No Longer a Free Lunch

But it probably never occurred to the villagers that a small water rights certificate held by farmers in Zhangye 600 km away brought the red grass back to Juyanhai Lake. Nor did they know that a series of pilot projects on water rights trading, namely the transfer of rights to water from one legally approved water-using entity to another, would offer a new solution to the country's water shortages and a means of reviving its dry and degraded lakes and waterways.

By any fair measure, China is not a country with abundant water resources. Uneven distribution and low water productivity have made water scarcity even more severe. The country's scarce water resources pose major challenges for it to manage and sustain its economic growth in years ahead. It has been widely recognized that the allocation of water rights and the establishment of water markets could improve the efficiency of the country's water use and help resolve shortages.

Because there have been no other large developing countries for China to emulate in implementing tradable water rights, it has cut its own path since 2000. Since then, the country has made remarkable progress with some pilot projects in water rights trading, which serves as a promising approach for China to pursue in the years ahead.

Grim challenges

Last month, the World Bank published a report on the issue, entitled "Addressing China's Water Scarcity: Recommendations for Selected Water Resource Management Issues." It notes that the availability of China's per-capita renewable water resources was estimated at 2,156 cubic meters in 2007-an amount that was only one fourth of the world average of 8,549 cubic meters annually.

North China's per-capita water availability is only 757 cubic meters a year, less than one fourth that of south China, one eleventh of the world average, and less than the international "water scarcity" threshold of 1,000 cubic meters a year.

While China as a whole faces serious strains on water availability, its problems have been made more severe by low water productivity. According to the World Bank report, China's water productivity cost of $3.6 per cubic meter is low compared with an average of $4.8 per cubic meter in middle-income countries and $35.8 per cubic meter in high-income nations.

The report also pointed out that a major contributor to China's low water productivity is its very inefficient water allocation system. A recent study of the Haihe River Basin in north China, one of the country's seven major river basins which is located in an extremely water-deprived region, found that the cost of water productivity, as reflected by the economic value of water for different uses, ranged from 1 yuan ($0.15) per cubic meter for paddy irrigation, 12.3 yuan ($1.81) per cubic meter for vegetable production, 21.3 yuan ($3.13) per cubic meter for manufacturing, and 33.7 yuan ($4.96) per cubic meter for the services sector. The magnitude of the cost differences indicated a serious lack of market consciousness in the water allocation process, the report said.

The very first attempt

Water has long been considered a generous and free gift from heaven, and people have taken for granted that its supply is limitless. Given the strains on water supplies, it is common for disputes about who owns water and who has the right to use it to arise from time to time. In north China, before the first water law was issued in 1988, squabbles over water occurred frequently, which destroyed social stability, said Ke Lidan, the former director of department of policy, law and regulation at Ministry of Water Resources of China, in an article on Outlook Weekly.

In China, the state is the legal owner of water rights. But in the past it did not clearly define the rights to water usage and whether they could be transferred among different water use entities. This created problems in some cases, causing inefficient water allocation and a huge waste of limited water resources. The Water Law of 2002 sought to correct this by introducing a water right that laid the foundation for the compensated use of water resources.

The World Bank report notes that China's water rights administration and trading need to be improved and that the country still has a way to go in establishing a well-functioning water rights administration system. Since there is no precedent for implementing tradable water rights in a large developing country like China, the World Bank recommends that China conduct pilot projects on tradable water rights as a promising approach to pursue in the future.

Zhangye of Gansu, which became the first water-saving pilot city in 2000, is a successful example. The city, located on the upper reaches of the Heihe River, used to be home to 92 percent of total population of the entire Heihe River Basin and consumed 76 percent of its water supply. Drawing on its easy access to rich water resources, Zhangye's water productivity was rather low. Flood irrigation not only caused soil salination, but also interrupted the downstream water flows into the West and East Juyanhai Lake in 1961 and 1992, respectively.

After the pilot project implemented in Zhangye, every rural family received a water right certificate that stated the amount of the water to which it was entitled. At that time, the history of unlimited water use came to an end, and farmers could only use the water they were allowed to use. As a result, they began to plant fewer water-consuming crops and stopped flood irrigation. Furthermore, they were granted permission to sell the water they saved to other villagers, an entitlement they still enjoy today.

"These measures encourage farmers to save water, because they can make a profit on their saved water," said Xie Jian, World Bank Senior Environmental Specialist and principle author of the report.

According to the Water Resources Bureau of Zhangye, the city has drawn less than 300 million cubic meters from the Heihe River annually since it implemented water rights, and the downstream Juyanhai Lake has been able to restore its water flow after many years of interruption. By the end of 2008, Zhangye's water withdrawals for agriculture decreased from 88 percent of the city's total water withdrawals to 81 percent at the beginning of the year.

Since 2005, Gansu also made Dunhuang and Wuwei two water-saving pilot cities. According to the Water Resources Department of Gansu, Gansu's penetration rate of water-saving irrigation reached 62 percent at the end of last year, and its water withdrawal for agriculture had a negative growth rate for the first time.

Water rights trading

China has made great progress in its water rights administration system, according to Chen Lei, Minister of Water Resources. A general control system for total water withdrawal has been set up in the country's seven major river basins, and stricter controls on total water withdrawal for water-stressed rivers such as the Yellow River, Talimu River and Heihe River have been put in place, he said at a state meeting on water resources on February 14.

With the abolition of the previous Measures for the Implementation of the Water Permit System and the issuance of new ones in April 2006, the biggest obstacles to water right trading have been removed. The new policy says any legally approved water use entities have the right to transfer their saved water resources upon payment with the consent of the original authority for examination and approval. This has ensured the transfer of water rights in administrative regulations for the first time.

Provincial governments have used more innovative and creative measures in establishing a water rights market. Water-consuming enterprises were supposed to finance farmers' water-saving irrigation reforms, under which they were entitled to use the water farmers saved, so that total water withdrawals would not increase and a win-win situation would be accomplished.

As for now, China must improve its system of water resources allocation, conservation and protection as part of its overall economic restructuring and changing economic growth pattern amid the global financial crisis, Chen said. To do this, it will vigorously advance its water-saving pilot projects in 2009, he said.