Water finance-driven mechanism of market vitality water rights trading in the Yellow River Basin

Against the backdrop of intensifying water supply-demand imbalances, water rights trading has become a vital market-oriented approach to optimize water resources allocation. The Yellow River Basin has pioneered water rights trading with abundant practical experience, but its market suffers from excessive systemic risks and poor liquidity due to outdated water allocation schemes and arduous cross-provincial coordination. Based on financial deepening and liquidity theories, this paper locally revises the CAPM model to establish a quantitative risk-return framework for water rights. It identifies major risk sources including unclear water right confirmation, absence of cross-regional coordination mechanism, insufficient incentives for water conservation, poor adaptability of financial instruments, inadequate risk management and control. Four water finance instruments, namely, the water rights market maker system, water rights options, water rights mortgage loans, and water banks, are proposed. Verification results show that the coordinated implementation and operation of these four water finance instruments can, from multiple perspectives such as risk mitigation, transaction facilitation, and value realization, reduce systemic risks in the water rights market in the Yellow River Basin, including cross-regional transaction volatility and obstructed water rights transfer. Additionally, they broaden the trading channels for water rights assets, lower the barriers to participation, significantly enhance the trading activity, transaction frequency, and overall market liquidity of water rights assets, and ameliorate the current development predicament characterized by sluggish trading and weak risk resilience.