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Navigating the looming China water/energy choke point

The choices government and business leaders make to resolve the tightening choke point between rising energy demand and declining freshwater reserves will form the central strategic focus of the next era of China’s unfolding development.

Arguably none of the world’s economies is as important today as China’s. In sector after sector — nuclear power, fossil fuel, and clean energy development, auto manufacturing, smart grid development, cement and steel making, highway and rail expansion, and housing construction, just to name a few — China’s markets are either the world’s largest or the fastest growing.

What’s not so well understood, as a recent project by Circle of Blue titled Choke Point: China points out in stunning detail, is how vulnerable the country’s surging economy is to shortages of its two most vital resources – fuel and fresh water.

Simply put, there is not enough water to both build the modern cities and manufacturing centers in the energy-rich northern and western provinces – which have become the primary focus of China’s domestic development – and tap the region’s enormous coal reserves. These colliding trends are already visible in the jammed rail lines, huge coal truck traffic jams, and buckling roads that are commonplace in China, and which are responsible for transporting billions of tons of coal from existing mines to market.

And as if the problems weren’t profound enough already, China now finds itself grappling with its worst drought in 50 years.

Markets in China and globally for grain, natural gas, oil, coal, steel, shipping, and investment capital will be substantially influenced. Even as China has launched enormous new programs of solar, wind, hydro, and nuclear power development, which tend to use much less water, energy market conditions will get worse without new supplies of coal, the source of 70 per cent of the nation’s energy. China’s economy and the new social contract with its citizens, who have come to expect rising incomes and improving opportunities, is at risk.

For companies with operations, suppliers, markets or investments in China, it is indeed a daunting picture. What will the tightening choke point mean for their business, and what can they do to profit and thrive in an environment of increasing energy and water scarcity? To what lengths will the Chinese government go to ensure there is enough water to support energy resource development, which in turn is essential for continued economic growth? For how long can the water/energy/economy spiral continue? Will we ultimately see a crash landing or a soft one, and how can companies succeed in either case? What market shifts will occur for companies’ products as a result of energy and water constraints, and which factories and links in the supply chain are most at risk?

These are indeed difficult questions, and in the months ahead – along with our partners Circle of Blue and GlobeScan – we are undertaking a project to answer them. The goal is to equip companies with the know-how and tools to respond effectively to the challenges ahead. If you think your business could benefit from the results of this work please get in touch.

Jeff Erikson is a senior vice-president at independent think tank and strategy consultancy SustainAbility. For more SustainAbility blogs, go to

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