The legal framework and its implementation in the Chinese water market

Table of Contents

1. Introduction

2. Factors influencing the reform policy
2.1. Environmental determinants
2.2. Social determinants
2.3. Economical determinants

3. Regulatory environment
3.1. Legislative authorities
3.2. Important laws and regulations
3.3. National standards and principles

4. Implementation of laws and regulations
4.1. Administrative authorities
4.2. Horizontal and vertical ties

5. Policy and investment implications
5.1. Public investments
5.2. Foreign participation
5.3. Remaining challenges

6. Conclusion

Literature

1. Introduction

Worldwide the hidden costs of Chinas rapid transformation have caused deep concerns. In recent years the cases of water shortages, pollution and flood/drought damages steadily increased in numbers. This development is caused by both a large population and a rapidly developing economy. Although China significantly improved its water and wastewater infrastructure, its water shortage problem is worsening year by year. In 2004 China’s per capita water resources accounted for 1,856 cbm which is a decline of approximately 15 % of the year 2000 (Bfai, 2006: 11). A recent study conducted by the World Bank estimates the overall cost of water scarcity to be approximately 147 billion Yuan annually (World Bank, 2007: xvi). This accounts for 1 % of China’s GDP.

The Chinese government tries to counter this misbalance and insistently pursues an environmentally sustainable development policy. Its countermeasures include management model reforms, Private-Sector-Participation (PSP) projects and the support of new technology development and application. According to the 11th Five-Year-Plan, more than 140 billion Euros will be spent on environmental projects and campaigns before 2010.

These reforms have unleashed a wave of optimism in China’s water market and created great market opportunities for investors. Significant amounts of new water infrastructures are to be built, and the operation and maintenance of all existing and newly built municipal water and wastewater treatment plants have been or will be transferred to authorized enterprises. However, these opportunities are not without risk. Investors are particularly skeptical about the development of the legal environment. The contradiction of theory and practice is striking. On one hand China’s legal framework for environmental protection appears extensive and strict. On the other hand a violation of these regulations is seldom sanctioned. This paper tries to analyze this ambivalent picture. It examines the key regulations of the Chinese water sector, illustrates the interdependencies between the relevant authorities and analyzes their implications on investment opportunities for foreign enterprises.

2. Factors influencing the reform policy

2.1. Environmental determinants

At first sight China per se does not seem to be a water scarce country. The Food and Agricultural Organization (FAO) of the United Nations (UN) estimates China’s total naturally available water flows from surface and underground sources at approximately 2,812 billion cbm per annum (FAO, 2007). This ranks China sixth in the world behind Brazil, Russia, Canada, Indonesia and the USA.

While China‘s water resources are substantial, compared to those countries, it has to deal with a much larger population. On per capita basis China’s naturally available water flow per annum of 2,206 cbm per capita (2004) is one of the lowest levels in the world. In fact, this is only one-third of the average of developing countries (7,762 cbm per capita) and even one- fourth of the world average (8,549 cbm per capita) (FAO, 2007). These figures show that the state of China’s water resources is alarming.

China also has to cope with difficult geographical conditions. While the demand for water is increasing throughout the country, the northern territories have much less water available than the south. The area north of the Yangzi River accounts for 70 % of the arable land, 46 % of the population and some of the largest industrial centres. However, this area can access only 20 % of China’s total water resources (2005). In contrast, the area south of the Yangzi River, bearing 30 % of China’s arable land and 54 % of the population, has access to 80 % of the national water reserves (Bfai, 2006: 13). Furthermore, the average rainfall in the southeast (1,800 mm) is nine times higher than in the north-western interior basins (200 mm) (Economy, 2004: 68).

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Figure 1: Water resources availability per capita (cbm per year) Source: Varis, 2005: 18

The problems are most acute in the North China Plain (NCP). This area contains the above illustrated regions Hai He / Luan He, Huang He and Huai He. The per capita water resources in this region stands at approximately 462 cbm. This is one-fifth of the national average and far below the critical value defined by the United Nations (UN) (Bfai, 2006: 14). What’s more, water shortages in the north have led to an overuse of ground water, which caused ecological problems like the destruction of wetlands and the drying up of rivers. Experts estimate that from 1998 to 2006 the groundwater tables in Beijing have dropped by 100 to 300 meters (Shalizi, 2006: 10). The state of China’s water resources is worsening year by year.

Table 1: Water resources availability per capita

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Source: China Statistical Yearbook, 1981, 1994, 2004.

