departments will still require much effort and we remain cautiously optimistic that this re-assures the proper execution of the policies.

Financing the clean-up is also an important component of success. Private investments in the water sector are also encouraged and foreign investments relaxed – more here.  Creating a market in the trading of water use and wastewater discharge permits also allows companies to use these as collateral to finance loans to clean up – see how these are used here.

Favourable financing can be obtained with a good environment report card while those with poor marks will face tougher financing measures

Aside from the usual tariff and fee hikes, China is experimenting with incentives schemes to reward good behaviour through credit evaluation schemes. Those with a good environment report card will score better and are able to obtain favourable financing and those with poor marks will face tougher financing measures from banks. By the end of 2016, the Water Ten wants a yellow & red card punishment mechanism for pollution violators in place. Yellow and red card lists will be published regularly. Will this eventually be linked to the credit evaluation scheme which is also colour coordinated? It would make sense.

Realistic targets & timelines reflect an understanding of the complexity in improving water quality

Let’s take a step back. The cynics amongst us are now thinking “surely this is too good to be true” – how can China be serious when all the above is just to move “very bad” groundwater by a mere 1% by 2020. Water quality meeting Grade I-III (for the same period) for the 7 key rivers should be >70 % whilst drinking water source quality should be >93%. According the 2013 official statistics these were already at 72% and 97% respectively. So either the targets are too soft and therefore the plan is just for show, or we are going backwards and water quality is deteriorating. The latter is indeed the case with groundwater. On 22 April 2015, the MLR issued 2014 China Land and Resources Annual Report in which groundwater in the ‘very bad’ category in 2014 increased from 15.7% to 16.1% (more on groundwater here).

It appears that some 2020 targets  are already achieved…

So either targets are too soft … or water quality is still deteriorating…

…or more monitoring points are giving us a truer picture

The plan is comprehensive and the actions tough. But in reality, achieving clean water is difficult. Increased monitoring stations also mean we are getting a truer picture of the pollution at hand and actual water quality meeting Grade I-III may fall to levels below the targets set for 2020.

State Council wants China’s water environment to gradually improve by 2020. The key word here is “gradually”. Why move gradually when the situation is urgent? Because setting up on-line pollution monitoring feeds takes time; restructuring incumbent industries take time; streamlining administration and shifting vested interests takes time. A mindset shift from ‘economy vs environment’ to ‘economy & environment’ takes time – there are no existing entire circular economies in the world today that China can “copy & paste” – finding new ways of doing old things takes time.

Cleaning up water pollution takes time … the main task for the next 5 years is to stabilize the current status i.e. prevent & control pollution… only then can water quality be improved

The main task for the next five years will be primarily to stabilize the current status. In  other words prevent and control pollution rather than improve the overall water quality. Beyond 2020 is when China can leverage off these first improvements to do that.

With real-time monitoring in place by 2030, water quality meeting Grade I-III for the 7 key rivers at >75% whilst drinking water source quality at >95%, are meaningful targets. In short, this is only the start. We are in for the long haul – by 2050, China wants to realize comprehensive improvement and the virtuous circle of the ecosystem.

Fast & Furious moves to the ‘New Norm’

The signs are here. Despite small incremental targets in overall water quality, the Water Ten Plan expects fast and furious reform across industry and agriculture. Make no mistake this is the start of a march to the New Norm. Other than the Water Ten Plan, policies issued over the last month should also clue us in on key concerns and the direction ahead:

The picture is clear – the future is business-unusual with a circular economy. As in Water Ten Plan, the above involve a cast of multiple industries sanctioned by the top.

Officials at all levels now face a “red line” – a ‘lifetime’ accountability to hold the Three Red Lines

Pollution is one of these lines and fast & furious reforms are expected to hold this line

In case there are any doubts, last week, the CPC Central Committee & State Council issued the Opinions on Accelerating the Construction of An Ecological Civilization to reassert the 2020 targets to protect the environment. Interestingly, officials will be held accountable for any decision found to have caused ecological damage, not just for their tenure in government but for their lifetime. The document also states that officials should apply “significantly increased” weighting to the use of resources, environmental damages and ecological competitiveness so that the pursuit of economic growth is not the only goal.

