The World Bank report notes that China's water rights administration and trading need to be improved and that the country still has a way to go in establishing a well-functioning water rights administration system. Since there is no precedent for implementing tradable water rights in a large developing country like China, the World Bank recommends that China conduct pilot projects on tradable water rights as a promising approach to pursue in the future.

Zhangye of Gansu, which became the first water-saving pilot city in 2000, is a successful example. The city, located on the upper reaches of the Heihe River, used to be home to 92 percent of total population of the entire Heihe River Basin and consumed 76 percent of its water supply. Drawing on its easy access to rich water resources, Zhangye's water productivity was rather low. Flood irrigation not only caused soil salination, but also interrupted the downstream water flows into the West and East Juyanhai Lake in 1961 and 1992, respectively.

After the pilot project implemented in Zhangye, every rural family received a water right certificate that stated the amount of the water to which it was entitled. At that time, the history of unlimited water use came to an end, and farmers could only use the water they were allowed to use. As a result, they began to plant fewer water-consuming crops and stopped flood irrigation. Furthermore, they were granted permission to sell the water they saved to other villagers, an entitlement they still enjoy today.

"These measures encourage farmers to save water, because they can make a profit on their saved water," said Xie Jian, World Bank Senior Environmental Specialist and principle author of the report.

According to the Water Resources Bureau of Zhangye, the city has drawn less than 300 million cubic meters from the Heihe River annually since it implemented water rights, and the downstream Juyanhai Lake has been able to restore its water flow after many years of interruption. By the end of 2008, Zhangye's water withdrawals for agriculture decreased from 88 percent of the city's total water withdrawals to 81 percent at the beginning of the year.

Since 2005, Gansu also made Dunhuang and Wuwei two water-saving pilot cities. According to the Water Resources Department of Gansu, Gansu's penetration rate of water-saving irrigation reached 62 percent at the end of last year, and its water withdrawal for agriculture had a negative growth rate for the first time.

Water rights trading

China has made great progress in its water rights administration system, according to Chen Lei, Minister of Water Resources. A general control system for total water withdrawal has been set up in the country's seven major river basins, and stricter controls on total water withdrawal for water-stressed rivers such as the Yellow River, Talimu River and Heihe River have been put in place, he said at a state meeting on water resources on February 14.

With the abolition of the previous Measures for the Implementation of the Water Permit System and the issuance of new ones in April 2006, the biggest obstacles to water right trading have been removed. The new policy says any legally approved water use entities have the right to transfer their saved water resources upon payment with the consent of the original authority for examination and approval. This has ensured the transfer of water rights in administrative regulations for the first time.

By the end of 2008, China had established more than 82 state-level water-saving pilot cities in keeping with water right market theory, according to the Ministry of Water Resources. They included Dalian in northeast China's Liaoning Province, Xi'an, the capital city of northwestern Shaanxi Province, and Mianyang in southwestern Sichuan Province, as well as almost 200 county-level water-saving pilot projects nationwide.

Provincial governments have used more innovative and creative measures in establishing a water rights market. Water-consuming enterprises were supposed to finance farmers' water-saving irrigation reforms, under which they were entitled to use the water farmers saved, so that total water withdrawals would not increase and a win-win situation would be accomplished.

As for now, China must improve its system of water resources allocation, conservation and protection as part of its overall economic restructuring and changing economic growth pattern amid the global financial crisis, Chen said. To do this, it will vigorously advance its water-saving pilot projects in 2009, he said.