Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Profit from China's $586 Billion Economic Stimulus Package

Companies / China Stocks Nov 11, 2008 - 07:25 AM GMT

By: Money_Morning

Companies Best Financial Markets Analysis ArticleMartin Hutchinson writes: The $586 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 Money Morning 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% [ Editor's Note : One media report stated that $145 billion of the $585 billion was to come from Beijing, with the rest coming from increased investment by state-run companies, bank lending or bond sales by local authorities. For more information, check out this related news story on China's $585 billion stimulus plan located elsewhere in today's issue of Money Morning ].

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:

  • Anhui Conch Cement (Pink Sheets: AHCHF ) is China's largest cement producer – hence, it's certain to benefit from a major infrastructure program of this kind. Be careful, however: It's quoted only on the “Pink Sheets,” and is trading on 17 times earnings.
  • China Railway Construction (Pink Sheets: CWYCF ) is China's largest construction group, with a special expertise in railroads. Again, it's traded on the Pink Sheets, this time at 31 times earnings.
  • Yanzhou Coal Mining Co. Ltd. (ADR: YZC ) is an energy supplier that should profit greatly from the additional infrastructure investment. It's much-better priced than the two predecessors, trading at only three times earnings and has an alluring dividend yield of 4.3%.
  • Huaneng Power International Inc. (ADR: HNP ) is a top China energy producer that's been generating losses lately due to high coal prices. But it's likely to increase output and profits with the economic expansion that should follow the massive infusion – and the 9.3% dividend yield is rather electrifying, as well.
  • But a big winner from China's infrastructure boom (don't forget, $100 billion in railroad investment) is Brazilian iron ore producer Vale (ADR: RIO ), which has increased its prices to China twice in 2008, and that's now actually holding back supplies while the Chinese market rebalances. China is a huge importer of iron ore, its imports will increase with heavy infrastructure investment, and Vale is the world's largest supplier. Best of all: With a Price/Earnings ratio of 4.3 and a dividend yield of 4.2%, Vale's shares are not at all expensive.

[ Editor's Note : With the U.S. financial markets in tatters from the global credit crisis, Money Morning and its affiliated monthly newsletter, The Money Map Report , have together trained their profit-seeking sights on markets beyond the U.S. borders. For instance, just check out this new report on a Wisconsin-based company we've discovered that's posting quarter after quarter of earnings surprises - while the rest of Wall Street tanks. Not only does this company have a lock on China - the fastest-growing market on the planet - this corporate gem is also riding the profit wave of the most-powerful global trend that we're following right now. If you act on this opportunity now - as an added bonus - you'll also receive a free copy of investing guru Jim Rogers ' best-seller, “ A Bull in China ,” which includes full research reports on that country's key profit plays .]

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in