Three plays on green China

After 20 years of spectacular growth, China became the world's third-largest economic power, with GDP growing 13% year-on-year in 2007. But momentum began to weaken last year, largely due to tighter fiscal and monetary policy. Export growth has also been hit by the financial crisis and the downturn in developed countries. In response, China's central bank has slashed interest rates since September 2008. The government has also introduced measures, such as a $586bn stimulus package, to boost the economy. These moves are intended to speed up China's long-term aims to steer the economy from export-led growth towards broader-based, domestically driven activity.

I aim to invest in companies that are geared to long-term trends in sustainable environmental, social and economic growth in China. Take China South Locomotive and Rolling Stock (HK:1766). China has committed $1 trillion to developing transport infrastructure between 2006 and 2010, with $193bn allocated to railway-based projects over the next five years. This is the most significant railway undertaking in the world today. The stimulus package also included a $110bn budget increase for railway construction over the same five-year period. The budget for buying new trains was also raised by about 67% for the next four years.

This should be good news for China South Locomotive, China's largest train manufacturer. It is one of only two players in the field and so is likely to win a significant chunk of government contracts. Locomotives are being upgraded to models with more capacity and that use less energy. China South is an innovator in this area.

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China has set an ambitious target to increase wastewater treatment by 2010. As a result, many local governments are likely to speed up plans to build new sewage treatment plants. The government is also pushing for environmentally friendly ways to dispose of solid waste. New tax incentives came in from December 2007 to give environmental-protection firms tax cuts or exemptions for three years. Since 2003, China Everbright International (HK:0257) has turned itself into an environmental protection and waste management firm from a conglomerate with businesses ranging from timber products to property development. It now has a far clearer focus and should gain from this environmental drive. It builds wastewater treatment and waste incineration plants, and is developing new technology such as waste-to-energy power generation and recycling electronic products.

The government has promised to substantially raise spending on China's healthcare system. Reforms focusing on improving rural services are expected to cause a profound change in the way the industry is structured. Shandong Weigao Group Medical Polymer (HK:8199) is a leading Chinese medical devices maker. Its products range from syringes and blood bags to orthopaedic devices. Its single-use and biodegradable products are increasingly seen as environmentally friendly ways to protect against contamination. Shandong is likely to expand in rural areas through acquisitions, using the funds it received through the sale of 15% of the company to Medtronic. The US giant became its strategic partner and they now have a joint venture to distribute both companies' orthopaedic products in China.

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The stocks Philip Ehrmann likes