A Drier China Adds To Economy’s Woes

GLANCING BACK THROUGH the archives, this Bystander came across a more-than-a-decade-old post about China’s water insecurity.

The problem persists. The unprecedented scale of this year’s heatwave and drought — phenomena that will likely be recurring as they are climate-change induced — has only exacerbated it. The consequences will have high economic costs, including some of the second-order ones.

It is not an exaggeration to suggest that water shortages due to climate change are now one of the most serious threats to an economy that looks increasingly beset by structural challenges.

Droughts — and flooding — are annual events, but climate change is making them more severe and longer-lasting. That also gives foreign companies one more reason to source their raw materials, components and finished goods from elsewhere, threatening the maintenance of China’s central role in international manufacturing supply chains.

One reason that water shortages are so difficult to tackle is the uneven geographical distribution of the country’s water resources. Northern China has sparse natural water flows compared to southern China and to the requirements of its dense population and industrial concentration.

Urbanisation has caused water tables throughout northern China to fall fast, drying up irrigation wells for farmers. Poorly regulated industrialisation has worsened the problem by polluting surface and underground water reserves.

Southern China is expected to provide net water transfers to the north and other parts of the country through the South-North Water Transfer Project, a massive three-canal engineering project to divert Yangtze waters to the arid north.

However, the heatwave and drought that occurred from June to August were centred in the south, and persistently drier conditions will raise further doubts about southern China’s capacity to compensate for the north’s structural water deficit.

Economic disruption

They also imply adverse impacts in various sectors of the economy.

Monsoonal rainfall patterns usually mean that the upper Yangtze basin receives half its annual rainfall in July and August. However, during the heatwave, water levels in the Yangtze river dropped to their lowest since records began in 1865. Hydropower generation along the river fell, causing electricity rationing that interrupted industrial production. Shipping using the country’s longest watercourse, a major transportation artery, was disrupted, causing some factories downstream to close temporarily because of the non-arrival of raw materials or parts.

China’s southern and south-western provinces also export hydroelectricity to the eastern seaboard. In mid-August, Sichuan province, which relies on hydropower for 80% of its energy usage, saw its hydropower generation capacity fall by half. The provincial government there, too, required factories to ration power usage, leading to reduced production, which fed into global supply chains.

A second-order consequence is that the drier conditions will also undermine the ‘Eastern Data and Western Computing’ plan to boost the economically lagging western provinces by locating power- (and water-) hungry data centres there that will serve digital activity in the more developed eastern provinces.

The rationale for setting up data centres in poor, western provinces like Guizhou is that mountain rivers can produce hydropower to generate electricity and the mountains also provide a cool climate to help bring down the cost of cooling, one of the largest expenses for data centres. Those conditions no longer look assured.

Agriculture

Agricultural impacts will likely be significant. According to state media, the summer drought wilted hundreds of thousands of hectares of crops, probably millions.

China is a net food importer, and the government prioritises increased domestic production. Harsher farming conditions will make it more difficult to achieve food self-sufficiency. China will thus remain a significant buyer and price-setter in global food markets as climate change aggravates agricultural problems worldwide.

Beijing has few means to ameliorate persistent nationwide water deficits. The agriculture ministry advised local officials during the drought to increase efforts to ensure adequate irrigation water, open new water sources, rotate irrigation and produce artificial rainfall when necessary.

Inducing rainfall by cloud-seeding can provide local relief (providing there are some clouds to seed) but is not a systemic solution to chronic annual heatwaves and drought. Exhortations to open up new water sources are empty words when rivers and lakes are drying up.

China will double down on investing in renewable energy technologies, increasing its influence in these industries globally. Yet, less hydropower may also sustain the continued construction of coal- and oil and gas-fired power plants, reinforcing climate change effects.

Cross-border disputes

Internationally, the reliance of South and Southeast Asian countries on river water originating upstream in China means that chronic droughts in China may inflame international tensions.

China has a poor record of addressing its neighbours’ concerns about upstream dams affecting water levels in the Mekong, Salween, Ganges and Yamuna rivers.

As India’s industrial activity grows, including power-hungry sectors such as semiconductor manufacturing, management of shared rivers is likely to add to tensions with China over disputed territory.

Power Rationing Widens As China’s Extreme Heat Continues

SHANGHAI IS THE latest city to introduce electricity rationing as drought and extreme temperatures overstrain the country’s power grid.

