Chinese deserts are on the move…

Each year, the Gobi Desert devours 2,460 square miles of Chinese soil, an area roughly the size of Delaware. Violent sandstorms threaten to conquer Beijing. Dunes now tower just 43 miles from the ancient capital…firmly marching south, like Sherman through the soft Georgia pines, at a brisk 12-15 mile per year clip:

Why is Asia’s largest desert growing so quickly?

It is because of a process scientists call desertification. Basically, China’s rapid economic growth comes at a great price, as the fast-approaching desert threatens to blanket Beijing before the Summer Olympics in 2008.

The solution?

The “Green Wall.” Beijing officials set aside $8 billion to construct a natural wall of trees spanning more than 2,000 miles.

But they’re no match. Trees need water. And air pollution inhibits precipitation. Researchers from Israel’s Hebrew University of Jerusalem and the Chinese Academy of Meteorological Sciences found that on hazy days, precipitation from the top of Mount Hua in China’s northwestern Shaanxi province is cut by up to 50%.

Consequently, one quarter of China currently finds itself buried beneath sand.

China’s immediate need for water remains paramount.

Two out of every three major Chinese cities have less water than they need. Cities in northeast China have roughly five to seven years left before they completely run dry.

Beijing knows the stakes. It’s spent $60 billion diverting river water to address this problem. That commitment represents the largest civil engineering project since the Great Wall.

Regardless, it may be too late.

But those lucky enough to fill their pipes have another problem: 90% of China’s city aquifers are deemed polluted, and 700 million Chinese drink water contaminated with either animal or human waste. In most cases, their murky glasses contain both.

You see, water, in essence, is a commodity. When scarce, it’s the one commodity even more valuable than either oil or gold.

Westerners, however, take water for granted. We simply turn on the tap and it flows. But that’s certainly not the case the world over.

Arid landscapes, low rainfall and fast-depleting underground water tables make fresh water one of the most pressing issues facing countries like India and China today. Roughly 50% of the world’s population resides in this region of the world. They’re the economies experiencing the most dynamic growth.

Last year alone, these economies accounted for more than half of world GDP. They now churn out 43% of the world’s exports and hold 70% of the world’s foreign exchange reserves. Going forward, sustainable growth will require sustainable supplies of fresh water.

Solutions vary. Some have proposed towing icebergs. Despite being highly inefficient, we’re not assured the icebergs will even be there to tow.

Others argue for heavy investment in desalination. We see two potential problems here. First, desalination requires massive amounts of energy, as well as specialized, expensive infrastructure. Saltwater conversion also produces a byproduct of concentrated seawater, which some scientists claim attibutes to marine pollution.

We also like to point out that desalination takes place at sea level. For flat regions like the Middle East, where desalination plants account for a majority of total world capacity, that isn’t too much of a problem…

But what about countries with steep terrain? Pumping water to higher altitudes presents a significant challenge both economically and physically.

And finally, for the most part, countries use desalinated water for washing, filling swimming pools and watering golf courses…they rarely use it for drinking.

The solution: We firmly believe as does World Bank water resources manager John Hayward: “One way or another, water will be moved around the world as oil is now.”

There are companies very attuned to this trend. They’re in the midst of buying water rights in the same way wildcatters used to buy oil rights.

Which companies? I can’t reveal much more in this letter, but I will say this: I own one stock, and one stock only. As you might guess, it holds some of the world’s most precious water rights.

Until next time,
Christopher Hancock
November 16, 2007

P.S.: I’ll also say this: Chris Mayer has been deep in study over this very issue for years now. He has given his Capital & Crisis and Mayer’s Special Situations readers tons of opportunities to strike it big with it. Some of his water plays have helped readers double their money in no time flat. He has a few more in a very special report he titles “Blue Gold.”

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Special Report: Imagine Getting Rich as Ignored Stocks Soar- How you could turn $200 into $1.2 million!

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