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To Conserve Water, China Lifts Its Price
By Peter Wonacott
The Wall Street Journal
BEIJING -- In the past 50 years, China has gone from an aspiring Communist utopia to the land of a billion different business plans. But one constant has remained through the country's economic transformation: cheap water.
Now, facing acute shortages and a true threat to future growth, the Chinese government this year is ordering local water bureaus across the country to lift the price of water for the first time since the People's Republic of China was established in 1949. Officials believe it is a matter of national security.
"China's water situation and economic security are very tightly linked," says Wu Jisong, a senior official at China's Ministry of Water Resources.
Among the many environmental strains created by China's economic growth, water problems are perhaps felt most acutely and widely. From memory-chip plants in Shanghai to grain growers in the nation's north, shortages are hindering production. Pollution poses health threats to wealthy urbanites and poor farmers alike. China's challenge is tied up in raising prices steadily enough to encourage people to conserve water and to entice foreign companies to help overhaul creaky facilities, but not so steeply as to fuel inflation and turn people against the government.
A long era of heavy subsidies has allowed industry and ordinary citizens to waste water with few economic repercussions. But under the government's new plan, local water bureaus this year will raise prices to what they deem the market can bear. Some have started, and cities including Beijing, which is especially short of water, plan marked increases. Within two years, Beijing plans to lift the price of water to 54 cents a ton, or nearly double the price it is now. Changing the capital's habits is seen as crucial if Beijing is going to have enough water when it hosts the 2008 Olympics.
"We have two choices," says Mr. Wu, the water official. "Raise prices and generate income, or not raise them and continue to suffer from shortages."
Indeed, China is choking in a lot more places than Beijing. About two-thirds of China's cities are short of water, according to the Ministry of Water Resources. In the cities, 90% of China's rivers also are seriously polluted; in the countryside, 360 million residents aren't able to drink water that meets normal sanitation standards, and water tables in the arid north are dropping.
China's experiments with saving water go beyond lifting prices. The country is expanding water-rationing programs after test-piloting them in a handful of cities.
In the Southwest city of Mianyang, in Sichuan province, all water users receive a quota, and those that exceed it on a quarterly basis are charged higher prices. Some academics also are urging the government to allow farmers to sell the water they don't use, a trading system that has apparently popped up in scattered Chinese villages to alleviate the burden of high water prices.
The waste is staggering, and costly. About 20% of China's urban water supply is lost through leaky pipes, the water ministry says. It figures that the nation's factories use five to 10 times more water than factories in developed nations like the U.S. to produce an equal amount of goods.
Spotting an opportunity, foreign companies have dived into China's water market, with mixed results. Among the most aggressive is Veolia Water, the water-management division of Veolia Environnement SA, which has invested about $480 million in 11 water projects in China. "We don't see any hurdles to expanding in China," says Stephan Truchot, project finance director, Veolia Water Asia, a unit of the French water giant.
Likewise, ITT Industries Inc. of White Plains, N.Y., sees the market tide going its way. The company is supplying pumping equipment to projects ranging from the massive Three Gorges Dam to the relatively minuscule municipal water projects. As a result, ITT sees China as its fastest-growing market, with sales up 55% last year from a year earlier, with a similar pace expected this year. By 2006, ITT expects to be earning $500 million a year in China, according to Mark Steele, ITT's country chief.
"The price rise is going to encourage more infrastructure investment," he says.
At the same time, other foreign companies' experience points out the hazards of an evolving market and the difficulty of profiting from government-run projects. Britain's RWE Thames Water, the world's third-largest water provider, earlier this month said it was pulling out of a money-losing water treatment plant in Shanghai. The retreat followed the government's decision to end a policy that guaranteed a 15% fixed rate of return on such projects.
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