Even though water is a scarce resource in China, most water resources in the country are used to produce basic staple crops.

In 2005, production of irrigated cereals accounted for 85 percent of total national cereal production, covering 82 percent of the harvested area for cereals, up from 74 percent of total production and 70 percent of area in 1995.

By comparison, irrigated cereal production worldwide accounted for 52 percent of total production on only 38 percent of the global harvested area of cereals.

Significant irrigation water use for basic staple crops is largely driven by food security concerns: the Chinese government's policy on grain security set a target of 95-percent self-sufficiency in grain production. The instruments put in place to reach this level of production have been mainly investments in science and technology, which are laudable, but also direct support to farmers.

The self-sufficiency policy is damaging for water availability and use. Moreover, service fees for irrigation water have fallen since the agricultural land tax was abolished, thereby reducing the functionality of the irrigation network. This is because service water fees and land tax were once collected together, and some farmers felt that when the land tax was axed so should the water fees.

Other policies have run counter to water saving efforts. For example, managers of irrigation districts have few incentives to work to improve water efficiency because their wages generally rely on the collection of water fees.

Finally, water quality has been deteriorating rapidly as a result of rapid economic growth and still very high fertilizer and pesticide applications compared with what occurs in other middle-income countries.

Climate change will wreak further havoc on China's water economy. The country's north has experienced a large degree of warming and reduced annual precipitation since the 1950s. This long-standing change in climate, with the growing competition over water resources for irrigation and for urban and industrial development, are at the heart of water shortages in areas like the Yellow River basin.

There is still room for using technological solutions to improve water efficiency and save water in agriculture, industry, and urban-domestic sectors. Engineering measures could improve domestic water efficiency, and modernizing irrigation systems in agriculture by introducing canal lining and micro-irrigation could produce savings in agriculture.

Although there is still scope for savings of agricultural water, continued transfers of water out of agriculture will eventually result in falling agricultural production, with implications for national food production as well as global food prices and trade.

By far, the most important change to improve water efficiency and tackle the problem of water shortages is to switch from managing supply to managing demand. The 2002 Water Law is moving in that direction, thanks to the establishment of a water permit system and the introduction of the concept of water rights. However, although both the 2002 Water Law and the 2006 Water Permit Regulation recognize water rights, they do not allow their transfer. This limits the potential for the development of water markets. Despite this, in some regions experiments have been conducted on water rights transfers from agriculture to industry, although these were tests driven by the local government rather than the result of free-market mechanisms.

Responding to water scarcity across China requires a variety of interventions. Changes will require a high level of institutional and technical integration and plans to improve the implementation rate of laws and regulations down to the local level. The government should continue to reform the institutions responsible for irrigation management and water pricing across all water-use sectors, and promote projects in which water rights are transferred based on market mechanisms.

China is now investing $2 billion (1.51 billion euros) in irrigation infrastructure, which should increase water use efficiency and boost crop yields. It is to be hoped that such investment also tackles challenges on the demand side. In turn, this would increase incomes of the poor and reduce poverty. However, the potential for expanding irrigation is limited, and labor productivity is known to be lowest in agriculture. Therefore, accelerating a shift of the rural labor force out of agriculture by creating off-farm employment opportunities in higher-productivity sectors in rural areas is arguably even more important for future rural economic development.

Claudia Ringler is a senior researcher at the International Food Policy Research Institute. Nicola Cenacchi is a research analyst at the institute. The views expressed do not necessarily reflect those of China Daily.