To mitigate Northern China’s water scarcity, the Chinese government launched the enormous “South-to-North Diversion Project” (Nanshui Beidao) in 2002. This project aims to divert the rich water resources of the south to the water thirsty northern regions. It combines some of Chinas greatest rivers - the Yangzi River with its tributary streams, the Yellow River, the Huai River and the Hai River. After completion, the eastern, middle, and western route are to divert up to 50 billion cbm water per annum (USDC, 2005: 19). But even if the Chinese government succeeded with this ambitious plan, the country will continue to face severe water challenges in the short and medium run. Some authors like Zmarak Shalizi from the Development Research Group of the World Bank even argue that China will soon become the most water stressed country in East and Southeast Asia (see Shalizi, 2006).

However, the definition used to describe ‘water stress’ is not being used consistently. Most definitions are either based on the “overall water use model” by the International Water Management Institute (IWMI) or on the “per capita water use model” that is applied by the United Nations (UN), World Bank and World Resource Institute (WRI):

- The IWMI uses a four-part scale to classify countries in terms of their overall water use. A) Low exploitation: <20%; B) Comfortable range: 20-59%; C) Environmentally overexploited: 60-100%; D) Mining: >100% (World Bank, 2002: 87).
- The UNO, World Bank and WRI define “water stress” on a per capita basis as annual water availability of 2,000 cbm per person or less. In this framework “water scarcity” is defined as 1,000 cbm per person or less (World Bank, 2002: 43).

Using the per capita definition (UNO, World Bank, WRI), China as a whole will be classified as water stressed by 2010 at the current rate of population growth. Taking the IWMI’s classification, China currently uses 44% of its water and is still within the “comfortable” water use margin, but its use of water is projected to exceed 60% by 2020, putting it in the “environmentally overexploited” category (Shalizi, 2006: 5). Thus, by either definition, China will face a potentially serious water management problem in the coming decades.

However, it is not only the availability of China’s water resources that give reason to worry. At the same time China’s development leaves evident ecological foot-prints and creates new environmental challenges. Especially water pollution remains to be a cause of serious concern. The Ministry of Construction (MoC) stated, that 90 % of the national water resources to be polluted at different levels. The situation for water reservoirs is much alike. 75 % of the lakes don’t fulfil the standards for drinking water. Over 70 % of the water in five of the seven major river systems - the Huai River, Songhua River, Hai River, Yellow River, and Liao River - was graded IV or worse (Bfai, 2006: 15).

Table 2: Contamination of important rivers

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Remarks: The classification is based on the Chinese categories in five quality classes for the drinking water quality: classes I to III are sufficient for the supply of drinking water. Classes IV and V are regarded as insufficient.

Source: SEPA, 2005, Online: http://english.sepa.gov.cn (accessed: 06.02.2008)

2.2. Social determinants

The Chinese government is aware of the volatile situation and increases pressure to take actions against water pollution. One can illustrate this development by looking at the chemical accident in the upper regions of the Songhua River in November 2005. The water contamination caused a temporary shutdown of the entire supply of drinking water for the area of Harbin that is populated by more than nine million people and even affected the supply of drinking water in neighbouring Russia. Due to shortcomings in prevention measures and communication hurdles, local government officials and the head of the SEPA had to resign. Some experts argue that this incident has set new impulses for the development of Chinas water protection system (see for example Bfai, 2006: 16).

Table 3: Cases of water contamination from 2000 to 2004

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Source: China Statistical Yearbook, 2005

One must not neglect the important role of the Chinese population in the water market reform process. Its living standard and state of health is directly influenced by the quality and accessibility of Chinas water resources. In 2006 more than 75 % of the water in rivers flowing through China’s urban areas was not suitable for drinking or fishing and the drinking water supply of only six of China’s 27 largest cities’ meet state standards (Shalizi, 2006: 12). Many urban river sections and some large freshwater lakes are polluted to such an extent that they cannot even be used for irrigation.

Additionally, the poor quality of the water resources has a significant health impact. This holds particularly true for rural areas, where about 300 million people lack access to piped water. A study by the World Bank (World Bank, 2007) attributes excess cases of diarrhea and excess deaths due to diarrhea among children under 5 in rural areas to lack of safe water supply. In response to these severe problems, Chinese authorities have begun to address these issues from the national down to the village and farm levels.

The impact of social needs on China’s water resource policies is also reflected in the development of Chinas water prices. Despite of widespread rising prices in recent years, Chinas water prices are still far below international average. Here the capital Beijing serves as a good example. The quotas of 3.7 RMB per cbm water and sewage water are among the highest in the country (Bfai, 2006: 22). Nevertheless, they account for as little as about 1 % of the overall consumption expenses of the population. The benchmark of the World Bank for developing countries is 5 %. This example shows that water prices do not reflect the water scarcity in the country in any way.

Table 4: Water prices per cbm in Beijing, Shanghai and Guangzhou

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