Buildings along the Bund have been told to turn off external lighting for two evenings early this week to save power.

In the middle reaches of the Yangtze river, where conditions are severe, falling water levels have reduced the power supply from its hydroelectric dams. At the same time, demand for air conditioning has soared.

Factories and shopping malls in Chongqing have already been subject to temporary power cuts as authorities prioritise supply to domestic consumers.

Impacts on production have varied; vehicle maker VW says its plant has shut down, while electronics maker Foxconn says the effects have been minimal.

Authorities have extended the power saving measures by five days into a second week, with Sichuan and the rest of the Southwest bearing the brunt of the extreme heat.

Falling water levels have also disrupted shipping. Tesla’s Shanghai plant has suspended production because components are not arriving from Sichuan.

The impact on agriculture is growing, too. On Saturday, Sichuan’s provincial disaster committee said that 47,000 hectares of crops had been lost and 433,000 hectares damaged. More than 800,000 people face a shortage of drinking water.

In neighbouring Hubei province, authorities say 6.9 million hectares of crops are damaged, and a further 220,000 people are short of drinking water.

Brush fires are starting to be reported, adding further peril.

State media report that the drought threatens the autumn grain harvest, which provides three-quarters of the annual yield. Authorities are cloud seeding to try to induce rain.

China issued the year’s first national drought warning last week, a yellow alert, the third highest. The summer is the hottest and driest since China began keeping temperature and rainfall records in 1961, adding to the stress on an already slowing economy.

Heatwave And Drought Stress China’s Electrical Power Supply

BACK IN 2009, this Bystander alighted on a press report that China spent $100 million a year on cloud-seeding to induce rain and snowfall to combat drought.

That was more than six times the figure quoted for the United States. China frequently resorts to using anti-aircraft guns and rocket launchers to blast the sky with silver iodide, reportedly resorting to this way to make rain more often than any other country.

In the past, most cloud seeding occurred in the increasingly arid North China Plain. Now it is being deployed in parts of central and southwest China amid a severe drought and a two-month-long heatwave that the National Climate Centre says is the country’s longest and strongest since records were first kept in the early 1960s.

However, Hubei and several other provinces along the drought-stricken Yangtze river, now at record low levels following less than half the usual rainfall in some stretches, have run into a familiar problem with the technique: you need the clouds to seed in the first place. They are in short supply in a heatwave.

Upstream in Sichuan, the mercury has risen above 40 degrees Celsius with no immediate relief in sight. With water levels in hydropower reservoirs down by as much as half and demand for air conditioning rising, power shortages of up to several hours are widespread.

Electrical blackouts as authorities ration power are affecting industrial production. Emergency measures instituted to ensure households get priority for what power is available are forcing factories to cut back output or stop work altogether.

Foxconn’s factory in Chengdu, which makes Apple’s iPads, is one business amid a six-day shut down because of power rationing.

The overall impact on the economy of drought-induced temporary factory shutdowns will likely be minimal, but it is another drag on an already decelerating economy.

A longer-term concern may be the loss of crops for the autumn harvest, which could drive up inflation. The Ministry of Water Resources has said that the drought has affected 821,333 hectares of farmland in Sichuan, Chongqing, Hubei, Hunan, Jiangxi and Anhui.

Only half the usual annual release of water from the Three Gorges reservoir to relieve drought downstream has been possible this year. Many rivers and streams that flow into the Yangtse and are a source of agricultural irrigation are reported to have dried up.

Meanwhile, at the mouth of the river, Shanghai hit a sweltering 40.9 degrees Celsius in July, equalling its hottest day since the city started keeping records in 1873.

Meteorologists predict that the long-lasting heat wave will become the ‘new normal’ due to climate change.

This will force authorities to pay more attention to the inadequacies of the country’s national power grid, as evidenced by Vice Premier Han Zheng, who, on a visit to the State Grid Corporation of China this week, highlighted the importance of the energy and power supply for social and economic stability.

Worst Summer Rains In 60 Years Lash Southern China

SOUTHERN CHINA HAS been seeing its heaviest summer rains for 60 years, bringing floods, widespread destruction of crops and more disruption to supply chains.

Hundreds of thousands of Guangdong and Guangxi residents living around the Pearl River delta have been evacuated after a week of persistently high rains. State media have aired footage of people being rescued with ropes and rubber dinghies, and cars floating down streets. Several cities in Guangdong have raised their flood alerts to the highest level.