Officials at all levels now face a “red line”. They now face lifetime accountability to hold the Three Red Lines. Pollution is one of these lines and the Water Ten is the action plan.

Fast and furious reforms are expected across the board – yes, there’s much money to be made but to steal a line off comedian Russell Peters, it is also clear in this race (no pun intended) that “somebody is gonna to get a hurt real bad”. 


Further Reading

  • Groundwater Under Pressure - New official survey says that China’s groundwater quality has yet again deteriorated. Can the ‘Water Ten Plan’ turn this around? Who will be affected? Hear from China Water Risk’s Hu on what’s at stake & why the next 5 years are crucial
  • Can The Water Ten Protect Water Sources? – Some 40% of urban residents drink bottled water. This could change with the Water Ten Plan which aims to eventually deliver safe drinking water from the tap. Are the water source protection targets tough enough or will the bottle water market proliferate? CWR’s Liu & McGregor expand
  • 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
  • Water In Coal: Still Murky – Multiple policies were issued recently over the proper management of coal mine water, in particular mine water reuse to alleviate groundwater woes. But the road ahead is still murky. China Water Risk’s Thieriot walks us through inconsistencies in data & targets
  • 2015 World Water Forum: 5 Key Takeaways – See what tops our list of key takeaways from the 2015 World Water Forum in South Korea. From bottled water to ‘green hydropower’ and transboundary issues – where does China stand? China Water Risk’s McGregor expands

Other key articles on water pollution, water policy, water management & opportunities in China

  • China Water Risk’s 5 Trends for 2015 - As China moves to re-balance its economy and environment, Beijing will shepherd the nation towards water, food & security. For the Year of the Goat, it is better to be the surefooted goat than the sacrificial lamb so check out our top 5 trends in water for 2015
  • 8 Game-Changing Policy Paths - There has been a fundamental shift in planning China’s future growth with changes in regulatory landscape due to multiple polices set & changes in law. Many come into full effect in 2015. Get on top of these
  • New Market Tools to Enforce Red Lines - China has been experimenting with market mechanisms. Can China’s new water permit trading markets (discharge & use) help the nation hold its Three Red Lines on water use, efficiency & pollution as well as catalyze a bigger water market? Feng Hu expands
  • Pollution: It Doesn’t Pay to be Naughty - State Council wants to use the enforcement of law & regulation “to force the economy to transform and upgrade”. See how violation cost surges with daily fines, new standards & discharge permit trading in a bid to push China to go clean
  • China Water Investments: 3 Thoughts - Investing in the water sector looks attractive with the Chinese government & consumers wanting water tariff hikes. Will water supply or wastewater treatment be the larger market? Debra Tan shares some on-ground views distilled from recent conversations
  • Dirty Thirsty Wars – Fashion Blindsided - CLSA report titled “Dirty Thirsty Fashion: Blindsided by China’s water wars”, examines how China’s water risks could blindside the US$1.7 trillion global fashion industry. Is this the end of fast fashion? Debra Tan expands
Debra Tan

About Debra Tan

Debra heads the China Water Risk team and spearheaded the development and build out of the China Water Risk brand and website in 2011. Since then, she has written extensively about the water-energy-food nexus as well as reports analyzing the impact of water risks on certain sectors for financial institutions and corporates. She has also given numerous keynotes, moderated and participated in panel discussions and conferences around water issues to investors and corporates. Debra started her career in finance, spending over a decade as a chartered accountant and investment banker specializing in mergers & acquisitions and strategic advisory. She has lived and worked in Beijing, HK, KL, London, New York and Singapore. Debra left banking to explore her creative side pursuing her interest in photography resulting in her first solo exhibition within a year. She also ran and organized hands-on philanthropic and luxury holidays for a small but global private members travel network and applied her auditing, financing and photography skills in the field for various charitable organizations and foundations.

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