A looming liquidity crunch in China could affect trillions of RMB worth of economic output and spill over into the financial markets. This liquidity crunch doesn’t involve capital, but a commodity no economy or country can function without – water.

Yet, many investors and companies may not be paying attention to these liquidity constraints brought about by China’s water crisis. According to the 2011 global EIRIS Water Risk Report, only 36% of companies have acknowledged that water is a real risk they understand they must address.

“Investors in China don’t seem to be aware of the business risks around water. Many still are not factoring this into their decision-making unless an egregious violation triggers fines or regulatory changes,” says Robert Appleby, a founding partner of Hong Kong-based investment manager, ADM Capital.

The statistics are alarming. According to the National Bureau of Statistics of China, 11 of the 31 regions in mainland China have renewable water resources per capita p.a. below 1,000m3, a level considered by experts to pose a severe constraint on food production, economic development and protection of natural systems.

These “Dry 11” have average water resources of 311m3 comparable to Syria, yet their combined Gross Regional Product contribution to China’s GDP is a staggering 45%.

Already, 19% of the seven rivers and basins monitored for pollution and 35% of the 26 key lakes and reservoirs are essentially useless for both agriculture and industry.

Investors and companies may not be paying enough attention, but water is top of the agenda in Beijing. This year’s No 1. Document sets water as the top priority.

The 12th 5-Year Plan echoes this, targeting a 30% improvement in water efficiency, an 85% sewage water treatment rate for cities, and six new specific water pollutant reduction targets. More investment is targeted for desalination, conservation and water recycling.

Clearly, regulatory, pricing and investment changes are coming and they will be significant.

To take avoid potential pitfalls, investors and companies should understand which regions are water scarce, whether impending water tariff hikes will eat into margins, whether water usage quotas and pollution fines will limit expansion and which industries are exposed to supply chain disruptions from potential water shortages.

China Water Risk, ADMCF’s innovative information portal, which went live late last month, aims to highlight and address these complex and interlinked issues by framing the risks clearly and by sector.

China Water Risk provides a platform to share expert views, research, interviews and analysis from industry leaders. Users can access the most relevant and critical information to help make informed investment decisions as well as remain on top of opportunities to invest in a changing environment.

“Regardless of whether we care for the environment, we have come to a point where water risks affect us all as the economy runs on water” said Debra Tan, director of China Water Risk.

The seven new Strategic Emerging Industries, identified in the 12th 5-Year Plan, all include water elements and are forecast by analysts to account for ~5% of China’s GDP by the end of 2015. The Ministry of Water Resources also has stated that Beijing will spend RMB 4 trillion for water infrastructure over the next decade.

With 85% of water use in China by agriculture and industry, business and portfolio implications are profound. The 11 water scarce regions account for 40% of the Agricultural Output Value of China and 52% of the Industrial Output Value. They are also home to 500 billion people and hold up to 62% of the country’s reserves of bauxite, coal and iron ore.

The Water-Energy Nexus

There are not only food security implications but also energy constraints, with 95.6% of electricity in China requiring water to generate. “Increasing population in cities means increasing demand for water supply and for wastewater treatment. This means increasing energy demand. The two are closely linked.” said Prof. Zou Ji, China Country Director for the World Resources Institute and a China Water Risk network partner.

Indeed, China’s new target to cut energy consumption per unit of GDP by 16% is not only a carbon-saving but a water-saving measure.

Looking Forward.

China’s challenge is to balance GDP growth at 8% and maintain social stability, as competition for clean water rises with increasing demand from agriculture, industry and a more affluent population. Clearly, water is a national priority for China, and with the country’s sheer size, water scarcity will have global ramifications.

ABOUT CHINA WATER RISK

China Water Risk is a non-profit initiative dedicated to highlighting and addressing business and environmental risk arising from the country’s urgent water crisis. CWR aims to foster efficient and responsible use of China’s water resources by engaging the global investment and business communities, civil society and individuals in understanding and managing China’s water risk.

China Water Risk works closely with a growing network of Chinese and international water industry experts and investors. The portal was developed in its pilot stage as The Asia Water Project, in collaboration with Civic Exchange, the Association for Sustainable and Responsible Investment in Asia (ASrIA), Business for Social Responsibility (BSR), the Institute of Public and Environmental Affairs (IPE), and Responsible Research.

Visit www.chinawaterrisk.org for a comprehensive overview of China’s water risk