Churchouse Letter
March 2014             by Peter Churchouse

Can’t Eat, Can’t Drink, Can’t Breath – Part II

When China’s top officials got together this past November to map out the country’s strategy for the next decade, they were drinking maotai, China’s strong rice liquor, or bottled water. No one in their right mind would get their fluids out of Beijing’s taps, before the H2O has been processed, treated, cleaned.

The decisions they made at the Third Plenum will drive China’s development over the next 10 years, or more. Any government worth its salt spouts green ideology. But with 1.3 billion people to keep happy and ever-expanding cities to build, China is serious about turning around its ravaged environment. The Communist Party knows that if they don’t, they won’t last long.


Each year, my wife and I head to the French Alps for a bit of R&R. The bright blue skies and gleaming snow are just the right antidote to Hong Kong’s crowded and smoggy streets.

Up in the mountains, you wouldn’t think twice about drinking from the many mountain streams that flow even under the snow. The pristine environment freshens up your lungs, your mind, your soul.

There are vistas, views, that are equally beautiful in China. But while they may enliven your spirit, you wouldn’t want to breathe too much of the air, if you’re anywhere near the industrialized east coast. The air is bad enough. Forget about a drop to drink.

It’s the water that I want to focus on in this issue of the Asia Hard Assets Report. In our last edition, we examined how the “iron rice bowl” is starting to crack in Asia, a development that is bringing unrest and discontent to the boil in China. The situation is even worse if the people believe that the water they’re using is also poisoned for personal use.

You can’t drink the water in China, or in many other countries in Asia. I remember going on business trips with a colleague who had not travelled much outside the United States, and who insisted on bringing muesli bars and bottled water on every business trip we made. He took the paranoia to an extreme – but there was a kernel of truth to the fear that he had.

China is developing into a consumer culture. Urbanization is well under way. But people still don’t trust what they buy, eat, breathe. They don’t believe what they’re being sold, not surprising since it is so often a line.

But there are companies that are beginning to make a name for themselves by becoming the trusted sources of life’s most essential ingredients. None of us would last much longer than three days without fresh water. So why not give the market what it wants, and deserves?

These companies aren’t going to be the next Facebook. They’re real-world businesses, in essential industries. And as China grows, they are going to be ever-more in demand....

Enjoy the issue,

Peter


Water...

My family and I make an annual pilgrimage to the snows of the French Alps for a cleansing of the lungs and a stretching of the legs. And of course a bit of skiing. If I’m overheating on a run, I’m not beyond grabbing a handful of snow to soothe my thirst (although this is not necessarily recommended should you ever find yourself in a mountain survival situation).

In fact, I remember one early morning in the Trois Vallées where we woke up to find that the pipes in our chalet had broken down. We weren’t going to let that stop us getting out on the slopes, so we poked our noses out the door, grabbed a saucepan full of snow and took that back indoors to melt down for a bit of drinking water. Our program is very much one of a gentle ski, with a leisurely afternoon ski home after a lunch in one of the delightful mountain restaurants serving wonderful food, always accompanied by a carafe of cool tap water.

There’s no way I would be touching a glass of tap water placed on the table in a restaurant in China. Or indeed in pretty much most countries in Asia. In fact, it was a standing joke in the English-speaking world 30 years ago that you did not drink the water in most Mediterranean countries – hence the rise of brands such as Perrier. An American colleague of mine years ago would fly into Asia on his business trips with a suitcase full of water bottles and muesli bars to avoid eating the local food in India and China. He had just been promoted to the Asian sales desk, and hadn’t travelled much, and pretty much didn’t want to either. But he was required to do site visits and “press the flesh.” On his first trips to “China,” he got a room in the Mandarin Oriental hotel opposite our Hong Kong offices, and would only eat meals prepared by their chefs.

His reaction was extreme – but he’s not the only one to worry. Last month’s Asia Hard Assets Report gave an overview of the dire problems involving food, water, and air safety and pollution in China – and that barely scratched the surface of the topic. The intention isn’t to sensationalise these problems. It’s to identify opportunities.

We’re now, over the coming months, going to outline a range of very substantial investments that will make money as those issues are addressed.

There is money to be made in food scares and the fight against pollution. We focus here on China, but the opportunities extend much further than this.

The companies that are involved in the solution of these deep-rooted problems will provide investors with very powerful returns over the next few years. These are not “flash in the pan” fast-money trading ideas but companies that are going to benefit hugely from the growing pressures in China (and elsewhere) to address the desperate environmental and lifestyle conditions that are affecting the economy, health and political legitimacy of government.

It is easy to dismiss lofty, well-intentioned pronouncements from politicians on pollution control and climate change as nothing more than pious blather, lots of high-minded talk with little concrete action.

In China’s case, though, there is increasing action to back up the talk, and that commitment is real. It will provide numerous avenues for mere mortals like us to make money from investing in new growth industries that could rival opportunities in areas such as technology, communications, and transport.

So why are we so confident that the Chinese authorities are going to address these problems? There are many reasons, some economic, some political, some just a matter of survival.

Top of the National Policy Agenda

The policy talk-fest that took place in November of 2013 – sexily known as the Third Plenary Session of the Communist Party of China – gave the first real road map of the new regime’s policy priorities for the next 10 years. The meeting sets the agenda for government action and investment over the next decade.

Addressing environmental disasters was very much top of the agenda – they can create sever social and economic problems. The government backed its words by budget numbers, in water energy and air in particular. These are not paltry sums. They run to hundreds of billions of dollars. Just this month Beijing said it would spend RMB 2 trillion (US$325 billion) to tackle water pollution. As we said in last month’s AHA Report, water is the biggest concern so that is where we start.

The financial muscle is there. China has reserves of around US$4 trillion. This gives it considerable wriggle room in committing hard resources to these issues. The political will to invest is clear.

A Compelling Case for Environmental Investment

Environmental degradation costs China a bundle in lost economic output. The Government say it shaves five percentage points off GDP. According to the World Health Organisation it’s closer to 10 percent.

Whatever the figure, it’s HUGE. This is no rounding error. The central government knows that effective policies that address the issue could boost economic output substantially, at a time when the country’s traditional export-led growth is slowing.

A Switch in Investment

China currently wants to shift from growth driven by investment and exports to growth driven by domestic consumption. Sounds simple and compelling. But China can also enhance growth by shifting investment from producing excess capacity in industries such as steel, aluminium, textiles and metals to activities that enhance productivity, such as better water supply, energy generation, waste disposal, waste-to-energy programs….. the list goes on.

Again, the evidence is increasingly clear that the government “gets it.”

"In the face of growing environmental pollution, we have to face the problem. This is our war against pollution."

Premier Li Keqiang, January 27, 2014, during a visit to a plant operated by BYD

Note the word "war" used by Premier Li in this context. Coming from the central government, this is a heavy statement of intent.

“This year, the word haze has attracted a lot of attention, and PM2.5 has become a hot topic….to solve environmental problems we need to take greater strides, and we must also have the patience and determination.”

President Xi Jinping, December 28, 2013



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