Economics of Water Scarcity in China
Authors: Jiang Yong 
Published: August 2020

Water scarcity has long been recognized as a key issue challenging China’s water security and sustainable development. Economically, China’s water scarcity can be characterized by the uneven distribution of limited water resources across space and time in hydrological cycles that are inconsistent with the rising demand for a sufficient, stable water supply from rapid socioeconomic development coupled with a big, growing population. The limited water availability or scarcity has led to trade-offs in water use and management across sectors and space, while negatively affecting economic growth and the environment. Meanwhile, inefficiency and unsustainability prevail in China’s water use, attributable to government failure to account for the socioeconomic nature of water and its scarcity beyond hydrology.

China’s water supply comes mainly from surface water and groundwater. The nontraditional sources, wastewater reclamation and reuse in particular, have been increasingly contributing to water supply but are less explored. Modern advancement in solar and nuclear power development may help improve the potential and competitiveness of seawater desalination as an alternative water source. Nonetheless, technological measures to augment water supply can only play a limited role in addressing water scarcity, highlighting the necessity and importance of nontechnological measures and “soft” approaches for managing water. Water conservation, including improving water use efficiency, particularly in the agriculture sector, represents a reasonable strategy that has much potential but requires careful policy design.

China’s water management has started to pay greater attention to market-based approaches, such as tradable water rights and water pricing, accompanied by management reforms. In the past, these approaches have largely been treated as command-and-control tools for regulation rather than as economic instruments following economic design principles. While progress has been made in promoting the market-based approaches, the institutional aspect needs to be further improved to create supporting and enabling conditions. For water markets, developing regulations and institutions, combined with clearly defining water use rights, is needed to facilitate market trading of water rights. For water pricing, appropriate design based on the full cost of water supply needs to be strengthened, and policy implementation must be enforced.

An integrated approach is particularly relevant and greatly needed for China’s water management. This approach emphasizes integration and holistic consideration of water in relation to other resource management, development opportunities, and other policies across scales and sectors to achieve synergy, cost-effectiveness, multiple benefits, and eventually economic efficiency. Integrated water management has been increasingly applied, as exemplified by a national policy initiative to promote urban water resilience and sustainability. While economics can play a critical role in helping evaluate and compare alternative measures or design scenarios and in identifying multiple benefits, there is a need for economic or social cost–benefit analysis of China’s water policy or management that incorporates nonmarket costs and benefits.