Chapter 12. Flexibility in allocation through informal water trading in North China1

This chapter explores how informal water trading has provided flexibility in groundwater allocation in North China. The case discusses how informal groundwater markets emerged as a result of well privatisation as well as some of the distributional considerations that arise from informal markets. The case also discusses the influence of pumping costs on trading activity and groundwater consumption.


Groundwater resources and use in North China

The population and economy in North China are highly dependent on groundwater resources. As of 2011, 35.5% of the total water supply in the region came from groundwater resources, whereas the share of groundwater in agricultural water supply amounted to about 70% (2004) (Wang et al., 2014). Close to 95% of China’s 3.5 million tube wells are situated in the northern part of the country (Zhang et al., 2008; Mukherji and Shah, 2005).

One of the most important groundwater sources in North China is the extensive and complex aquifer system underlying the North China Plain, which is the leading agricultural area in China. The region supplies 61% of the country’s wheat, 45% of its maize, 35% of cotton and 64% of peanuts (Yang et al., 2015). The North China Plain aquifer system consists of one shallow unconfined aquifer and three deep confined ones of different depths (Feng et al., 2013).

Extensive pumping has resulted in significant groundwater depletion

Despite the fact that North China produces 38% of the country’s GDP and more than half the country’s grain yield, the region has only 21% of the nation’s water resources (Wang et al., 2016; Yang et al., 2015). Water access has declined as the groundwater levels in the North China Plain Aquifers have fallen dramatically, due to expanded irrigation and urbanisation (Changming et al., 2001). Over the period 1995-2004, the water table dropped in 48% of the villages in North China; and 8% were subject to severe overdraft, with the water table falling by more than 1.5 meter annually (Wang et al., 2007). The groundwater depletion in North China threatens long-term agricultural and industrial development in the region, and is expected to alter the balance of economic activity (Foster and Garduno, 2004).

Groundwater depletion in North China has also caused seawater intrusion and land subsidence. Land subsidence resulted in the collapse of more than 200 buildings already before 1995, and has created cones of depression under some cities (Foster and Garduno, 2004; Changming et al., 2001; Wang et al., 2014).

Regulation and enforcement constitute key challenges

As of 2002, Chinese Water Law states that all groundwater resources, including the right to use, sell and charge for groundwater, belong to the government. In practice, however, villages overlying aquifers have a de facto right to use the resources. Thus, groundwater entitlements are not related to land ownership or historic use entitlements, but primarily to ownership of wells (Wang et al., 2014).

The regulatory framework for groundwater management in China and its enforcement is generally weak (Mukherji and Shah, 2005). For example, the issuing of water extraction permits is often delayed and complicated. According to a survey carried out across China in 2004, only 10% of Chinese drillers surveyed held an extraction permit, despite this being nearly a universal requirement across the country (Wang et al., 2009). No abstraction charges or quantity limitations were imposed on well owners in any of the villages surveyed. Only 5% of community leaders surveyed believed that well drilling decisions required considerations of well spacing requirements (Wang et al., 2009).

Also at national level, groundwater management is constrained by limited resources. The resources devoted to groundwater management at ministerial level are considerably smaller than those for surface water management and flood control (Wang et al., 2009). Furthermore, there are no single management authorities for those aquifers that span jurisdictional boundaries. As a result, the co-ordination of users within aquifers that span across several regions is limited, and weakens the enforcement of governmental regulations (Mukherji and Shah, 2005). Groundwater governance and management is primarily carried out on a village level. Although localised management has advantages, it makes it challenging to implement programmes requiring collective action, such as universal water savings (Wang et al., 2014).

Nevertheless, some improvement in state governance of groundwater has been observed. Groundwater governance has changed from being highly fragmented to being more integrated and institutionalised. Agencies have gotten clearer responsibilities, and user participation in the form of water-user associations has been given significant consideration (Mukherji and Shah, 2005).

The privatisation of wells led to the emergence of groundwater markets

Before the agrarian reforms of the Deng administration in 1979, wells were collectively owned all over China (Mukherji and Shah, 2005). They were financed by collective earnings and resources from the township governments. The pumps were provided by state-run local agricultural inputs corporations or water resource bureaus. The village leaders made all decisions regarding timing and location for the wells, and the quantity of water that would be extracted per season. Farmers in the villages contributed their labour to the tube well construction and maintenance. The local, collective management of wells was based on a set of simple rules for groundwater allocation, and all individuals were provided with an equitable share of water (Zhang et al., 2008; Wang et al., 2007; 2014).

