After months of sub-par economic data, the Chinese economy (
FXI
,
quote
) finally looks poised to recover after Beijing announced a
massive infrastructure spending package
late last week.
[caption id="attachment_73141" align="alignright" width="300"
caption="After the infrastructure announcement, there was a buying
frenzy in Chinese equities"]
[/caption]
As a result of the global financial slowdown, the Chinese
economy has slowed to its lowest levels in years. According to the
most recent figures, growth is down to 7.6%. While this rate would
be a boon for most countries, in China, anything less than 8% is
likely to threaten political stability: a concern the Communist
Party is eager to obviate at a time of political transition.
The announcement of this estimated ¥1 trillion ($158 billion)
stimulus package -- although Beijing was loathe to refer to it as
such -- looks to reverse the downward trend in the country's growth
rate. According to Beijing, the funds will go towards the
construction of new infrastructure: urban rail, highways,
waterways, and waste management projects.
For the short-to-medium-term health of both the Chinese economy
and individual Chinese equities, this announcement is indeed a
bullish indicator. The Shanghai Composite rallied a remarkable 3.7%
in one day, indicating that confidence may be returning to the
Chinese markets
after months of consistent underperformance
.
Although government-funded infrastructure spending isn't
sustainable over the long-term, now is apparently not the ideal
time to make the transition to a consumption-based economy given
global economic struggles. The aforementioned investment in the
country's infrastructure will boost a number of industries that
have struggled recently.
As a result, a number of Chinese equities and developed
multinationals with exposure to China may look good. Stocks like
machinery maker Caterpillar (
CAT
,
quote
) will be increasingly attractive. Stocks with a large exposure to
the price of commodities that have dropped as the result of
decreasing Chinese investment in infrastructure like Chalco (
ACH
,
quote
) and
VALE
(
quote
) could see near-term upside as well.
Finally, because these measures are unlikely to have a
discernible affect on data for a few months -- economists and
observers predict that the turnaround in the Chinese economy will
begin in earnest in
either 4Q 2012 or 1Q 2013
-- there will be plenty of opportunity for investors to jump into
these names.
Disclosure: Author's family is long CAT and VALE
