China's Water Crisis Is an Investment Opportunity

by: Richard Graham

“Water, water, everywhere, but not a drop to drink.”

In 1789, English poet Samuel Taylor Coleridge penned this famous line in The Rime of the Ancient Mariner, a poem that describes the deathly journey of a mariner’s ship. After being cursed for shooting an albatross, the mariner sees his crew slowly die of dehydration, only to be redeemed at the end of the poem for realizing the sins he has committed.

China, interestingly enough, is in this same precarious situation: it has been inadvertently cursed by the fruits of quick economic growth and urbanization. As a result of its explosive growth and recent droughts, China’s water supply is increasingly in danger. This threatens to choke China’s industrial and population growth. It also provides a valuable investment opportunity.

As China’s water problem deepens, it will be forced to invest in new water treatment and irrigation technologies, unlocking a 1 trillion RMB market with plenty of opportunity.

China’s Water Crisis

China is home to 270,550 sq km of water. Unfortunately, this water is heavily polluted, threatened by drought, or being overused. According to a March 2009 study by China Research and Intelligence, over 70% of Chinese rivers, lakes, and seashores, and 90% of its underground water supply in urban areas are polluted.

The main cause of this pollution is China’s unbridled economic growth. Much like during the United States’ own industrial revolution, Chinese firms dump their waste products into the water without regard for the environment, which makes the water unusable. Additionally, spills and accidents like the one at the Jilin chemical plant in 2005 exacerbate this cycle.

Another threat to the Chinese water supply is drought. In early February this year, China declared a drought emergency in the Hebei, Shanxi, Anhui, Jiangsu, Henan, Shandong, Shaanxi and Gansu provinces, which are provinces in central and northern China, China’s breadbasket region. For the past few years, the water table in northern China has been falling roughly five feet a year. These droughts, currently, show no signs of abating and are exerting extreme pressure on China’s water supply.

The final major threat to China’s water supply is overuse. China is an agricultural powerhouse, which poses a particular threat to its water supply due to excess irrigation. According to a Swiss Re focus report on water availability, between 1850 and 1980, China lost 543 medium to large sized lakes from irrigation. Today, as the result of excess irrigation, the Yellow river no longer reaches the sea.

Moreover, demographic changes will increase China’s water use to unsustainable levels. China’s population is projected to rise from roughly 1.3 billion today to 8.5 billion by 2025. Assuming current water use per-capita remains constant, China’s withdrawal of freshwater supplies will increase from 549.76 cu km/yr to 3527 cu km/yr, a 541% increase.

Additionally, China’s changing diet will pressure water supplies even more. The Chinese consume a primarily vegetarian diet; however, westernization has shifted her diet from being vegetable based to meat based. To put this into perspective, it takes roughly 1000 liters of water to grow a bushel wheat, but 15,000 liters of water to produce a kg of beef. Clearly, this trend will pressure China’s already dwindling water supplies even more.

Investment Opportunities in the Crisis

The Chinese government has recognized this water crisis. In its 11th five-year plan, the government allocated 1 trillion RMB for investments in the water sector. These projects range from a series of canals connecting the water rich Yangtze River of the south and the water deprived Yellow River of the north to desalinization and water reclamation projects. While projects like the Yangtze River-Yellow River canals are ambitious, they are not the future. Merely moving water around China will not be able to supply her with the water she needs in the future, the future for water in China is water reclamation, water treatment, and desalinization.

There are multiple firms that are well positioned to take advantage of this future trend. The first, and the best positioned, is Hyflux (SIN:600). Hyflux is a Singaporean company that specializes in water purification, treatment, and desalinization. They possess a proprietary membrane technology that can be applied on large scales in municipal settings. With fifteen wastewater treatment plants already constructed in China, the company has strong China exposure. Because of its advanced and unique technology, Hyflux is the leading firm to take advantage of this crisis.

A second well-positioned firm is Duoyuan Global Water (NYSE:DGW). Duoyuan Global Water has heavy China exposure and provides water treatment, purification, and wastewater treatment services. It has over 80 distributors in 28 provinces, with a quarter of those distributors in the drought-ridden north. While Duoyuan does not possess the same membrane technology as Hyflux, it provides the same range of services as Hyflux and has larger China exposure. For an American investor, Duoyuan could be a better choice if they cannot trade Singaporean stocks.

Other firms that are positioned to profit are Veolia Environment (NYSE:VE), China Water Affairs Group (HKG:0855), and Insituform Technologies (NASDAQ:INSU). These firms deal more in water transportation and infrastructure, and less in water purification and treatment. They do, however, have China exposure and should benefit from Beijing’s attempts to bring cleaner water throughout China.

Disclosure: No Positions.

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