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Tags: Martin Hutchinson

Five Ways to Profit From China's $585 Billion Stimulus Plan

By , Money Morning • November 11, 2008

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By Martin Hutchinson
Contributing Editor
Money Morning/The Money Map Report

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 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.]

News and Related Story Links:

  • Wikipedia:
    Three Gorges Dam.

  • ChinaDaily.com:
    Chuppies, China’s Yuppies.

  • China.org.cn:
    China to quintuple arable land use tax
    .

  • Money Morning Week Ahead Preview Story:
    China Stimulus, Troublesome Retail Earnings Point to Escalating Global Economic Woes.

  • Money Morning Market Analysis:
    Although “Hot Money” Flees China the Red Dragon Will Emerge From Financial Crisis Unscathed.

  • Money Morning Economic Forecasting Series (2008: Part XVII):
    Outlook 2008: Why Coal - the World’s Forgotten Fossil Fuel - is About to Double in Price.

  • Money Morning News Analysis:
    New Look General Electric Aims to Double its China Business by the Decade’s End.

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U.S. Automakers, Freddie Mac and Foreign Exporters Next in Line for Bailout Handouts
14 years ago

[…] might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve […]

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Jutia Group - Market Jitters & Political Critters
14 years ago

[…] might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve […]

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John
John
14 years ago

Re Vale as a supplier of iron ore. Please look at BHP, an Australian company – the largest mining company in the world and a major supplier, along with Rio Tinto, also Australian, to China.

Cheers, John

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Massive China Stimulus is Viewed as an Attempt to Help the West
14 years ago

[…] [Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald has spent more than two decades studying the Asian financial markets, and spends part of each year living in Japan. Fitz-Gerald is the editor of The New China Trader investing service, an affiliate of Money Morning. And last year, he headed a two-week investment tour into China, a sojourn that led to a multi-part Money Morning series about investing in China. Watch for Fitz-Gerald's 2009 forecast for the U.S. stock market, the latest installment of Money Morning's "Outlook 2009" economic forecasting series. Fitz-Gerald's forecast is scheduled to run tomorrow (Wednesday). For a related story on China investments elsewhere in this issue, please click here.] […]

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Robert
Robert
14 years ago

I would like some clarification on theses ADR's.

As I understand it, the shares are actually held by an American bank (American Depository Receipt), and not registered in the purchasers' name.

Is their any risk, to the purchaser, should the bank hit the wall.

In other words, I'm more concerned about the American situation than the Chinese.

Appreciate your insight.

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The Chinese Bailout: 5 Ways to Profit From China’s $585 Billion Stimulus Plan | Investment Advice and Investment Research with a Contrarian Point of View
14 years ago

[…] Note: Martin's original article can be found here. For Money Morning's latest online research, here's how to fully "crash […]

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Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009
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[…] Money Morning Special Investment Report: Five Ways to Profit From China’s $585 Billion Stimulus Plan. […]

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If Japan Bounces Back in the New Year, Investors Will, Too
14 years ago

[…] in “stimulus,” and with so many bad examples internationally (and others – such as China’s – so new that we can’t yet pass judgment on them), it seems inevitable that he will […]

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China rural development - against economy crisis
China rural development - against economy crisis
14 years ago

China actually would rely on domestic consumption to overcome the coming crisis, just like one the 3 meanings in 1997 financial crisis.
However, domestic consumption can't be easily promoted, SO stimulus package is intended to create domestic demands although it won't last for long.
suppliers of raw materials may benefit from infrastructure constructions, and workers' unemployment may be delayed.

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14 years ago

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[…] That stimulus money will largely go to infrastructure projects – low-income housing, water and energy projects, airports, disaster relief and new railroads. [Editor's note: Money Morning recently identified five way investors can profit from China's stimulus.] […]

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Jutia Group - Market Jitters & Political Critters
14 years ago

[…] That stimulus money will largely go to infrastructure projects – low-income housing, water and energy projects, airports, disaster relief and new railroads. [Editor's note: Money Morning recently identified five way investors can profit from China's stimulus.] […]

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14 years ago

[…] its rise Nov. 10, the day after Beijing announced an ambitious economic stimulus plan that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over […]

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[…] its rise Nov. 10, the day after Beijing announced an ambitious economic stimulus plan that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over […]

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[…] most recent push: An ambitious economic stimulus that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over […]

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[…] government also recently unveiled a $585 billion (4 trillion yuan) stimulus package that to boost investment in infrastructure projects, such as water and energy projects, airports, […]

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[…] government also recently unveiled a $585 billion (4 trillion yuan) stimulus package that to boost investment in infrastructure projects, such as water and energy projects, airports, […]

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