KEY  INSIGHTS  This  report  was  commissioned  by  ADM  Capital  Foundation  for  the  Asia  Water  Project  as  part  of  their  special  series  on  China.  It  focuses  on  the  rapidly  developing  importance  of  water  as  a  PDWHULDO IDFWRU LQ LQYHVWPHQW DQDO\VLV DQG DFWLRQ ZLWKLQ &KLQD ,W GUDZV RQ WKH ODWHVW ¿QGLQJV IURP the  Chinese  government  and  civil  society  institutions,  linking  these  to  investment  considerations  VXFK DV PDUNHW RSSRUWXQLWLHV DQG ULVNV WR HDUQLQJV 7KH NH\ ¿QGLQJV DUH DV IROORZV
1.
2.
3.
4.
Global  investors,  business  groups  and  civil  society  will  begin  to  challenge  the  issue  of  water  pollution  in  China  with  multi-Âlateral  engagement  of  government  and  industry RI &KLQDÂśV ULYHUV DQG ODNHV DUH VLJQLÂżFDQWO\ FRQWDPLQDWHG RI &KLQDÂśV FLWLHV KDYH polluted  groundwater  and  over  30%  of  China  is  affected  by  acid  rain.  Despite  the  2008  Water  Pollution  Prevention  and  Control  Law,  a  concerted  effort  is  needed  to  prevent  the  water  quality  IURP ZRUVHQLQJ 7KH PRVW UHFHQW YHUVLRQ RI WKLV ODZ ZDV WKH ÂżUVW HQYLURQPHQWDO ODZ LQ &KLQD WR OHY\ ÂżQHV RQ LQGLYLGXDOV ZLWKLQ SROOXWLQJ FRPSDQLHV &RUSRUDWH ÂżQHV XQGHU WKLV ODZ FDQ EH XS WR 50%  of  income.  This  legal  development  creates  a  more  immediate  incentive  for  plant  managers  WR UHGXFH SROOXWLRQ SUHYLRXV ÂżQHV ZHUH VPDOO DQG LW ZDV HDVLHU WR SD\ WKH ÂżQH WKDQ DGGUHVV WKH issue  of  pollution.  A  strategic  and  collaborative  focus  by  global  investors,  business  associations  and  civil  society  is  the  most  impactful  way  to  ensure  progress  on  these  issues  and  prevent  a  return  to  bad  habits  during  periods  of  rapid  ecnomic  growth. Water  shortages  will  begin  to  clearly  reduce  economic  growth  forecasts,  resulting  in  trade-Âoffs  between  clean  water  access  and  growth $W WKH QDWLRQDO OHYHO ZDWHU VKRUWDJHV DQG GURXJKWV GDPSHQ &KLQDÂśV HFRQRPLF GHYHORSPHQW :DWHU shortages  are  responsible  for  direct  economic  losses  of  US$35bn  every  year,  about  2.5  times  WKH DYHUDJH DQQXDO ORVVHV GXH WR Ă€RRGV 5HFHQWO\ QHZVSDSHUV UHSRUWHG WKDW WKH Âł$XJXVW drought  left  nearly  5  million  people  and  4.1  million  livestock  short  of  drinking  water,  damaging  8.7  million  hectares  of  croplandâ€?.  The  winter  2009  drought  in  Northern  China,  one  of  the  worst  in  50  years,  impacted  almost  10  million  hectares  of  crops  and  left  almost  4  million  people  and  2  million  livestock  with  out  adequate  drinking  water  supply.   Approximately  RMB1.5bn  was  spent  on  short-Âterm  relief  efforts. Industry  associations  will  collaborate  to  deal  with  China’s  water  challenges Our  research  has  found  few  examples  of  industry-Âwide  activity  and  collaborative  projects  to  DGGUHVV &KLQDÂśV ZDWHU FKDOOHQJHV +RZHYHU QRWDEOH H[FHSWLRQV H[LVW 7KH &KLQHVH SXOS DQG paper  industry  recently  held  a  sustainable  development  forum  and,  in  January  2009,  the  China  %DQNLQJ $VVRFLDWLRQ LVVXHG &65 JXLGHOLQHV IRU ÂżQDQFLDO LQVWLWXWLRQV 7KH 6XVWDLQDEOH :DWHU Group,  a  Business  for  Social  Responsibility  (BSR)  working  group,  involves  companies  committed  to  managing  water-Âuse  and  wastewater  discharge  in  global  textile  supply  chains.  