The economic and rural reforms of the late 1970s and 1980s aimed at accelerating growth in a number of sectors, notably agriculture. The economic reforms required local village governments to be fiscally more independent. As a result, several villages experienced considerable economic difficulties and were no longer able to invest in agriculture, including in the establishment and maintenance of collective wells. A coinciding fall in groundwater levels caused an additional decline in the number of functioning wells. Moreover, governmental regulations increasingly relaxed their restrictions on private activities and allowed for expanded freedom for individuals to invest in their own farms. The income and control rights of land were shifted from the collective to the individual household. Consequently, several farmers started sinking and operating their own wells (Wang et al., 2014). The number of private wells had been close to zero during the 1980s, but rose to approximately 40% in the 1990s. By 2004, 70% of the tube wells were privately owned (Zhang et al., 2008).

The economic reforms and the emergence of privately owned wells facilitated and encouraged the establishment of informal groundwater markets (Zhang et al., 2008; Easter and Huang, 2014). In 1994, groundwater markets only existed in 9% of the villages of North China, whereas by 2004, such markets had appeared in as much as 44% of the villages. In 1995, only water from 5% of tube wells was sold on the groundwater markets; this rate had risen to 18% by 2004 (Zhang et al., 2008).

Groundwater markets in China are localised and informal

Groundwater markets in North China are for the most part informal; transactions between sellers and buyers take place without legal contracts and sanctions. Nevertheless, some sort of formal regulation applies in 20-25% of the villages in North China, often in the form of a price ceiling. In other places, local authorities have influenced groundwater market activity by providing grants and loans for tube well construction, stimulating expanded market activity (Wang et al., 2014; 2016; Zhang et al., 2008).

Most markets operate within one single village. Only 6% of water-selling well owners sell to other villages than their own (Zhang et al., 2008). Contrary to the practice in many Southern Asian countries, in groundwater markets in North China water is sold at the same price regardless of the customer: only 7% of water sellers report that they charge different prices depending on the type of buyer (Zhang et al., 2008). Because the price of electricity in China is based on metered consumption, the depth from which water is pumped influences the price at which well owners sell groundwater on the market (Zhang et al., 2008).

The groundwater markets, access to and depletion of groundwater are strongly interlinked

The groundwater markets in North China provide a mechanism for the allocation of scarce water resources. Compared to a situation where wells had been privatised but no groundwater markets had emerged, markets create enhanced access to water for those who otherwise would struggle to access groundwater, such as poor, old and less educated farmers (Zhang et al., 2008; Wang et al., 2007; 2016). Research shows that 70% of sample households depend on groundwater for irrigation, whereas only 35% of these have their own wells. Some people still access groundwater through collective wells, but more than 20% depend on the informal markets for access to groundwater for irrigation (Zhang et al., 2008). The income of water-buying households is on average 61% of that of water-selling ones, and most of these would not be able to afford to invest in their own tube well. In addition to expanding groundwater access, the groundwater markets have become an important source of income for tube well owners (Wang et al., 2016).

Groundwater markets’ implications for equitable access have been challenged by the steadily increasing groundwater depletion. As water levels have fallen, tube wells have been sunk to deeper levels, and the price of water has gone up due to increased electricity costs. Consequently, the access of some of the poorest farmers has been restrained (Zhang et al., 2008). Further, some scholars argue that the privatisation of wells and the emergence of informal groundwater markets have resulted in increased depletion, since this facilitates groundwater usage for a larger number of people. Thus, in the long run, in the absence of a limit on abstraction, markets may actually end up limiting access to water by increasing the scarcity of the resource (Song and Woo, 2008; Wang et al., 2016).

Conversely, there is empirical evidence showing that market actors respond to groundwater scarcity by reducing groundwater use, making water consumption more efficient and turning to crops that are less water-intensive (Song and Woo, 2008; Wang et al., 2006). When the water price increases because pumping costs go up, farmers seek to reduce their usage of groundwater while maintaining their crop production. This effect spreads in the groundwater markets. By creating a price signal, some argue that groundwater markets have encouraged efficiency of use, without harming production or income (Zhang et al., 2008; Wang et al., 2007).

Lessons learned

The privatisation of groundwater wells in China gave rise to informal water trading. Groundwater markets in North China constitute a means for reallocation of water among users (see Health Check #14, Part I). The groundwater markets have allowed for increased groundwater access for farmers that lack the means to install their own wells.

Increased groundwater scarcity tends to lead to expanded groundwater market activity, but also more efficient use of the water resources. Because electricity tariffs in China are set based on metered consumption, the depth from which groundwater is pumped determines the costs of operating a tube well. When pumping costs are higher, water sellers as well as buyers tend to optimise their groundwater consumption, at least in terms of their private use. Due to the informal market’s responsiveness to price changes, some observers argue that the government should introduce a formal groundwater pricing mechanism, allowing for the recovery of the full costs of supply and reinforcing the price signal to reflect the scarcity of the resource (Wang et al., 2016).


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← 1. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.