By Jason Simpkins
Stocks surged yesterday (Wednesday) after it was revealed that Chinese Premier Wen Jiabo would announce new stimulus measures on top of the $585 billion (4 trillion yuan) package introduced in November.
"This is just evidence of what we've been saying all along about China's economy, the rest of the world is just finally catching on," said Money Morning Investment Director Keith Fitz-Gerald. "While the rest of the world remains focused on band-aids, China remains focused on growth."
Premier Wen is expected to make the announcement today (Thursday) when he appears at the opening session of the National People's Congress.
"In Premier Wen's report… there will be an announcement of a new stimulus package," Li Deshui told reporters in Beijing.
Analysts anticipate the original stimulus package will be expanded to as much $1.2 trillion (8 trillion yuan) – more than double the infusion that was announced last fall.
"Looked at from the perspective of demand and financing capacity, I don't think it will be a big problem to get to 7-8 trillion yuan," Mingchun Sun, chief China economist for Nomura International PLC, said at a Beijing summit last month. "It could be even higher."
Chinese stocks surged on the news, with the Shanghai Composite Index soaring 6.12%, to close at 2,198.107.
"," . analyst Chen Huiqin told Reuters. "The index might be volatile but it is still likely to touch 2,300 points during the session, given hopes for an economic recovery and the possible expansion of the stimulus plan."
Major global infrastructure companies climbed on speculation that additional infrastructure spending would be a key focus of the plan, driving foreign indexes higher.
Britain's FTSE 100 Index added catapulted more than 133 points, or 3.8%, to close 3,645.87. Germany's DAX Index jumped 200 points, or 5.4%. Even the Dow Jones Industrial Average managed to break a five-day skid, soaring 150.06 points, or 2.2% to close at 6,876.08.
The Peoria, Ill.-based Caterpillar Inc. (CAT), the world's largest producer of construction and mining equipment, climbed more than 13% to close at $25.44 a share yesterday.
Prices for commodities – such as oil – responded well, fueled by speculation that demand in China would increase. Light, sweet crude for April delivery rose $3.73 a barrel to settle at $45.38 on the New York Mercantile Exchange, its highest close in six weeks.
"China is key," Bill O'Grady, chief markets strategist at Confluence Investment Management LLC told Bloomberg News. "They are talking about doing the right things to boost growth. An additional stimulus program will be good for commodities, such as oil and copper."
Reuters cited an unnamed official at the National Development and Reform Commission as saying additional spending on infrastructure and manufacturing would be introduced. Beijing has been flooded with more than $2 trillion ($16 trillion yuan) in infrastructure project proposals since announcing its first stimulus package in November.
Beijing would also spend more on welfare to strengthen its social safety net and encourage more domestic consumption.
Skeptics have been critical of China's stimulus measures for failing to spur domestic demand. That failure has locked Japan into a decades-long malaise from which it has never recovered, which is why China must avoid the same misstep, experts say.
"Building more factories will not solve the problem," He Fan, an economist at the Chinese Academy of Social Sciences, told The Financial Times.
Beijing needs to increase spending on social services and deregulate parts of the service sector in order to boost domestic consumption, He says.
But recent data suggests that an economic recovery in China is already underway. China's official purchasing manufacturing index (PMI) rose to 49 in February, still indicative of contraction, but a marked improvement over January's 45.3 reading. The index hit a record low 38.8 in November.
"The continued rise in the PMI confirms our view that an economic recovery is already underway," Nomura International wrote in a report.
Credit also appears to be loosening. Chinese banks extended $160 billion (1.1 trillion yuan) in new loans last month, Market News International reported Tuesday, citing an unnamed senior banking source. That would be less of a slowdown than expected from January's record $237 billion (1.62 trillion yuan), Reuters reported.
China's manufacturing index rose to 51.2 in February from 45.5 in January and the new-order index climbed to 50.4 from 45. A measure of export orders jumped 43.4 from 33.7 in January, and the nation's employment index went from 43 to 46.1 – the first increase six months, Bloomberg reported.
Some analysts are skeptical that the rebound is sustainable. If nothing else, however, Beijing has demonstrated how committed it is to maintaining an economic growth rate of 8% for the year.
"The parliament session has sent a signal to investors that the government is willing to be flexible about policies to aid the economy," Xiangcai Securities Co. Ltd. analyst Li Shiming told Reuters. "The government seems ready to invest any amount of money to aid the economy."
News and Related Story Links:
- Financial Times:
Fresh stimulus expected in China
- Huatai Securities Co. Ltd: .
Xiangcai Securities Co. Ltd.