Since the days of Confucius, water has been a central concern of China's rulers and people. Throughout its history, China has attempted to control water as few nations have ?providing flood control, waterways for transportation and a clean water supply through enormous public works. In the West, the Great Wall is better known than the Grand Canal system, which was begun in the sixth century AD, but the canal has had a more profound effect on the country.
Over the past century, China's modernisation and industrialisation drive has been dictated by water. Unfortunately, the advantages gained from using its water resources have wrought tremendous environmental damage.
Important industries such as textiles, chemicals and steel are a double-edged sword. They contribute to faster economic growth , and bring in export dollars, but they also seriously degrade China's water systems. Rivers and lakes ?which most of the country still depends on for drinking water ?have become disposal vehicles for sewage and chemical waste. Energy plants, which release heated water back into the water flow, also degrade river and lake ecologies.
Overall water quality is deteriorating because of industrial and agricultural development, a dense urban population and a failure to adhere strictly to regulations concerning the protection of water resources. The untreated waste dumped by Chinese factories into the nation's lakes, rivers and coastal seas ternational Review, stated that one-fifth of China's metropolitan areas already face year-round water shortages. He further predicted that pollution would affect over 70 per cent of China's water resources by the year 2000.
According to the Ministry of Health, China has water shortages in 300 of 517 cities and that only one in seven rural Chinese has access to safe drinking water. This is hardly surprising given that less than 20 per cent of China's industrial and residential wastewater receives any treatment. Officials estimate the cost of water pollution at US$14bn a year in lost economic output.
A developing crisis
The Chinese government is becoming increasingly aware of the crisis of the country's water systems. After 18 years of industrialisation and an accompanying rise in effluents and waste, the government has incorporated environmental concerns into its Ninth Five-year Plan (1996-2000). This policy statement has dramatically boosted demand for environmental technology in the form of large-scale investment plans, which will double environmental spending from 0.8 per cent of GDP to 1.5 per cent by the year 2000. Using official growth estimates, this would increase annual environmental spending to about US$15.4bn
at 1995 prices. China says that US$54.2bn is required to fully implement the pollution abatement goals of the plan. Projected state spending in the plan is US$18.3bn with foreign money making up the rest, either through loans and aid from international organisations and foreign governments, or by foreign investment in build-operate-transfer projects.
Water treatment is given the highest priority in environmental spending under the Ninth Five-year Plan, with 719 projects on which the state will spend US$9.6bn. Air treatment and treatment of solid wastes have a combined total of 554 projects and spending of US$8.7bn. Cleaning up the Huai, Hai and Liao rivers, along with Lakes Tai, Cao and Dianchi ranked first among China's most urgent pollution abatement priorities.
According to the Ninth Five-year Plan, China will attempt to hold down the discharge of 12 major pollutants, eight of which are water pollutants ?chemical oxygen demand (COD), petroleum wastes, cyanide, arsenic, mercury, lead, cadmium and chromium.
A deputy director of the State Environmental Protection Agency, Zhang Kunmin, announced recently that US$21.7bn from the US$54.2bn required for the current five-year plan would be used to build wastewater treatment plants.
To enforce the new pollution regulations, China is relying on fees, fines and shutting down offending factories. The number of firms paying fees and fines doubled from 188,100 in 1990 to 368,200 in 1995. For the current five year plan China expects to collect US$2.17bn in pollution taxes.
According to the Xinhua news agency, environmental officials shut down nearly 50,000 severely polluting enterprises during the last quarter of 1996. Over 20,000 environment officials travelled across China to inspect factories and close down heavy polluters after the Stag Council decided to step up environmental protection.
The current need for improving water quality offers excellent prospects for foreign environmental technology firms. The tim-
has made the water in more than one-quarter of the lakes and rivers unsuitable even for irrigation use, much less domestic consumption. The Asian Development Bank has reported that industrial pollution kills 200,000 tonnes of fish in China each year.
Further studies are even more disheartening. Mr William Bardeen, in the June 1995 issue of the Harvard In-
ing seems particularly opportune. Many projects are tendered during the first years of a five-year plan and regulations from newly passed environmental laws are more likely to be en-forced. In coastal and urban areas, in-comes are reaching levels associated with growing demands for improved environmental quality. China's leaders are also concerned about the political and social unrest which could result from environmental degradation spinning out of control.