Much  of  the  JURXSÂśV IRFXV LV LQ WKH 3HDUO 5LYHU 'HOWD D KXE RI WH[WLOH DQG DSSDUHO PDQXIDFWXUHUV 7KH &KLQD Training  Institute,  another  BSR  initiative,  has  held  courses  on  water  management  in  the  textile  and  apparel  industry  for  general  and  plant  managers  and  water  technicians. Chinese  citizens  are  increasingly  active  in  protests  against  polluting  companies Activism  against  water  pollution  is  expected  to  increase.  According  to  Zhou  Shengxian,  head  of  the  Ministry  of  Environmental  Protection,  this  could  be  by  as  much  as  thirty  percent  every  year  due  to  rising  expectations  of  the  right  to  clean  water.  Older  factories  that  lack  water  treatment  facilities  continue  to  pollute  surrounding  water  sources,  but  local  populations  will  become  increasingly  antagonistic  to  this  behaviour.  The  August  2009  clash  between  10,000  locals  and  2,000  riot  police  in  Fujian  province  demonstrated  this.  Violent  protests  erupted  due  to  allegations  that  local  tannery  DQG RLO UHÂżQHULHV KDYH EHHQ GLVFKDUJLQJ FDUFLQRJHQLF VXEVWDQFHV LQWR WKH ZDWHU XVHG IRU GULQNLQJ Although  incidents  have  focused  on  mostly  local  issues,  with  local  government  responses,  the  potential  for  these  to  be  of  a  larger  scale,  with  far  wider  consequences  remains.  The  violence  in  )XMLXDQ IRU H[DPSOH FRXOG KDYH VSLOOHG RYHU WR WKH QHDUE\ )XMLDQ 5HÂżQLQJ 3HWURFKHPLFDO &R Ltd.,  a  US$5bn  joint  venture  between  Sinopec  Corp,  Exxon  Mobil  and  Saudi  Aramco.
5.
6.
Top-Âdown  reforms  will  combine  with  grass  roots  activism  to  strengthen  regulation 7KH 0LQLVWU\ RI (QYLURQPHQWDO 3URWHFWLRQ 0(3 LV IRFXVLQJ RQ VRSKLVWLFDWHG ÂżQDQFLDO UHJXODWLRQV VXFK DV VFUHHQLQJ FRPSDQLHV SUH ,32 DQG PDQGDWLQJ EDQNV WR RSHQ ÂľJUHHQÂś OLQHV RI FUHGLW 7KH MEP  will  concentrate  on  macro-Âlevel  policies  to  regulate  companies  that  have  a  national  presence  and  face  national  environmental  regulatory  scrutiny.  Meanwhile,  the  Environmental  Information  Disclosure  Regulations  took  effect  in  May  2008.   These  regulations  ensure  that  disclosure  of  environmental  information  by  enterprises  becomes  mandatory  over  time  and  places  responsibility  for  the  environment  with  various  levels  of  the  administration.  It  also  has  begun  to  gently  promote  the  rights  of  citizens  and  other  organizations  to  obtain  environmental  information  and  to  encourage  WKH SXEOLFÂśV LQYROYHPHQW LQ HQYLURQPHQWDO SURWHFWLRQ Companies  will  become  more  conscious  of  water  issues,  water-Âsaving  initiatives  and  technologies  Companies  can  only  manage  what  they  measure.  In  China,  as  in  much  of  the  world,  measuring  corporate  water  use  and  discharge  is  in  its  infancy.  The  measurement  of  the  direct  impact  EXVLQHVV RSHUDWLRQV KDYH RQ ZDWHU LV RQO\ WKH ÂżUVW VWHS LQ FRPSUHKHQVLYH ZDWHU IRRWSULQWLQJ Further  measures  involve  helping  to  measure  and  manage  supply  chain  and  end-Âuser  water  use  and  discharge.  Some  industries  and  companies  in  China  are  more  advanced  in  terms  of  water  disclosure  than  others,  for  example  Baoshan  Iron  &  Steel.  Companies  in  certain  sectors  are  becoming  increasingly  aware  of  this  issue  as  their  global  competitors  and  customers  push  for  the  incorporation  of  environmental  performance  data.  This  is  normally  due  to  the  ecological  and  community  impact  of  their  operations.   For  these  companies,  more  comprehensive  water  reporting  should  be  expected.  Companies  providing  water  measurement  services  in  China  will  be  in  high  demand.