The rain has disrupted manufacturing and shipping, already suffering under strict anti-Covid measures. Particularly in the more mountainous north of the province, where the flooding is most severe and landslides have happened, businesses were ordered to close temporarily, and public transport was suspended as rising waters approached dangerous levels. The direct economic loss so far is estimated at more than 1.7 billion yuan ($250 million).

To the north of Guangdong, Jiangxi province has also raised its flood warnings. Officials report direct economic losses already reaching 470 million yuan, with 43,300 hectares of crops inundated.

In neighbouring Hunan province, 21,607 hectares have been damaged, and there are reports of landslides and building collapses.

China’s National Meteorological Center warned that downpours could continue for another week, although the heaviest rains are expected to move northwards across central China from mid-week.

In recent years, climate change has made the south wetter and the north hotter and drier.

US Xinjiang Imports Ban Takes Effect, Further Darkening Trade Relations

US LEGISLATION BANNING the import of products made in Xinjiang unless the importer can prove the product was not created with forced labour went into effect today.

The Uyghur Forced Labour Prevention Act was passed last December and presumes that goods from Xinjiang are made with forced labour. That flips on its head the burden of proof required under existing US bans on importing products made with forced labour.

The act has been roundly condemned by Beijing.

Given the near impossibility of US importers verifying their Xinjiang supply chains on the ground as independent auditors are being denied access, the law will become as good as a blanket ban. How it is implemented, particularly the rigour with which US authorities pursue the diffusion of Xinjiang products throughout supply chains in the rest of China and the region, will determine how dampening the blanket is on trade.

Xinjiang produces more than 90% of China’s cotton, which is used by the textile and apparel industries across the country. Thus the impact of the law will be widespread in those sectors.

According to the South China Morning Post, stocks of unsold cotton are piling up at Xinjiang mills as US importers get their supply chains into compliance. With the next harvest less than three months away, half the cotton harvested last autumn has yet to be sold.

Xinjiang is also a grower of tomatoes for export and a producer of solar-grade polysilicon and electronics components.

The act will further harm China-US relations, regardless of any cosmetic changes the Biden administration may make to Trump-era tariffs on Chinese imports of consumer goods, semi-manufactures and raw materials.

Ukraine Crisis Will Slow China’s Economy

CHINA WILL NOT be immune from the global economic impacts of the Ukraine crisis.

Higher prices for energy and food and metals commodities — Russia and Ukraine are significant producers of all three — will raise inflation, providing a drag on real GDP growth. Almost certain recessions in Ukraine and Russia due to the fighting and sanctions, respectively, and an intensification of existing bottlenecks in global supply chains for raw and intermediate goods will exacerbate the impact.

It is too early to know the severity of these shocks, given their dependency on the outcome of the crisis. However, some scenario-based estimates are being made.

One set that crosses this Bystander’s desk comes from The Conference Board, a US business research organisation, which produced the chart above. Assuming an oil price averaging $125 a barrel in the second quarter of this year, The Conference Board estimates that China’s GDP growth for this year will be reduced by between point two and point five of a percentage point and by the same amount in 2023.

By comparison, the comparative numbers for the world economy are reductions of 0.4-0.9 percentage points and 0.1-0.3 percentage points, respectively.

Long-term energy contracts and the likelihood of buying more discounted Russian energy and agricultural commodities such as wheat that Moscow will not be able to sell into sanctioning markets will somewhat mitigate the impact on China. Nonetheless, the Conference Board is forecasting a 0.5-1.5 percentage points increase in year-on-year consumer price inflation in China for this year and a 0.1-0.8 percentage points increase in 2023.

Those will be unwelcome numbers for authorities already struggling to tame politically sensitive energy and food price rises.

The Ukraine crisis will add to the challenge of meeting the newly announced target of 5.5% GDP growth for this year. That was already looking ambitious. Headwinds from the real estate slump, the cost of the zero-Covid tolerance policy and the measures imposed by the United States to limit Chinese access to US capital, technology and intellectual property are already slowing the economy’s momentum.

China Will Help Russia Economically But On Its Own Terms

THE TIMING OF the announcement by China’s customs authorities that they would approve all Russian wheat and barley imports — just hours after Russia launched its invasion of Ukraine — seems barely coincidental.

It also underlines how China is acting in its national interest as much as supporting its neighbour.

Presidents Xi Jinping and Vladimir Putin agreed to the end of the import ban when the latter attended the Beijing Winter Olympic Games earlier this month.

