China's Future Hindered By Power Shortages

For many investors, China represents the cream of the crop with regards to emerging markets. After all, the nation possesses all the qualities of success. Blistering growth built on the back of rising incomes, new consumerism and expanding population are all hallmarks of the Asian Dragon. Exposure to the nation via funds like the SPDR S&P China (NYSE:GXC) have become portfolio must-haves. However, last summer's grand nine-day traffic jam and this past May's epic drought highlight China's need for continued infrastructure improvements. Without the proper infrastructure, the nation's talents and potential will go unutilized. Most recently, problems with China's electrical grid have underscored this problem further.

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Rolling Blackouts
China, like many emerging market nations, is facing a power crunch. As the nation's citizens crave their newly found middle-class lifestyle and all the trappings that come with it, energy consumption continues to rise. The nation consumed over two trillion kWh worth of electricity during the first six months of 2011. That's a 12.2% increase versus the same period in 2010. To support its energy needs, China has emerged as the largest consumer of coal, burning nearly 10 million tons of the fuel source each day. China's usage of oil and natural gas also continues to climb. However, despite the rise in energy demand, China's citizens are still faced with a problem.

According to China's Electricity Council, the nation will face a severe 70 million kilowatts power shortage in 2013 and over the next five years these shortages will be harsher and more widespread. Already the nation has experienced widespread rolling blackouts. In the province of Zhejiang, which boarders Shanghai to the north, the demand for electricity has produced a 2- to 3-million kilowatts shortage each day. The local government has been rationing electrical power since early this year. The key central provinces of Hunan, Jiangxi and Chongqing have already introduced power usage curbs in March, and more recently Hubei has begun to impose restrictions.

The head of China's energy administration, Liu Tienan, recently spoke about the power problems by saying, "Owing to excessively heady demand, even with production and supply growth in the double digits, supplies of coal, power and oil in some regions are still tightening, and future trends give no grounds for optimism." (For more on China's investment opportunities, see Investing in China.)

Building-Out China's Grid
In order for the nation to succeed, new sources of supply along with electrical grid improvements must occur. The recent blackouts and shortages highlight that need. For investors, playing that need could be a great pathway to China. The EGShares China Infrastructure (Nasdaq:CHXX) or PowerShares Emerging Markets Infrastructure (NYSE:PXR) make ideal over-arching plays on theme. However, there are many individual ways to add exposure as well.

The recent market rout has provided investors an opportunity to add some of the largest industrial electrical equipment manufacturers to a portfolio. The trio of ABB Limited (NYSE:ABB), Siemens (NYSE:SI) and Eaton (NYSE:ETN) all provide equipment (such as transformers) needed to build-out an energy efficient electrical grid. All three stocks sit well below their 52-week highs and provide juicy dividends. Similarly, General Cable (NYSE:BGC) is still the leader in transmission wires and cables.

Despite the world's hesitation towards nuclear energy in the wake of Japan's crisis, China is still on track to add nuclear capacity at a quick pace. The nation has plans to add 10 new reactors every year, for the next 10 years. The Market Vectors Nuclear Energy ETF (NYSE:NLR) tracks a basket of 25 different nuclear-energy related companies. This includes a healthy dose of uranium miners and nuclear energy infrastructure stocks such as Areva (OTCBB:ARVCF). The ETF represents a deep value play on the future of nuclear energy within the nation.

Finally, global construction firms such as URS (NYSE:URS) and Foster Wheeler (Nasdaq:FWLT), which tat specialize in building power plants and energy generation, will continue to see their fortunes rise within emerging Asia. (For related reading, see Investing In Emerging Market Debt.)

The Bottom Line
While China's long-term promise is certainly great, its recent problems with its electrical grid and power demands are hindering that promise. In order for the nation to fully realize its potential, vast improvements to its grid network need to occur. For investors, playing that build-out could be a great opportunity. The previous stocks are just a few examples of how to gain exposure. (For more on Asia, see Introduction To Asian Financial Markets.)

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