The biggest challenge facing environmental companies seeking to explore the China market is the issue of funding. Because the Chinese government does not expect environmental projects to generate commercial returns, the authorities are reluctant to approve major projects that are financed on this basis.
European and Japanese firms often have the benefit over US firms of obtaining concessional financing from their governments' export credit agencies, which provide tied-aid to China. A re-cent example is a waste-water treatment facility in Haikou, capital of Hainan province. This is being built partly with a US$10m loan from the German government, tied to the import of a waste water treatment plant from Germany. European firms are also involved in multi-lateral funded projects. Degremort, a French water treatment company, recently won a bid to design and build a 600,000 cubic metre water purifying plant in Hangzhou, Zhejiang province. The US$27m contract for the first-phase of construction is financed by a World Bank loan. When finished, the first-phase of the plant will add a daily water supply capacity of 300,000 cubic metres.
US companies are at a disadvantage because the US Export-Import Bank can-not initiate soft loans. Its policy of tied-aid matching can be impractical in the environmental market, since projects of-ten owe their existence to a third-country's assistance programme. Nevertheless, US companies are succeeding in pursuing multi-lateral funded projects
1. and smaller projects financed by local governments, individual enterprises, and foreign-invested ventures in China.
The UK is represented by Thames Water and Bovis, who are constructing a US$68m water treatment plant in Shanghai on a 20-year build-operate-transfer basis. The plant, serving 2m people, will process 400,000 cubic metres a day.
Perhaps the best way to enter the China water treatment market is via a joint venture. For foreign firms, the best prospective partners have a strong distribution network, are well connected with the environmental bureaucracy and understand the decision-making process that leads to water treatment projects. Chinese firms seek partners that can con-tribute high-quality technology, as well as other forms of co-operation, such as the training of personnel.
The Chinese government is also encouraging joint ventures to increase out-put of water treatment chemicals.
The US International Trade Agency estimates that there are 758 wastewater control equipment manufacturers in China, making products ranging from physical and chemical waste-water treatment equipment to environmental monitoring instruments. There are also many potential joint venture partners for manufacturing water treatment chemicals. According to Chemical Week , there are over 100 plants in China engaged in the production of water treatment chemicals. More than 100 varieties are being made, with a total output of about 30,000 tonnes a year. However, total demand for water treatment chemicals in China far exceeds local supply and is expected to reach 220,000 tonnes a year by 2000.
Joint venture opportunities
US, Japanese and European firms have all established joint ventures with Chinese companies to produce water treatment products and services. One of the first companies to take advantage of the opportunities for water treatment chemicals was the US company, Nalco Chemical, which established a joint venture with Citic Chemicals in Suzhou, Jiangsu province. The Chinese partner is a wholly owned subsidiary of the China International Trust and Investment Corp., a state conglomerate. The venture was launched with an initial investment of US$3.6m. The new plant in Suzhou will provide water treatment and related services with a production base, warehouse and distribution centre.
Another US company, Lemna Corporation, has signed a contract to build a waste water treatment system for Guangzhou, Guangdong province, which is intended to reduce the pollution in the Pearl River. The first phase of system will cost US$120m and will be completed in 2000, when it will purify 200,000 cubic meters of waste water a day. Other companies in China include Stockhausen, the German fine chemical corporation which recently entered into a joint venture with China Chemical Econo-Techno Development Centre. It will specialise in water treatment techniques and produce 100 types of products that will help save water, improve water quality and facilitate waste water recycling.
Water treatment firms need to pursue opportunities with patience and perseverance. China is becoming a major environmental market where opportunities for entry are becoming more diverse while projects relient on tied-aid financing are in decline. To export to China, a firm may need to find an experienced local agent or a network of agents in different regions to facilitate sales. However, to sell to China on a long-term basis, a Western firm probably needs to establish a joint venture with a partner who can provide government connections and ready access to China's enormous market. ^
Butler Waugh is an associate at China Venture Advisors, a San Francisco-based firm which specialises in helping American companies establish joint ventures in China. For further details, contact Butler Waugh at tel: (1) 415-564-0215.