State media is suggesting that shows there is no connection between lifting the import ban and the invasion of Ukraine. However, that line raises more questions than it answers about how much Xi and Putin discussed Russia’s plans in advance.

Russia is the world’s largest wheat exporter, with around an 18% global market share. It has been excluded from the Chinese market because of concerns about introducing dwarf bunt fungus (seen in the photograph above) — a disease that can stunt wheat and other crops, reducing yields by up to three-quarters.

China often cites phytosanitary reasons to justify non-tariff barriers to trade, but the fungus is a serious threat; hitherto, China had zero tolerance for dwarf bunt spores in imported grain. Putin agreed that Russia would suspend wheat shipments to China if the contaminants were found.

For Russia, the agreement offered the reassurance of a secure buyer to mitigate possible Western sanctions. For China, it will mean a supply of cheap wheat to offset the looming shortages caused by flooding that disrupted last year’s sowing season across one-third of the country’s wheat acreage. Food security is a priority concern for Xi.

With 1.4 billion mouths to feed and rising use of wheat for animal feed, China is already the world’s largest wheat market, accounting for shy of one-fifth of the world’s consumption. It has somewhat opaque import quotas established when it first joined the World Trade Organization in 2001 that were intended to open up the market. Imports are running at well below allowable volumes. There is headroom to expand imports from Russia.

Some reports suggest that this new trade will be settled in yuan, not the dollars customary in commodities trading. That will be easier as some of the imported wheat will come from Chinese-owned farms in Russia’s Far East that up until now could only sell their produce in the domestic Russian market.

The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China from almost all of it in 2013 to around 40%.

In January, Russia’s state-owned Gazprom signed a 30-year contract to supply natural gas to China’s northeast from the Russian Far East. This will be priced in euros to avoid using dollars. Beijing insisted on favourable terms given Moscow’s desire to diversify its export markets for its energy since the sanctions imposed for Russia’s annexation of Crimea in 2014, which also produced a cut-price supply contract.

Russia has been building up its reserves of euros and yuan at the expense of the dollar since the imposition of the sanctions for annexing Crimea. Since 2017, the yuan’s share of Russia’s foreign-currency reserves has risen to 13% from 3% and the euro’s share to 32% from 22%, while the dollar’s share has fallen to 16% in 2021 from 46% in 2017.

The two countries’ central banks agreed a three-year $24 billion currency swap in 2014 to facilitate trade financing in yuan. This has been renewed twice since. One effect has been to reduce the dollar’s share of financing of Russia’s exports to China to around 40%, against almost all of it in 2013.

When they met earlier this month, Xi and Putin said they aimed to raise their countries’ bilateral trade to $250 billion from $140 billion last year. China will dictate the terms with a hard head more than a friendly heart.

Severe Flooding Hits Central China

RECORD RAINFALL IN Henan province has caused extensive flooding and left at least 12 people dead.

The twelve who died were trapped by rising waters in the metro system in Zhengzhou, the provincial capital which lies on the southern bank of the Yellow River. More than 500 others were rescued from flooded trains and platforms underground.

The city experienced two-thirds of its annual rainfall in 24 hours spanning Monday and Tuesday. The silt-rich Yellow River often floods during the rainy season from July to October.

Some 100,000 residents have also been evacuated from the city, known for being a centre for iPhone assembly at a Foxconn plant, though the company says that the flooding has not affected operations.

More than a dozen cities in the province have been deluged. Property damage is extensive. Henan accounts for a quarter of the country’s annual wheat harvest.

Concern is mounting that a breached dam in Luoyang city could collapse. Several reservoirs whose water levels are above safety levels also pose a risk of further disasters, as do landslides.

Forty-five years ago 125,000 people lost their lives in flooding in Henan, many in incidents that occurred after the initial flooding.

Thousands of rescuers including soldiers are being deployed in a huge rescue effort. State media is actively countering social media grumbling about the lack of warnings of flood risk ahead of the heavy rains.

Local officials have been told to act pre-emptively where they see danger and not wait for instructions from central authorities. This would suggest that lessons have been learned from the slow initial response to the Covid-19 outbreak in Wuhan, where municipal officials were accused on not acting swiftly enough to contain the outbreak.

The flooding in Henan is the latest example of extreme weather around the world.

