The $585 billion (RMB4 trillion) stimulus package that China announced Sunday may or may not help China's economy. But with investments in low-income housing, water and energy projects, airports, disaster relief - and $100 billion for new railroads - over the next two years, this financial package provides oodles of opportunities for investors.
There is no doubt China needs infrastructure. Now the world's fourth-largest economy, China has grown so rapidly that many of its services are stretched beyond belief. Equally, it is not so certain that the government knows what infrastructure to build, or that it can be built, without hopeless corruption. For instance, the Three Gorges Dam became a global watchword for waste and environmental destruction, while the fancy toll roads built between major cities are still very underutilized, because the tolls are too high for all but the rich. In the stimulus package, more than $100 billion is earmarked for railroads, a seemingly 19th Century priority at the beginning of the 21st.
(As we reported in a market analysis story this past summer, General Electric Co. (GE) said it expects its business in China to double to $10 billion a year by 2010 - making that country a key element of the struggling U.S. industrial giant's strategy to offset its struggles here in its home market by pursuing business in faster-growing markets abroad. GE also announced that it would be providing China with 300 of its most modern locomotives between now and 2010).
Even if the Chinese economy had slowed sufficiently to warrant stimulus, there was a better way of getting it. For a decade, China has enjoyed unbalanced growth, with excessive rates of savings and investment and inadequate consumption. This has resulted in the huge buildup of Chinese foreign exchange reserves, now more than $1.9 trillion -the largest in the world, both in relation to the economy, and in real terms.
To rebalance the economy and maintain growth, China actually needs more domestic consumption. While Bush-style cuts in high-level income taxes would benefit only the "Chuppies" - China's newly emergent yuppie class - there are other taxes that bear heavily on the economy and could usefully be cut. The farmland usage tax, for example, levied at 13.6 cents to $1.36 (one to 10 RMB) per square meter in 1987, was late last year boosted to 68 cents to $3.40 (five to 25 RMB) - thus increasing what was already a huge imposition on the poorer farmers, whose margin above subsistence is very limited, only to be made even more so by such regressive taxes. Thus a Chinese government that truly had the welfare of its people at heart would have engaged in tax cuts, not grandiose public sector infrastructure projects.
There is considerable danger of such a massive Chinese infrastructure program leading to inflation. Assuming that China uses $585 billion of its foreign exchange reserves to fund it, increasing the domestic supply of Renminbi, this will increase its M2 money supply by almost 10%
However, The People's Daily yesterday (Monday) stated that this massive financing package would have a positive effect on "cement, iron and steel producers." The capital outlay should also be a boon for China's trading partners: Not so much its three largest trading partners - Japan, South Korea and Taiwan - as they primarily manufacture components that are assembled in China for re-export to the West, or supply manufactured goods, which would benefit from a consumer-led spending surge, rather than this government-led stimulus.
However, suppliers of raw materials - which have already found the long Chinese boom to be a bonanza - can look to benefit further.
And that brings us to some possible profit plays that should rise with the tide of this $585 billion infusion:
updated Nov 11, 2008
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