The nation's urbanization and economic growth will require huge amounts of electricity and water, which will exacerbate its water crisis, according to global sustainability investment specialist RobecoSAM.
The firm said that China's renewable water resources per capita stand at only about one-quarter of the global average.
The average European consumes 150 to 400 liters of water a day for personal use, while the figure for the United States is 560 liters. But the figure is only 130 liters in China.
The urbanization rate in China has increased by an average of 2.9 percentage points per year over the past decade. Every percentage-point increase in the urbanization rate could lead to an additional 1.6 billion cubic meters of water demand a year, according to the Chinese Academy of Sciences.
In addition to growing demand for fresh water, the volume of waste water discharge in China has increased by an average of 7 percent per year over the past decade.
Water challenges in China are exacerbated by geographical supply imbalances and demand. For one thing, water is more abundant in the south than in the arid north, where agriculture and the country's most water-intensive industrial sectors such as mining and petrochemicals are concentrated, according to RobecoSAM.
For another, about 67 percent of China's energy production is in areas that are facing severe water scarcity, including Shanxi, Shaanxi provinces and Inner Mongolia and Xinjiang Uygur autonomous regions, which together hold 74 percent of China's total coal reserves but only 7 percent of the water resources.
The low cost of water to consumers is a universal problem when it comes to encouraging conservation. But China increased integrated water tariffs at a compound average growth rate of 5 percent between 2007 and 2013.
This is a more sustainable way to secure water resources in the long run, said Ronnie Lim, senior investment specialist at RobecoSAM.
Water also offers many investment opportunities. The Chinese capital market has responded positively to the water sector, the firm said. And both large State-owned enterprises and private-sector companies have moved into the industry.
Most public companies will focus more on utilities, including those that supply water and provide waste water services to residential, commercial and industrial sectors.
Private-sector companies have played a very important role in the areas of goods and chemicals, such as valves, pumps and integrated water treatment systems.
Other opportunities lie in the construction and materials sectors, which refer to the infrastructure of pipelines, reservoirs, and the like, as well as the quality and analytics sector, which refers to companies that develop and sell products and services linked to water quality monitoring and testing, systems to treat at its point of use, and water resource protection.
The Chinese government has been committed to water protection and treatment. In 2012, the State Council approved the Water Pollution Control Plan of Key River Basins, running through 2015, to invest a total of 346 billion yuan ($55.75 billion) in more than 6,000 projects.
During this period, the investment amount for national industrial waste water treatment reached 129.1 billion yuan, up 57.37 percent compared with the years 2006-2010.
In April, Beijing released the Action Plan for Water Pollution Prevention and Control. According to the plan, 70 percent of the water in China's seven major river basins, including the Yangtze River and the Yellow River, must be classified as being in "good condition".
That means the water is clean enough to swim in by 2020, rising to 75 percent by 2030. The total investment into water treatment will be as much as 2 trillion yuan.