Yuan Longping, 1930-2021

IN THE 1950s and early 1960s, there was serious concern that Asia could not feed itself, particularly China, afflicted by the famine induced by Mao’s Great Leap Forward.

That is a distant memory thanks largely to the agronomist Yuan Longping, ‘the Father of Hybrid Rice’, seen above in a 1981 photograph. Yuan died in hospital on May 21 following a fall in March. He was 91.

Yuan was a pioneer in developing the higher-yield hybrid rice varieties that fed China and the region’s growing population. An estimated one-fifth of all rice now comes from hybrid species resulting from his breakthrough discoveries.

He started work on these while teaching at Hunan Agricultural University in Anjiang in Hunan province in the 1950s, publishing his first research paper in 1964. His first cross-breeding successes came in the early 1970s; he developed his breakthrough hybrid, Nan-you No. 2, which yielded 20% more than existing rice varieties, in 1973, by when he had become a research professor at the Hunan Academy of Agricultural Sciences.

Yuan and his colleagues had refined their seed production technologies by 1975, allowing the large-scale production of hybrid rice to begin. Nan-you No. 2 was put into commercial production the following year.

According to obituaries in state media, the difference in yield was sufficiently great to feed an additional 70 million people a year. With higher yields, farmers could grow more rice and switch hectarage to other crops to provide greater food security. 

Yuan presented his work to the International Rice Research Institute in the Philippines (IRRI) in 1979, setting off an avalanche of regional hybrid rice research. Our man wet to the calves from standing in paddy says he recalls the stir that Yuan’s presentation caused.

In 1984, Yuan was appointed the inaugural director-general of the China National Hybrid Rice Research and Development Center in Changsha and took on a growing national profile in advancing agricultural research inside China and promoting hybrid rice and China’s scientific standing internationally. He received the highest state honour, the Medal of the Republic, in 2019.

Yuan continued to develop hybrid rice strains that could adapt to different growing environments, working most recently on rice that could grow in saline-alkali water, until shortly before his death.

Recognised internationally for his work, if not the household name outside his field that he was in China, Yuan shared the prestigious World Food Prize in 2004. His citation said he had ‘discovered a genetic phenomenon in rice and then developed the technologies essential for breeding the first hybrid rice variety ever created’. 

It also said that Yuan had ‘helped create a more abundant food supply and more stable world’. A finer epitaph no man could hope for.

Beijing-Taipei Relations Get Prickly

WORD ARRIVES FROM our man in fruit and veg that Taipei is not taking the rough end of the pineapple, as the Australians say, when it comes to Beijing’s ban on Taiwanese exports of the large juicy tropical fruit to the mainland.

At the start of this month, the General Administration of Customs started refusing entry to Taiwanese pineapples, citing pests. Taiwanese pineapples are susceptible to some forms of mealybugs and thrips. However, Taipei’s view is that the incidence is minimal and that China is indulging in fake biosafety by banning all pineapples, and that the action is political.

Zhu Fenglian, a spokesperson for the Taiwan Affairs Office of the State Council, counters that calling the move political smears the mainland, which does not get either side anywhere.

Taiwan consumes around 90% of the pineapples it grows, exporting the remaining 10%, overwhelmingly to the mainland. Our man tells us that Taiwan is the world’s sixth-largest exporter of pineapples with a 3% share of the global market, a trade worth some $65 million in 2019 and growing fast. China buys around four-fifths of Taiwan’s fresh and frozen fruit exports in normal times.

Taiwanese have responded to the pineapple ban by clearing grocery shelves and market stalls of local pineapples, while restauranteurs are doing their bit by adding pineapple to their recipes. Japanese and Canadian diplomats have been photographed next to pineapples in support. It was a Canadian who first thought of putting pineapple on pizza, apparently. Who knew?

The hashtag #FreedomPineapples has appeared on social media, echoing the #FreedomWine hashtag that emerged in Australia during that country’s recent contretemps with China. It is also a more distant echo of Freedom fries, as some Americans re-branded French fries in the wake of some perceived slight by Paris after 9/11.

China’s main fruit exports to Taiwan are apples, but it was a small trade worth barely $6m in 2019, so tit for tat retaliation seems unlikely. After pineapples, sugar apples are next largest fruit export to the mainland from Taiwan, which has developed a pineapple-flavoured hybrid as if the knobby, custard-flavoured fruit is not sweet enough in the first place.

If Beijing chooses to escalate from prickly to knobby, this could get very sticky indeed.