Structural Growth Headwind: Water Problems

Last month NASA's GRACE satellite data showed that the majority of the world's largest groundwater basins - major sources of the planet's drinking water - were being rapidly depleted and on the verge of disappearing.  The North China Plains aquifer, which provides water for 11% of China's population and 14% of its arable land, was one of the critical basins cited.  The NASA revelations are a reminder that China has serious problems with its water resources.  

China's pollution is well documented and highly publicized.  Air pollution often seems to be the focus of most reports concerning China's environmental degradation, but water problems pose just as much, if not more of a threat to the economy. Air pollution foments unrest and leads to severe health problems in the long-term, but water problems require much more immediate attention.  Air is polluted, but plentiful.  Water resources in China are polluted, but very scarce, and literally drying up.  China has a natural water shortage issue due to geographic reasons.  But, pollution and desertification are drastically exacerbating China's water troubles.  

Water pollution, water shortages, and desertification all have both human costs and economic consequences.  Water conservation projects, pollution cleanup, mandatory firm closures, the battle to fight desertification, desalinization projects, health costs, the loss of agricultural productivity, industrial water shortages, and grand projects to move massive amounts of water around the country are all very costly. Beijing needs to throw hundreds of billions of dollars at the problems, diverting resources that could build productivity improving value-added investments.  Unlike roads, tunnels, rails, communications, or smart-grid construction projects, once water projects are completed, most of the contribution to economic output disappears.

Roughly 60-70% of China's water resources are used in agriculture, and another 17% just for the coal and power industries.  Those industries are concentrated in the north, where water is already scarce.

China has renewable internal freshwater resources of 2,070 cubic meters per capita, above the 1,000 cubic meters considered the threshold for "absolute scarcity" by the UN, but roughly a quarter of the global average.  However, the overall number masks a big problem: Four-fifths of China's fresh water lies in its south, and much of the heavily populated economically important north lies well below the UN scarcity threshold.


A solution to China's north vs. south water disparity problem has perplexed China for years.  Chairman Mao once stated, "Southern water is plentiful, northern water is scarce.  If at all possible, borrowing some water would be good."  But it was not until recently that Beijing had the know-how and financial resources to tackle the problem.

At the end of 2014, one of the largest public works in history went online with little fanfare.  Construction on the project, called the "North-South Water Diversion Project", began in 2002 with final costs of roughly $60 billion, with some outside estimates of almost $80 billion. The project is designed to divert 45 billion cubic meters of water annually from the south to the north through a series of 1,500 miles of canals and tunnels.  The number amounts to roughly 4% of China's total water consumption.  The project is only one of many expensive measures taken to deal with China's water troubles.  

For investors, taking advantage of China's water investment is more difficult than the country's renewable energy investments.  Water investment is more about know-how and less about components and economies of scale.  Firms with water project know-how, a number of them from Singapore (called the "silicon valley of water" by famed investor Jim Rodgers) are benefitting.  Public-private partnerships to deal with water issues are being aggressively pushed.  The firm I work for restricts me from giving investment advice on this blog, so I will not elaborate.

Here are some interesting facts about China's water troubles:


  • According to the council on foreign relations, in 2013 the environment replaced land expropriation as the leading cause of social unrest in China.
  • According to state media reports last year, nearly 60% of China's groundwater is polluted.  
  • A Ministry of Land Resources survey from 2013 reported that 70% of groundwater in the North China Plain, an area that is made up of some of the country's most densely populated and economically vibrant areas (including Beijing and Shandong) is unfit for human touch.  Only 22% of that water is safe for drinking.
  • According to a state media report from 2012, up to 40% of China's rivers were "seriously polluted", with 20% too polluted for human contact.
  • In 2013, the Ministry of Supervision reported almost 1,700 water pollution accidents annually.
  • The Diplomat reported last year that about 70% of water pollution comes from agriculture (runoff from pesticides, fertilizer, and animal waste).  
  • In 2014, authorities announced that 3.3 million hectares of farmland, equivalent to the country of Belgium, is to contaminated for farming.
  • 5 billion tons of soil is lost every year in China according to the WWF, the nutrient equivalent to 40 million tons of fertilizer.  Chinese farmers in turn need to increase the amount of chemical fertilizer each year to make up for the loss of nutrients, adding to pollution troubles.
  • Last year a river in the Zhejiang province caught fire after a lit cigarette was tossed in, leading to 16-foot flames before the fire was put out by the fire department. This year, a lake in Anhui China, where I once lived, turned the color of soy sauce from a wastewater released upstream.  The water killed hundreds of thousands of fish.  
  • Antibiotic resistance is a problem in China, which consumes half of the world's antibiotics with 22% of the world's population.  China sees one million deaths a year from antibiotic-resistant infections.  China's bodies of water are flooded with antibiotics each year.  The Guangzhou Institute of Biochemistry reports that in 2013 92,700 tons of 36 commonly detected antibiotics were consumed in China, 53,800 tons of which ended up in China's rivers after leaving the animals and humans that consumed them. A study in April by Fudan University found that Chinese children are frequently exposed to antibiotics from food and the environment.  


  • Beijing's annual per capita water availability is only a couple hundred cubic meters, about a fifth of the UN definition line for "absolute scarcity".
  • China's water resources are down 13% since 2000.
  • A widely publicized census of rivers in 2011 found that China had lost 28,000 rivers in roughly a few decades.  Some of the loss was explained away as bad information collection in past census, but the number is still quite staggering.
  • According to the WWF, desertification has already swept over 30% of China's land.  Every year desertification, caused by overfarming, failing to rotate crops, pollution, climate change, and water scarcity, takes 2,460 square km of land.  Vast tracks of land in China have given way to desertification, affecting 400 million people over the last few decades.  China feeds 22% of the world's population on 7% of the world's tillable land.  The loss of land from desertification was significant consequences for China's food security
  • In 2011 a senior official warned that China's progress tackling desertification was insufficient, calculating that it would take 300 years to reclaim land already lost with its current efforts.


  • China is ramping up water projects.  This year 57 new water projects are under construction throughout the county.
  • In 2014 nearly $80 billion was invested in water conservation projects, and this year spending is expected to increase.
  • Last year, roughly $330 billion was pledged to take on water pollution over the next five years.
  • In the spring, China's State Council announced an official roadmap for tackling water pollution, dubbed "10 measures for water". The plan aims to get 70% of China's 7 major rivers in "good condition" by 2020 (grade 3 on a 5 point scale; good enough for drinking).  The roadmap also contains plans to improve drinking water, and reduce severely polluted ground water from 15.7% to 15% by 2020.
  • The latest plan also mandates shutdowns for small-scale polluting enterprises.  Smaller firms are easier for Beijing to shutter.
  • To tackle the water shortage, Beijing is building a desalinization plant to go online in 2019 that will provide one-third of Beijing's drinking water.  Desalinization is a highly energy intensive process that will lead to further air pollution and divert resources from economic endeavors.
  • The Ministry of Environmental Protection optimistically calculates that the plans announced this year to deal with China's water problems will over time add $900 billion to GDP through investment and related services.