Serious Money: Numerous commentators note that the year 2001 marked the beginning of the Asian century, notably the irrepressible rise of China and India.
Indeed, economic growth in the world's two most populous countries, has been laudable over the past five years - China has grown at an average rate of 9.5 per cent per year while India has recorded average growth of almost 7 per cent over the same period. This compares with average growth rates for the US and Japan - the world's largest economies - of 2.7 per cent and 1.3 per cent, respectively.
Both China and India have maintained strong economic momentum through 2006 despite a marked slowdown in the developed world. Based on realistic projections, the two economies combined could surpass the US as the world's largest in just 25 years. Not surprisingly, investors are seeking ways to profit from the emergence of these economic powerhouses, from China's seemingly insatiable demand for commodities to the emergence of a large middle class in both countries.
Few are highlighting the impact of the countries' economic development on the supply and demand of the most essential commodity - water.
It is easy to overlook the impact of Chinese and Indian economic development on the supply and demand of water, though the dynamics are not difficult to understand. Population growth and economic development have pushed water demand to unsustainable levels, placing both countries on a collision course with nature. Population growth increases the number of mouths to feed and, consequently, the demand for water. The combined populations of China and India should increase by almost 120 million people over the next five years to more than 2.5 billion.
Furthermore, economic development will raise not only income levels but per capita use of water as the emerging middle classes demand more meat and protein in their diets. Given that it takes 2,400 litres of water to produce a hamburger as against just 40 litres for a slice of bread, the implications for water demand are clear.
Economic development brings with it increased urbanisation, which poses a whole host of challenges including the provision of basic sanitation and safe drinking water. Additionally, urbanisation increases demand for water as people connected to the mains supply tend to conserve less. Mumbai is already home to more people than New York while Shanghai is more populated than Los Angeles. The combined population of both cities is expected to increase by 1.3 million people a year over the next decade.
The additional water demand created by industrialisation and urbanisation is often met through the diversion of resources from agricultural areas. Consequently, economic development not only reduces the amount of land available for food production but also the availability of water. Additionally, increased pollution reduces water quality. Indeed, 90 per cent of sewage in China either goes untreated or fails to receive secondary treatment.
Increased irrigation and dams will not ease the problem. Excessive withdrawal from surface waters combined with same from underground aquifers has already seriously depleted resources. China's Yellow River first ran dry in 1972 and since 1985 it has often failed to reach the sea. In China's Qinhai province, through which the Yellow River flows, more than 2,000 lakes have vanished in the last 20 years.
The water table in the Punjab, India's breadbasket, is falling by almost one metre every year and several lakes have disappeared. The scarcity of water is already showing up in the grain harvest. China's grain harvest has dropped by more than 25 per cent since 1997.
The facts reveal that both China and India face serious water problems in the future. However, the problem is is universal.
The United Nations notes that, within 25 years, if present consumption trends continue, five billion people will live in areas where basic water needs for sanitation, cooking and drinking are unlikely to be met. Water could be to the 21st century what oil was to the 20th.
The investment opportunity is large and unlikely to disappear anytime soon. Large companies such as America's GE have already entered the fray, though the contribution to overall revenues is not meaningful enough to have a material impact on share price performance. Several exchange-traded funds that give investors broad exposure have been launched in the past year. The investment performance of these funds has not materially outpaced the broader market but should do so in the future. Investors should consider this new "liquid gold".
Charlie Fell is an independent consultant and lectures in finance and investment at UCD and the Institute of Bankers in Ireland.
