Trading water in thirsty China

A new scheme hopes to alleviate water poverty in an arid area of southwest China. Zhou Jigang, Peng Guangcan and Zhen Ceng report on the promises and perils of water trading.

On April 1, 2008, the Tongliang county water authority in Chongqing, southwest China, approved Zhu Jiaping’s application for water usage. With stamps from the town of Pulu and three villages within its borders, the document gave Zhu the legal right to use water from limestone caves at Xinlian village.

Zhu’s company planned to use the water to raise giant salamanders. New regulations on the allocation of water rights in the county meant his application had to explain the potential impact of his company’s water usage on local stakeholders. Liu Shangwu, a water management official, explained that three nearby villages had to agree that the application did not impact on their water security. Otherwise it would not have been approved. 

The procedures were complicated, but Zhu believed it was worthwhile. A written agreement would give him a stronger position if there were future disputes over water abstraction. More importantly, it meant that if any firms moved into the nearby Tongliang Development Zone and wanted to take water from the same source, they would have to purchase it from him. Zhu would be the first person to benefit from the standardisation of water rights trading in China.

However, Tongliang is not the first Chinese county to experiment with water trading. Back in 2000, the drought-ridden city of Yiwu, in Zhejiang province, paid 200 million yuan (US$29 million) to its neighbouring city of Dongyang in exchange for 50 million cubic metres of drinking water every year in perpetuity. This may have been China’s first sale of water rights. In 2006, the water authority in Beijing announced the city would pay 20 million yuan in “environmental compensation” to the neighbouring province of Hebei and purchase water from both Hebei and Shanxi province. 

As the concept of carbon trading has become increasingly familiar in China, water trading has also appeared on the horizon. Informal trading has become increasingly common, but Tongliang local government was the first to put these deals into a legal framework. One thing is for sure: this is only the start.

The underlying cause of such schemes is China’s worsening water crisis. Since 1990, one-fifth of Chinese arable land has suffered from drought, according to state news agency Xinhua. Four-hundred of China’s 600 cities suffer from water shortages. This already presents an obstacle to the country’s economic growth. At the same time, water pollution is becoming increasingly severe. It is has become a headache for China’s politicians to decide how to allocate, use and manage scarce water resources through economic mechanisms.

Unfortunately, China’s water law does not provide a clear basis for the right to own and use water. This inevitably has led to battles between different interests – and resulted in water being wasted.

Chongqing, where Tongliang is located, is China’s largest municipality under direct central government control. It has suffered from the lack of a system for managing water rights. In the summer of 2006 the city saw a severe drought, with water levels in the Jialing River dropping daily, said Zhou Yi, a researcher with the municipal water authorities. But according to meteorologists there was plenty of rainfall upstream and the river should have been in full flow. In fact, more than 50 hydroelectric plants upstream in western China’s Sichuan province were stopping the flow of water, leaving the city dry. The Ministry of Water Resources eventually had to intervene before Sichuan released more water. Three days later after they intervened, the water levels in Chongqing had risen significantly.

Tongliang is one of Chongqing’s most water-poor counties. In August 2006, 260,000 people in the county were short of drinking water; 71,000 had to rely on water shipped in from elsewhere. The land is parched, with cracks wide enough to put your arm in. Even the bamboo, which is normally resistant to drought, has withered.

Although the problems in 2006 were eased by the release of additional water upstream, there are still disputes between Chongqing and Sichuan province over water. Consequently, quick responses to emergency situations are impossible. This has spurred Tongliang to take the lead and implement Chongqing’s first regulations on water rights trading.

In March 2007, the water authorities set up a working group to draft new regulations, but it was no easy process.

First, there were differing opinions as to what “water rights” really meant. Former Minister of Water Resources Wang Shucheng once said the way to understand water rights was simply the right to own and use water. But Cui Jianyuan, a professor at Tsinghua University’s School of Law, said that water rights refer to the legal acquisition of the right to use or benefit from surface and ground water. There has been a failure to define “water rights” in Chinese legislation.

