Drivers Of The China Water Market

Government investment in the industry
11th Five Year Plan
In the recent 11th Five Year Plan (2006 – 2010) that was adopted by the State Council in September 2007, the PRC government has committed to investing 1.35% of annual GDP for the next three years on environmental protection. According to Mr Zou Shoumin, director of the Chinese Academy for Environmental Planning who took part in drafting the plan, the majority of the spending will be used for treating water pollution. He estimated the PRC government spending on treating water pollution at approximately RMB640 billion (US$85.33 billion). In the 11th Five Year Plan, the PRC government also set several qualitative targets such as:
(i) reduce the chemical oxygen demand (“COD”) (an industrial measure of the quality of wastewater
discharge) in discharged wastewater by 10% by the end of 2010;
(ii) increase urban wastewater treatment rate to 70%;
(iii) 80% of portable water resources to meet quality standards; and
(iv) at least 43% of the water in the seven major rivers to be in the Grade I-III categories and water in the “inferior to Grade V” category to be lower than 22%.

Foreign investment in the industry
Though the government provides the bulk of financing for environmental projects, China has been very successful in attracting foreign investment in this sector. This includes private financing, multilateral/international loans and multilateral grants. China has long been the largest recipient of environmental assistance from the World Bank, the ADB, the Global Environmental Facility as well as considerable financial and human capital from international NGOs. According to the 2006 Statistic Bulletin on China Water Activities published by the MWRC, the total planned investment of fixed assets in the water sector in China was RMB93.27 billion, of which approximately 80% was from the central and local government agencies.
Foreign investment in the industry will also bring with them advanced technology and know-how which will in turn improve the efficiency of the municipal water and wastewater treatment industry in China.

Government policies and incentives Besides making direct investments in this sector, the PRC government also put in place several policies to speed up the development in this industry such as the “Circular on Accelerating the Industrialisation of Municipal Wastewater and Waste Treatment” and “Decisions on Accelerating the Market Conversion of Municipal Public Utilities”. The first policy focuses on introducing market mechanism into the construction of new municipal wastewater treatment facilities such as BOT/TOT or public-private partnership (“PPP”)
mechanisms. The second policy focuses on efficient private-sector operators bringing managerial skills and technology to China to acquire water assets and reap rewards from improving the efficiency of the acquired assets. One of the ways for the government to attract private-sector investment and to help curb water loss is via steady water tariff increases. The government has also raised the guidance on the allowed rate of return from 6% to 12% on net assets.

There are also tax deductions for enterprises using certain industrial waste products as raw material and value-added tax relief for import of pollution prevention and control products (to accelerate foreign investment and promote the import of advanced technologies and equipments). Other than this, the PRC government has also introduced strict measures aimed at tackling the water pollution in the country’s ailing rivers and lakes. Measures introduced include tougher emission standards for industries, increased monitoring of heavy polluting industries and heavy penalties imposed on offenders.

Increasing alignment of development with environmental objectives
The Chinese economy is booming with high rates of investment but increasing attention is being given to the urgent nature of environment problems both by local and international political and social groups. This rise in general environmental awareness as well as international events such as the Beijing Olympics in 2008 and World Expo in 2010 to be held in China are expected to serve as catalysts for the development of the environmental industry.