China denied it for years. And it wasn’t until April of last year that the communist nation finally came clean.

Finally, in the spring of 2010 — only after satellite images had been released of construction taking place — China officially told its Indian neighbor that it was building a major dam on the Yarlung Tsangpo River.

Chinese officials were quick to say they wouldn’t be diverting any water. Supposedly, the dam is only purposed to create electricity. I think that’s a farce.

Make no doubt about it. The most critical commodity for China’s economy isn’t oil, steel or even wheat. It’s water.

Few Americans realize what a luxury it is to turn on the faucet for a glass of clean water. More than one billion people each day don’t get enough water to drink or bathe in. Less than 3% of the world’s water is fresh and there’s no more of it now than there was a million years ago. What’s worse, more than 6 billion thirsty people must now share it.

Former United Nations Secretary-General Boutros Boutros-Ghali predicted the wars of the 21st century would be fought over water. I’m glad that so far, it hasn’t happened, but that may be changing.

The Tsangpo Dam that China recently admitted to building is one of five such projects Beijing is working on, ostensibly to meet its electricity needs. However, any one of these hydroelectric power projects will affect lives — and create tension — for millions of people downstream.

China has roughly 20% of the world’s population, a huge chunk of its industry and only 7% of its fresh water supply. It needs as much water as it can get. It’s predicted that China will see a water shortage of up to 201 billion cubic meters in the next 20 years. China’s shortfall works out to 53.1 trillion gallons — or roughly five times the amount of water the entire U.S. population uses in a year.

Not only is there simply not enough water, but the potable water the country has is unevenly distributed in a vicious drought-monsoon cycle. Existing shortages already cost China 2.3% of its gross domestic product each year.

China can remake its power system with new transmission lines, wind farms and solar panels. It can and has built highly efficient factories. The country can free itself from the shackles of communism, release political prisoners and embrace democracy. But without serious, proactive, nationwide efforts to conserve water, the country and its economic engine will, quite simply, stop growing.

We all know that no nation will sit idly by and fall victim to such an obvious and dangerous trend. That means if there are companies engaged in alleviating China’s water shortage, they’re sitting on a goldmine. Also bear in mind, the strategic water issues in China will also play out in India, so companies that cut their teeth resolving China’s long-term challenges will have a foot in the door working with India as well.

And that says nothing of the developed world and its need for water. My favorite game-changing stocks in this sector are primed to grow from the global scarcity of water, not just the Chinese challenges.

Action to Take –> Companies such as Tri-Tech (Nasdaq: TRIT) offer bright potential. The company is based in Beijing and helps manage water supplies. It has a hand in everything from sewage treatment to tracking reservoir levels, but it is still a tiny company ($90 million market cap), leaving plenty of room for growth.

If you want to profit from China’s need for water, starting your research with a Chinese-based water company is a no-brainer.

P.S. — Tri-Tech is a good place to start your research, but I haven’t yet checked the company stem to stern. For my Game-Changing Stocks readers, I covered one of my favorite plays that has been tackling the Chinese water shortages since 1994. It’s little wonder why from 2002 through 2009 the stock returned 826%. You can see all the details in my latest report, “The Hottest Investment Opportunities for 2011.”