Frost & Sullivan: China Targets Water in Stimulus Plan

In November 2008, China issued a stimulus package with 10 measures on housing, rural infrastructure, transportation, health and education, ecology and environment where ecology and environment was listed as a priority.

The plan involves construction of sewage and rubbish treatment facilities to preserve water resources in key areas as well as accelerate green belt and natural forest planting programs. Enhancement for energy conservation and pollution-control projects are also considered.

According to Frost & Sullivan's China Consultant of Chemicals, Material & Food Vivian Chen, the investment includes RMB120 billion in the fourth quarter of 2008 and RMB4 trillion in 2009. In the fourth quarter of 2008, about 10 percent, RMB12 billion, was devoted to energy saving and ecological projects. In 2009, 8.8 percent, about RMB350 million, is planned for the improvement of ecological environment.

Chen adds that a series of investments are allocated in various regions nationwide, such as Shanghai, Beijing, Qinghai, Guangdong, Jiangxi, Liaoning, Inner Mongolia, Shandong, and Jilin. A lot of these projects are relevant to water conditions and are stimulating the demand for the water and wastewater treatment equipment in China.

"Compared to some traditional industries such as petrochemicals, the water industry is less impacted by economic fluctuation because of its rigid feature as it belongs to public services and infrastructure construction. Meanwhile, due to political support and market innovation, the industry still expects good growth potential," she says.

Chen continues, "The biggest challenge comes mainly from the financial market as environmental protection is highly supported by capital input. The earthquake in the global economic environment will probably slow down the future growth rate of the Chinese water industry the coming two years. It is likely to recover to previous forecasts of 17 to 18 percent growth annually in the third year."

She adds that the Chinese water industry is likely to be one of the most dynamic markets globally to attract investors. Great demands for both water supply and sewage disposal are created by fair growth of national economy, the process of urbanization, the enhancement of environmental protection, the readjustment of water price system, the completion of relative regulative system, as well as the introduction of market mechanism.

One of the hot sub-sectors for 2009 to 2011 identified by Chen is the Chinese wastewater market.  "As the enforcement of legislation steadily improves, many major municipal projects were announced since 2002. Meantime, vast needs for improvements by both municipal and industrial sectors exist. These have created opportunities for equipment suppliers and contractors. Wastewater recycling and re-use and seawater desalination are gaining momentum in north China, where water resource is scarce. These have also promoted relative technical innovations in China," she continues.

In terms of water supply, she says that more opportunities are found in industrial applications such as food and beverage, pharmaceuticals, micro- electronics, etc. For instance, there are rules and regulations for food and beverage industry, such as Hygienic Specifications of Factory for Drinking Natural Mineral Water (GB 16330-1996) and Hygienic Specifications of Dairy Factory (GB 12693-2003). In late 2007, the State Council, China's Cabinet, approved in principle a draft food safety law to raise standards and regulate supervision. The demand for stable and secure pure water supply creates opportunities for high-tech membranes such as reverse osmosis and ultrafiltration.

"Original market leaders were from EU and Japan, but they are now facing fierce competition from rapidly growing Chinese players. In particular is the civil contracting market which is dominated by local players with a main local focus and access to cheap labor. The equipment and technology markets are much more open to international competitors and are also spawning Chinese players that are increasingly turning their attention to export markets. Some companies are even ambitiously trying to integrate engineering design and equipment supply through M&A, so as to be more competitive by providing value- added services to the Chinese water industry," Chen adds.

Taking the world economic recession into account, Frost & Sullivan forecasts the Chinese water industry to grow at 12 to 15 percent in 2009, which is above the majority of other industries. However, investors should recognize that the industry's development not only depends on the maturity of the market itself but is also influenced by the executive level of central and local governments.