Modeling the Impacts of Urbanization and Industrial Transformation on Water Resources in China: An Integrated Hydro-Economic CGE Analysis

Pressure on existing water resources in China is expected to increase with undergoing rapid demographic transformation, economic development, and global climate changes. We investigate the economy-wide impacts of projected urban population growth and economic structural change on water use and allocation in China. Using a multi-regional CGE (Computable General Equilibrium) model, TERM (The Enormous Regional Model), we explore the implications of selected future water scenarios for China’s nine watershed regions. Our results indicate that urbanization and industrial transformation in China will raise the opportunity cost of water use and increase the competition for water between non-agricultural users and irrigation water users. The growth in water demand for domestic and industrial uses reduces the amount of water allocated to agriculture, particularly lower-value and water-intensive field crops. As a response, farmers have the incentive to shift their agricultural operations from traditional field crop production to higher-value livestock or intensive crop production. In addition, our results suggest that growing water demand due to urbanization and industrial transformation will raise the shadow price of water in all nine river basins. Finally, we find that national economic growth is largely attributable to urbanization and non-agricultural productivity growth.