Food, Water And China

Food-price inflation has been, for some time, a strong feature in the emerging economies. Although developed economies face the same problem--i.e., higher food prices--the emerging markets receive all the publicity because of the great weight food has in their respective CPI baskets. It?�s therefore easy to spot in the official statistics.

China is the global point of reference, as its headline inflation continues to rise. Specifically, the country?�s CPI, including food, is now running at 3.4 percent year-over-year, while non-food CPI is at just 1 percent.

The debate regarding the sustainability of this trend is still young. It focuses on whether supply and demand be distorted in such a way that prices will remain higher for longer and, most important, whether such an outcome will be structural in nature. Oil provides a good example of such a shift.

The view here--as outlined in The Silk Road to Riches: How You Can Profit by Investing in Asia?�s Newfound Prosperity, a book I co-authored with my colleagues Elliott Gue and Ivan Martchev--is that the shift is most likely structural, and although it?�s not expected to meaningfully upset inflation stability around the world, it must be addressed by financial authorities, especially in regard to the short term.

For now it seems that the prevailing policy response to the issue is to allow some more currency strength in order to support purchasing power in dollar terms, in the context, of course, of a growing economic environment. India and Brazil have clearly picked that route, in the process slowing down inflation. What China?�s response will be is difficult to say at this point, although People?�s Bank of China (PBoC) officials have made it clear that they?�re closely monitoring the headline inflation number.

Nevertheless, it would come as no surprise if the currency route were identified as the appropriate response, given that greater renminbi appreciation is now viewed more favorably in Beijing in light of the combination of huge liquidity excesses and higher inflation.

The food inflation story is (at this point in the cycle) a byproduct of strong economic growth and some supply issues. As such it will present investors with many investment opportunities as the needs of emerging economies become greater and more pressing as time goes by.

Water is one such opportunity that should reward investors for years to come. And China is as good a place to start as any other emerging market.

China is one of 13 water-deficient countries in the world, with per-capita water availability of 2,100 cubic meters in 2005. By comparison, the US has 10,000 cubic meters per capita available. China?�s problem is even more complex because of its population distribution; 45 percent of Chinese live in the northeastern part of the country, where only 15 percent of available water is located.

Contamination and inefficient use of the country?�s water resources have further exacerbated the problem. Short-term economic growth has been hampered, and the long-term risk of a real crisis in the future--leading to social unrest and disturbing China?�s precious social stability framework--has also increased.

As China?�s minister of water resources has noted, ?�China?�s per-capita water holdings are one-third of the world?�s average, and this is combined with low efficiency in terms of its usage rate. For example, the amount of water used to produce a ton of steel in China ranges from 23 to 56 cubic meters, whereas in highly industrialized countries, such as the US and Japan, the average is less than 6 cubic meters.?�

China?�s national leadership is well aware of the problem, but local officials have made it difficult for it to enforce its will. Things have been improving as tougher regulation and harsh punishment for officials who continue to ignore the problem have been helpful. As a result, cities around China are more likely to follow the government?�s requirement for the construction of wastewater treatment facilities.

Wastewater treatment is becoming extremely important to China?�s plan for better water, and analysts expect for wastewater treatment plants to increase dramatically during the next five years. Efforts are also underway to use wastewater treatment not only for preventing pollution, but also recycling it for other purposes.

Accordingly, companies that operate in the relative areas should be viewed favorably by long term oriented investors.

A company in the space that I?�ve liked for sometime is Bio-Treat Technology, one of China?�s leading wastewater treatment companies. Bio-Treat specializes in the use of biotechnology to treat polluted water to a level whereby it can be released into the environment. A relatively young company, Bio-Treat was established in 1993 and was listed in Singapore in early 2004.

Bio-Treat concentrates on medium-scale projects and has been quite successful bidding on such, winning enough to build a strong order backlog. The company is working to improve existing technology and to create new ones, in order to offer new products and gain access to new growth segments of the market.