7.
Analysts  and  portfolio  managers  will  require  more  and  better  data  on  corporate  water  issues  in  China Standards  of  water  data  collection  and  reliability  in  China  vary  and  require  intense  scrutiny.  For  example,  at  the  national  level,  publicly  available  Chinese  government  statistics  on  water  FRQVXPSWLRQ GLVWLQJXLVK RQO\ EHWZHHQ Âľ+RXVHKROGV DQG 6HUYLFHVÂś Âľ,QGXVWU\ Âś Âľ$JULFXOWXUHÂś DQG Âľ2WKHUVÂś 7KHVH FDWHJRULHV IDLO WR JLYH D PHDVXUH RI GRPHVWLF ZDWHU FRQVXPSWLRQ DV WKH GDWD GRHV not  distinguish  information  from  the  domestic  vs  service  sectors.  Similarly,  further  analysis  and  due  diligence  is  usually  necessary  to  determine  company-Âlevel  water  performance  data,  when  available.  New  global  initiatives  such  as  the  Water  Disclosure  Project  and  the  CEO  Water  Mandate  will  assist  in  improving  the  environment  for  measurement  and  disclosure  of  water  metrics.  The  investment  management  industry  will  become  more  active  in  their  engagement  with  companies  in  China  on  these  issues  in  2010  and  beyond. Â
8.
There  will  be  increased  demand-Âside  management,  increased  water  prices  and  improved  pricing  transparency  The  National  Development  and  Reform  Commission  (NDRC),  which  plays  a  supervisory  role  in  water  pricing,  recognises  that  water  prices  are  too  low  to  cover  the  cost  of  managing  supply  and  sewage  treatment.   According  to  Chinese  water  experts,  water  prices  in  Beijing  are  expected  to  LQFUHDVH IRXUIROG WR RYHU 50% P IURP WKH FXUUHQW 50% P WKLV QHZ ÂżJXUH ZRXOG UHSUHVHQW DERXW RI D KRXVHKROGÂśV GLVSRVDEOH LQFRPH 7KH 1'5& KDV SODQV WR VXEVLGLVH ORZ LQFRPH JURXSV WR PLQLPL]H WKH LPSDFW RQ WKHLU OLYLQJ VWDQGDUGV /RFDO RIÂżFLDOV KRZHYHU DUH VKRZLQJ D reluctance  to  impose  price  hikes.  Throughout  local  water  pricing  debates,  which  take  place  on  a  UHJXODU EDVLV WKHUH UHPDLQV SRRU LQIRUPDWLRQ Ă€RZ UHJDUGLQJ WKH WUXH FRVW RI ZDWHU GLVWULEXWLRQ DQG VHUYLFHV &RQVHTXHQWO\ ZDWHU SULFLQJ LV DW D VLJQLÂżFDQW ULVN RI PDQLSXODWLRQ DQG FRUUXSWLRQ Greater  cost  transparency  would  ensure  greater  acceptance  of  higher  water  pricing.  Theoretically,  WKHUH DUH QRZ SHUIRUPDQFH LQFHQWLYHV IRU JRYHUQPHQW RIÂżFLDOV WKDW UHODWH WR HQYLURQPHQWDO DV well  as  economic,  targets,  which  should  make  this  easier.