Chinese Stimulus Will Stay to Achieve 8% GDP Growth

Last Thursday, the world learned China achieved 8.9% in Q3 based on year over year, while for the first three quarters the nation achieved 7.7% GDP growth year over year. Having said that, China needs to achieve at least 8.9% in Q4 to reach their average 8% growth for 2009, which means the massive stimulus policy needs to stay for Q4 at least. It was reflected recently in a speech by Premier Wen Jiabao. Chinese Premier Wen Jiabao pledged to continue his government's aggressive stimulus efforts on the World Economic Forum meeting in China last month. The Chinese leaders know that stimulus needs to stay well into 2010 to sustain the growth before the economy can grow itself.

China's $700B stimulus was largely spent on building infrastructure, such as the high speed railway across the nation. As a result, steel demand, hence the metal coal from overseas are sky rocketing. Both Peabody Energy (BTU) and Alpha Natural Resource (ANR) are seeing strong demand from China. The metallurgical coal demand is growing as China uses it to produce steel domestically. China is not importing steel from overseas, which is reflected in the weak demand in international steel names, such as US Steel (X), Nucor (NUE) and ArcelorMittal (MT). Building the high speed railway and other infrastructure will keep the demand of raw materials such as metallurgical coal growing in the next 5 years.

China is also spending aggressively on renewable energy. The nation sees the industry as an opportunity to surpass western nations in the 21st century. So far 270GW from solar, wind and nuclear power is planned to reach China before 2020. Many Chinese companies in the space have seen domestic demand picking up, such as GE (GE), Yingli Green (YGE), Solarfun Power (SOLF), Suntech Power (STP), JA Solar (JASO) and Best Solar. As a result, Chinese solar names will out perform US names such as Sunpower (SPWRA) and First Solar (FSLR).




Disclosure: Author is long GE, FSLR, SOLF

Comments

[bluesky123]

China is the biggest car market in the world. It passed the US this year. There are 130 billionaires in China, up from 101 last year. Asia will have more millionaires than the US before 2013. Asia is already the top market for US and European auto brands. GM's sales in Asia are up 74% in the last 12 months. Rolls Royces are flying out the show room. Asia is growing very, very fast.

www.nytimes.com/2009/1......

2009 Oct 26 01:26 PM

[Graham and Dodd Investor]

China can create almost any GDP number they want by spending enough. But there's "good" growth and "bad". growth.

2009 Oct 26 01:27 PM

[Mad Hedge Fund Trader]

nnd Two of my favorite picks for the year blasted through to new highslast night, the Hong Kong ETF (EWH) and the China ETF (FXI). Even Bonois singing about Chinese stocks going up. The FXI is now up astaggering 136% from the March lows, compared to a measly 65% for theS&P 500. Looks like those decades of eating fish heads and rice arefinally paying off for me. Have you ever noticed how the qualityinvestments rise much faster than the dodgy ones over time? At leastthe global wave of liquidity is surging into the good names, not onlyjust the crap, as it is here in the US. Jim Rogers, are you listeningyet?

2009 Oct 26 02:01 PM

[tripleblack]

Sky hook economics on every side, everywhere you look. The American government is doing the same thing, just with less success and competence.

2009 Oct 26 02:32 PM

[Erichz]

The Chinese government seems to be doing all the right things to keep their economy growing. Their stimulus is targeted and ensures that domestic consumption will increase and the money not be exported. It is also nice that they have a huge capital surplus, unlike the US, to fund future growth. I am getting more bullish on China all the time.

2009 Oct 26 04:45 PM

[einstein p fleet]

China is building a coal plant each and every week, plus building cars. ANR seems like a good bet --- gives you two ways to play the China story.

2009 Oct 26 08:58 PM

[Dan Feldman]

“China's $700B stimulus?” Every article I have read has stated that the size of the stimulus was 4 trillion yuan or $586 billion USD. Where does this figure originate?

The article above states that “the Chinese leaders know that the stimulus needs to remain well into 2010 to sustain the growth before the economy can grow itself.”

But how exactly will the economy grow itself?

Besides the massive government investment, the other major pillars of the economy are household consumption and the difference between exports and imports.

First, household consumption has been decimated since the crisis began.

According to Huang Yasheng, a professor at Massachusetts Institute of Technology and the author of the recently published book Capitalism with Chinese Characteristics, since the start of the financial crisis the following has occurred.