Second, legal experts said that China’s water law has not clarified the situation. If Tongliang’s regulations had explicitly defined water rights, they would conflict with existing legislation, so the second article of its rules simply said, “water rights in this document refer to the legal acquisition of the right to use water resources, including the right to water resources development, water abstraction, water usage and drainage.”

The original draft of the regulations included the phrase, “upon approval of the municipal water authorities”, which has now been changed to just require that the authorities are consulted. Behind this change lies a typical problem. “Saying ‘upon approval’ would get into issues of administrative licensing, which is troublesome,” said the water management official Liu Shangwu.

Despite its twists and turns, the regulations finally came into effect in January 2008. And although they are by no means perfect, they set an example for water rights reform in China and the use of economic mechanisms to resolve disputes between the water users. Under the scheme, the county water authorities allocate water usage and discharge rights to industries, businesses, villages and towns. What recipients do not use, they can sell.

The system means that the careless use or discharge of water beyond permits allow will require expensive purchases on the open market – or heavy fines if those purchases are not made. Businesses that use water carefully can reduce their running costs and earn an income by selling off water permits they do not use.

Cao Mingde, a professor at the Southwest University of Politics and Law in Chongqing, said, “Theorists have been exploring ways to reform water rights. But to date, I haven’t seen any other regulatory documents. The new regulations in Tongliang will undoubtedly be a useful trial for regulations covering the entire Chongqing municipality.”

When the results are seen from Tongliang, said Lu Feng, a spokesperson for Chongqing’s water authorities, then its lessons will be studied nationwide. China is in dire need for standardised practices in water management.

Local regulations have also promoted policy reform at the central government level. Experiences of private trading and local regulations were formally put into practice in interim measures for water allocation, issued by the Ministry of Water Resources on February 1, 2008. The interim document had 17 measures, which comprehensively set out the principles and mechanisms for water allocation across provincial and lower-level groupings. The deputy minister for water resources, Zhou Ying, said that “in combination with the existing regulations on management of water abstraction licenses,” the document “forms the start of China’s water rights trading system.” These interim measures may stimulate a water rights trading market in China, said the Shanghai Securities News. Water rights will be sold between different regions, with market mechanisms allocating water in a more beneficial fashion and water saving becoming a reality.

But will such a market be enough to solve China’s water crisis? Many experts think it won’t be so simple.

Pollution trading is an excellent way to use market behaviour for the public good, say economists. But to achieve good results, you need not only the legislation and technology, but also the government acting as a trusted guardian. Otherwise, the results will be unpredictable.

For example, there are vexing questions of how systems can allocate priorities and setting amounts of water that can be drawn or released. How can we ensure equitable distribution? How can we ensure sustainable development? These are tests faced by every level of government.

Li Bairang, who heads a magnetic materials plant – one of Tongliang’s major water users, supported the changes. But he also had worries. “If too much water is allocated, there will be no meaningful trade in water rights,” Li said. “But if too little is allocated, then high prices for water will be a burden for businesses and stunt local economic development.”

The most problematic issue is the lack of any precedent for allocating water rights, admitted Yin Yuanming, an official from the Tongliang water bureau official. In the case of a paper plant, for instance, there is a national standard for the amount of water necessary to produce a tonne of paper. But calculating how much waste water can be released and taking into account the use, recycling and loss of water leaves officials scratching their heads.

And since these limits will impact on profits, there is sure to be resistance to implementing of the new system. Liu Shangwu said he found some teahouses will report the use of 0.16 litres of water per square metre, when they actually use around 20.

The water bureau has put together a number of research groups to develop the regulations and set water use indices for industries, businesses and geographic areas, but it is a huge and complex process.

“It’s difficult setting standards,” sighs Liu. “There is a long and difficult road ahead.”


Zhou Jigang, Peng Guangcan and Ceng Zhen are Chongqing-based reporters

Jiang Xiaxi contributed to this report               


This article is an edited version of a report in Time & Truth News. Used with permission.

Homepage photo by Jae Yong.Bae