Your typical red Hong Kong taxi took Ted and me back to our flat in midlevels late one Thursday night. We had spent the night barhopping from Lawn Qua Fong down the hill with the post 2:00am crowd to find ourselves among the shady streets of Wan Chai.

Our routine was typical in Hong Kong’s single ex-pat scene. Young, ambitious men consistently file from the banks that line Queens Road up the hill to grab a pint(s) and swap outrageous stories detailing the “next big thing” to hit the Chinese market.

The atmosphere feels charged…someone knows something. If five minutes gets you nothing more than PetroChina or the Guaco Group, you instantly move on. Everybody has an “in” so to speak. Every banker and rouge hedge fund manager knows an angle. You sense this scene must be a replay of Wall Street in the 1920′s before the SEC and men like Elliot Spitzer rode into town.

When the clock struck 4:00am and the band at Dusk Till Dawn started to slow, Ted and I decided it was time to hang our hats. So back up the hill we went…Staunton Street was our destination.

I dropped to my bed fully dressed. Two hours of rock hard sleep passed when I woke up with a thirst that only multiple pints of the infamous Stella Artois could produce. I stumbled into the kitchen and checked out the fridge. All the water bottles were gone. This was not good.

At that moment, I would have walked to Shanghai for a bottle of water. But alas, even in a city of seven million, there wasn’t a bottle to be found. The 7-11′s are literally seven to eleven.

Desperation took over. Reason bowed to emotion. I stared at the sink with a squinting eye…is the tap water that bad? What are the chances? I mean, how dangerous could it actually be? The Chinese have relied on this water for decades.

Every time I leave the United States, my father always warns me to not drink from the domestic water supply… For a man whose dedicated a good portion of his life to municipal water projects, I chalked up this cautionary counsel as nothing more than professional hubris. Because at that point, any liquid short of maple syrup would have sufficed.

So without hesitation, I flipped up the tap, inserted my plastic bottle, and took down 32 ounces of Hong Kong’s finest.

What relief. After a couple more sips, I marched back bed to sleep off the last few minutes of darkness.

In fact, those were the last few minutes of any sort of respectable comfort your humble editor would experience for quite some time. Within an hour I was sprinting for the bathroom. The intensity of the pain rivaled the moment I crushed my left kidney under the axel of a John Deere hay wagon a few years back. Words don’t do this agony justice.

I’m serious… Really, I’m not kidding. In retrospect, it’s quite comical. But after two straight days of 20+ trips to the bathroom, I started to get a tad worried. Four days passed, no relief. I had no choice. Back in the red taxi I jumped. The nearest Hong Kong hospital was the destination.

The doctor spoke no English…not even a hello. Imagine trying to tell him your name is Kif.

After five minutes of pointing to every orifice on my shriveled, pale stricken excuse for a living corpse, he nodded his head and smiled. “Glad you find it funny,” I said. He kept smiling. Bastard.

He said something in Cantonese and left the room. Two minutes later I had a pack of pills. Now bear with me. If a mere thirty-two ounces of the local tap water did this, who in their right mind would accept an unmarked bag of white pills from a non-English speaking man whose credentials as a licensed M.D. were nothing more than a white lab coat and a stainless steel clipboard?

Someone with a mild case of dysentery, that’s who! It couldn’t get any worse. I thanked him, handed over the co-pay, and headed for home.

By the kind grace of God the pills started to work. The paid receded. Seven days later I was walking the streets of Soho once again.

The point: Clean water is a scarce resource in many parts of the world, especially China. Even in a city as cosmopolitan as Hong Kong, something so common to Americans as clean running water is one part of the American dream most countries can’t import.

I say this because the rising struggle for potable water has the potential to escalate to a magnitude similar to the current geopolitical conflicts over energy security.

China in particular has major problems. As Financial Times writer and author James Kynge points out: “Streams and rivers are drying up all over the northern half of the country, and water tables are falling precipitously as well, many of them illegally dug, are sunk even deeper into dwindling reserves of groundwater. Altogether, some 400 our of 668 large Chinese cities are short of water, and the incidence of rationing is growing.”

And what water does exist remains highly contaminated. The Chinese industrial machine spews around six hundred tons of mercury into the air each year, accounting for nearly one-quarter of the world’s non-natural emissions.1

Chinese mercury emissions are so destructively ubiquitous that the United States Environmental Protection Agency has warned that a third of the nation’s lakes and a quarter of its rivers are now so polluted with mercury that children and pregnant women are advised to limit or avoid eating fish caught there. One-third of that mercury comes from China.2

Readers of The Economist may recall a small blurb in the December issue highlighting Beijing’s appetite to fund the world’s largest artificial rainmaking program. That’s right… the Chinese government has entered the business of controlling the weather. The method: “weather-modification offices” dispatch rocket-launchers and airplanes loaded with silver iodide directly into the dilapidated clouds themselves. Peppering these clouds with this particular mixture theoretically enhances the probability that rain droplets will form and fall on the parched Chinese soil.

The real fear for Chinese officials isn’t so much water to drink; but more importantly, they need more and more water to irrigate the massive food supply needed to feed roughly one-fifth of all humanity. Around half of China’s landmass is uninhabited, so what farmland they do have must be utilized to its full capacity.

Above all political and economic ambitions lay the fundamental need for domestic stability. China can’t afford another famine. You see, for many Americans, the sole Asian tragedy of the 1960s was the Vietnam War. But less we forget the famine that followed Mao’s Great Leap Forward claimed the lives of more than 30 million Chinese.

And the 1960′s famine piggybacked a similar disaster a mere twenty years prior when some three million peasants in Henan died of starvation.

While most pundits illustrate China’s burning desire to scour the earth for oil, most fail to mention the fluid natural resource the Chinese need even more: water.

For investors, the day when water stocks steal the headlines from energy stocks may not be too far off. For many, that may be hard to imagine…especially those who live in regions of the world where and endless supply of fresh running water is just a faucet away.

But for those whose history with drought and starvation in the last century alone entails the loss of life of nearly 40 million of its own people, potable water becomes just as precious as the air we breathe.

I’ve touched on this theme before…and you’ll see it come up time and again here and in other publications I’m sure. My recommendation at this point is to keep our eye out for potential solutions. Will the Chinese buy millions of acres of South American arable land? Will water infrastructure be the next big thing for multi-national’s like GE and Siemens? Who’s to say?

But one thing is for certain. The world conveniently churned along for many years without abundant stockpiles of oil. However, that same world has never survived a single year without abundant stockpiles of water.

Sincerely,
Christopher Hancock
January 19, 2007

P.S.: Last year in the water industry, there were nine major takeovers. This company, with its small $300 million market cap, is a perfect candidate to be next in line.

1 James Kynge, China Shake the World: A Titan’s Rise and troubled Future – and the Challenge for America (New York: Houghton Mifflin Company, 2006) pg 152.

2 Ibid

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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