* households have increased their consumption, but not nearly as fast as government and (mainly government-controlled) corporations.
* the state may have increased its consumption by between 30 and 40 per cent.
* household consumption has probably fallen to a world-record low of about 30 per cent of GDP.

Until China's leadership makes the painful and politically difficult decisions necessary to restructure the economy, household consumption will be grossly insufficient to sustain a vibrant domestic economy. While a researcher in the State Council has stated that expanding domestic consumption must be the core of economic restructuring, no plans have been discussed yet.

Second, Jiang Jianjun, a deputy director with the Ministry of Commerce's Department of Foreign Trade, stated today that two to three years are needed before China's imports and exports regain pre-crisis levels.

Therefore, China will not have a self-sustaining economy before 2011, and possibly not until 2012. And if Beijing continues its reluctance to make the difficult political choices necessary to restructure the economy, China may need to continue its state-corporatist investment led economic model for even longer.

Unfortunately this government investment led model is unsustainable. Already observers have warned of asset bubbles forming in real estate and stocks. Continuing these over loose lending practices will eventually yield the flotsam of a fleet of bankruptcies, bad bank loans and overcapacity.

Readers interested may find a more detailed examination of how the stimulus has strengthened state-owned corporations and government bureaucrats at the expense of household consumers here: www.chinamanufacturing...

2009 Oct 27 11:46 AM

[Alphameister]

Hard to reconcile the assertion that household consumption is declining with the more demonstrable reality of extraordinary growth in car sales in China.

While China's central planners might not be handling this transition optimally, they seem to be doing a better job than their counterparts in most other countries. And they also have the financial wherwithal to persist with stimulus a lot longer than most other countries can do.

2009 Oct 27 02:01 PM

[einstein p fleet]

PCX reported strong earnings, which would lead me to believe that ANR is a strong buy under 36 --- they report on November 2 and we'll get to test the theory.


On Oct 26 08:58 PM einstein p fleet wrote:

> China is building a coal plant each and every week, plus building
> cars. ANR seems like a good bet --- gives you two ways to play the
> China story.

2009 Oct 27 02:18 PM

[Mrudula Shah]

Growing too fast through industrialization has its serious drawbacks. Also, economically and politically, sustainability is important. People who see China in bright colours to-day, may not see it that way two to three decades from now and may need to reassess their thoughts as time passes. In my opinion, a nation does not grow if it does not grow philosophically and spiritually. Real happiness and wefare for people in any nation do not come alone from material or monetary progress alone. China will have to realize that sooner or later. Bureaucracy and central planning won't sustain themselves.

2009 Oct 28 11:28 PM

[Dan Feldman]

There may be extraordinary growth in car sales, but it is important to keep in mind that just 5 years ago barely any private citizens owned an automobile. I'm not certain of the precise statistic, but something like 60% of the drivers on the road have been driving for less than a a year or two. Extraordinary growth is easier at the beginning. China has almost no market for used cars. But even with the extraordinary growth only a small percentage of the Chinese own a four wheeled automobile, even in the cities. Car owners are mostly members of the upper class and upper middle class urban elite. As Michael Pettis argues in an October 16 Seeking Alpha article, very powerful economic policies have biased state-owned production and urban residents at the expense of household consumption and rural residents. China is a country of 1.3 billion people, but only about 500 million urban residents have any hope of significantly influencing household consumption. The remaining 800 million farmers in the countryside are still waiting for their promised prosperity, particularly the 300 million still living in poverty.

Household consumption is declining as a percentage of GDP. Prior to the crisis in 2008 it was already one of the lowest in the world at 40%, now in Oct 2009 it has dropped to a world record low of just 33% of GDP.

Household consumption is growing, but government production is growing at a much faster rate making the discrepancy between consumption and production larger with each passing year.


On Oct 27 02:01 PM Alphameister wrote:

> Hard to reconcile the assertion that household consumption is declining
> with the more demonstrable reality of extraordinary growth in car
> sales in China.
>
> While China's central planners might not be handling this transition
> optimally, they seem to be doing a better job than their counterparts
> in most other countries. And they also have the financial wherwithal
> to persist with stimulus a lot longer than most other countries can
> do.

2009 Oct 29 12:19 PM