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One of the first things visitors to China notice is the pollution. Burning eyes and hacking coughs are commonplace. The mix of coal to heat homes, factories belting out chemicals full-steam to produce more goods, and the surge in personal automobiles emitting CO2 combined with weak implementation of environmental protection codes has left China awash in pollution.

The World Bank estimates that 16 of the 20 most polluted cities in the world are in China and that the economic impact of environmental issues on China’s economy amounts to an 8% drain on GDP. In Beijing last year, 80% of the days failed to meet requirements for health standards. More than 400,000 deaths annually are attributed to pollution related illnesses in Beijing alone.

The results for China’s population have been devastating. While brain and heart disease accounted for only 12% of deaths in 1957, they now account for almost 40% of deaths.

Many critics of China for years have unfairly labeled the Chinese as not caring about the environment. China’s government countered by saying that they understand the need to protect the environment but that the costs to economic development are extremely high – the argument was that so many Chinese were so poor that China had to jump start the economy first so that everyone could eat before worrying about the environment.

But now that China has become a donor country, rather than a receiver of aid, the financial hit on China from pollution is straining China’s medical system and the situation is changing. China is investing the capital necessary to minimize pollution. Hopefully, China will be able to cleanse its environment much as Japan has done after its choking growth in the 1960s or as the US did to counter-balance the effects of America’s drive to economic power.

Solar and Wind Energy

China’s pollution problem is now one that is acknowledged by both the Chinese government and the Chinese people, who are increasingly worried about their health. The government implemented initiatives during its 10th and 11th five-year plans to mitigate environmental degradation. In 2005, the government passed the Renewable Energy Promotion Law to develop clean and renewable energy sources.

China currently depends on coal for nearly 70% of its power. To minimize this reliance, the Government seeks to increase renewable resources like solar, wind, bio-diesel, and hydroelectric power from 7% today to 16% by 2020. Westinghouse Electric Co. recently inked a deal to build four civilian nuclear reactors in China. General Electric (GE) is helping make the use of coal power cleaner by providing updated coal gasification technology.

Solar power also appears to have a bright future in China. Investors in Suntech Power (STP) have done well if they bought at the 52 week low of $20.83 USD as the stock is now at $33 USD, down from a 52 week high of $45.95 USD. Both Solarfun (SOLF) and Trina Solar LTD (TSL), companies that produce photovoltaic power cells and integrated solar power solutions, might be worth looking at when they IPO this week.

Wind power will also be an important source of renewable energy as China has the goal of surpassing Germany as the largest user of wind energy by 2020. China imports most of the technology for wind turbines from companies like GE and American Superconductor (AMSC) that have the technology.

In addition to dealing with pollution due to energy demands, China also faces a challenge in the form of water pollution and high demand for water resources. For 200 days out of the year, water flowing along the Yellow River, historically one of China’s most important waterways, no longer reaches the ocean. It would be like the Mississippi or Amazon drying up.

Pollution of the Yangtze River and last year’s chemical spill in the Songhua River in China’s northeast has heightened public awareness of polluted water. GE’s water treatment systems as well as Corning’s (GLW) scrubbers have huge potential in China. Companies such as DuPont (DD), Dow Chemical (DOW), and Xerox (XRX) that make mass spectrometers and other tools for measuring chemical traces in water will do stiff business in China as the Government protects China’s limited supply of potable water. The pollution of China’s water tables also means that more and more Chinese consumers will turn to bottled water from companies like Coca-Cola (COKE) as alternatives to boiled municipal water that they fear may still contain traces of pollutants.

Cars

Another major environmental concern for China is the increase in the number of vehicles on the roads as China’s Baby Boomers make use of their increasing disposable income to buy personal vehicles from Toyota (TM), Volkswagen (OTC:VLKAY), Ford (F), and Nissan (OTC:NSANY). Emissions standards in China are slated to meet European level III standards, and the Government recently passed a law to reduce the sulfur content in gasoline to 150 parts per million to go into full effect by December 31st 2009. Petroleum company Sinopec (SHI) is already well under way in its conversion to the new standard and its investment in clean gasoline will pay dividends in future years.

Although car use is certain to go up in China, new laws will reduce emissions.

Health Conscious Chinese Baby Boomers

Chinese are also becoming more health conscious, and they recognize that pollution is impacting the quality of their lives and their life expectancy. The damage that pollution inflicts on public health is likely to remain a major contributor to health concerns in China ranging from cancer to heart disease.

Companies like Medtronic (MDT), Johnson and Johnson (JNJ), Pfizer (PFE), and Boston Scientific (BSX) that provide medical devices and medicine to help alleviate pollution related health problems have big potential in China.

Conclusion

Many environmental issues still need to be addressed. But on the positive side, both China’s government and China’s populace are pushing for better environmental controls. Investors will take note and back the companies that have the best chance of helping China clean itself up. I am hoping for more blue skies to dot the skyline.

Note: CMR analysts Natalie Zhu and Ben Cavender contributed to this article.

Source: Investing in China's New Environmental Consciousness