Rivers are disappearing in China. Building canals is not the solution

Oct 12th 2013 |From the print edition


CHINA’S emperors regarded control over water as one of the principal ways of controlling the country. They poured their kingdom’s resources into vast projects such as the Grand Canal between Beijing and Hangzhou, which was finished in about 500AD. The country’s Communist leaders have inherited this passion. Eight of the nine members of the previous Politburo’s standing committee were engineers and a former president, Hu Jintao, was a water engineer. The country has built as many large dams as the rest of the world put together.The Grand Canal now forms a link in one of the biggest engineering projects the world has ever seen, whose first stage is due to open by the end of this year. It goes by the unlovely name of the South-North Water Diversion Project (see article). If it is ever finished it will move water along 2,000 miles of new canals, some of them across the Himalayan plateau, from the Yangzi in the south to the Yellow River in the north, at a cost of more than $50 billion.

Unlike some of China’s recent infrastructure extravagances, the diversion project addresses a serious problem. China is dangerously short of water. While the south is a lush, lake-filled region, the north—which has half the population and most of the farmland—is more like a desert. The international definition of water stress is 1,000 cubic metres of usable water per person per year. The average northern Chinese has less than a fifth of that amount. China has 20% of the world’s population but only 7% of its fresh water. A former prime minister, Wen Jiabao, once said water shortages threaten “the very survival of the Chinese nation”.

The shortage is worsening because China’s water is disappearing. In the 1950s the country had 50,000 rivers with catchment areas of 100 square kilometres or more. Now the number is down to 23,000. China has lost 27,000 rivers, mostly as a result of over-exploitation by farms or factories.

Water shortages impose big costs. China is hoping for a shale-gas revolution but does not have enough water for it since most of the gas reserves are in the driest parts of the country. The World Bank puts the cost of China’s water problems—mostly damage to health—at 2.3% of a year’s GDP.

Right problem, wrong solution

China clearly needs to do something—but not the South-North diversion project. Aside from the massive cost, the two rivers involved have very different ecosystems and taking water from one to the other could do irreparable environmental harm. The bits that have been finished already have killed many organisms. China’s vast engineering projects could also hurt its neighbours. The diversion scheme is just one of several proposals for the rivers of southern China, including the upper reaches of the Brahmaputra and Mekong, which could affect a billion people who live downstream. And all those projects would increase the amount of water in China by only a few percentage points.

The government is approaching the water problem from the wrong end. Damming or diverting rivers tackles only supply—increasing available water by capturing more of what flows through rivers or by moving water from one river to another. The government would do better to focus on demand, reducing consumption of water in order to make better use of limited supplies. Water is too cheap in most cities, usually costing a tenth of prices in Europe. Such mispricing results in extravagance. Industry recycles too little water; agriculture wastes too much. Higher water prices would raise costs for farms and factories, but that would be better than spending billions on shipping water round the country.

Development plans should also be rewritten with an eye to the shortage. China is building cities of a million people in the Gobi desert. That makes no sense. The government should stop boosting demand for water in places that have none.

China should also fine polluters. According to the land ministry, more than half the groundwater in northern China is too dirty for people to wash in, let alone drink, and some is so poisonous it cannot even be used in the fields. Reducing pollution would not just improve Chinese people’s health, but would also do more than building any number of dams to increase available supplies of usable water.

China’s engineers have performed amazing feats in the course of its development. But the water problem is best solved by its economists and environmental regulators.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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