Shortages of potable water are prompting China to open up to private participation in the sector and providing new profit channels for foreign companies.

Patrick Decker, chief executive officer of Xylem Inc, a global water technology provider, said that the United States-based company has "a very active pipeline of companies in different markets", including China, that are possible acquisition targets.

"We have the financial strength to do acquisitions but we have to make sure they are smart acquisitions, which has long been a priority for us, as it is an enabler for growth in China," said Decker, who's also president of the New York Stock Exchange-listed company.

Xylem is just starting to evaluate what those good deals are, he said.

Decker said that first-quarter sales rose 18 percent in emerging markets and 3 percent around the world. The company recorded "steady double-digit growth" in China.

He said the toughest challenge in China's water sector comes from insufficient clean water supplies, especially in third- and fourth-tier cities.

"By focusing on reducing greenhouse gas emissions and maintaining energy efficiency, China could prevent industrial water contamination," he said.

With almost 20 percent of the world's population but only about 6 percent of global freshwater resources, China's water sector is a high priority area for the 12th Five-Year Plan (2011-2015).

Under that plan, the nation will allocate about 1.06 trillion yuan ($170.1 billion) in total to upgrade water treatment facilities and industrial water and waste water treatment.

Industry leaders are investing heavily in research and development to develop high-value, low-cost products.

This month, industrial equipment maker Siemens China signed a strategic agreement with WPG Co Ltd, a water technology company, to develop products in the water treatment sector.

Li Dong, Siemens' vice-president of industry sales in China, said that the company anticipates more cooperation with Chinese companies.

"Water is a long-term investment and our alliance with Siemens is our commitment to the market, which is not a quick money-making sector," said Yang Feng, chairman of the board at WPG (Shanghai) Co Ltd.

He forecast China's water sector will grow by a double-digit annual pace as companies in the sector expand into third- and fourth-tier cities and existing facilities are upgraded.

But experts warned that although China has opened up to private involvement, the public-private partnership structure for projects has been used for many years in China. Foreign companies will have to play by the rules and allow for some time before they can start making a profit.

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