China Still Looks Like the Best Global Bet

Local governments have already established plans for increased infrastructure investment, only to be told to put a brake on plans by Beijing because of fears of economic overheating. Those plans have now received a green light, and projects are starting up throughout the provinces. Shandong and Guangdong each have plans to spend more than $100 billion in local profits, while Beijing, Hebei, Sichuan, Zhejiang and Chongqing plan to spend $40 billion to 80 billion in their provinces as well. To keep that spigot open, the central government will need to re-authorize the legality of local municipal bond markets -- a move which is expected to come within the next few months.

This spending by local governments will start the ball rolling, but it is the massive central government initiatives that should really catalyze growth, starting next spring or summer. The government's primary focus appears to be on railways and subsidized housing, which should provide robust demand for a host of ancillary industries such as steel-making and financial services.

And the Chinese government will still have plenty of financial resources to keep stimulating, as net debt is just 17% of GDP. The company could double that percentage and still remain financially sound. The alternative if repatriating nearly $2 trillion in foreign currency reserves, as it would likely lead to a radical strengthening in the yuan, which is a political non-starter.

The government is also taking a number of other steps to boost the economy. In just the past 30 days, it has:

• Abolished export taxes on some steel, chemical and food products while raising export tax rebates on nearly 4,000 goods.
• Announced plans to spend more than $150 billion to accelerate rebuilding efforts in the Sichuan earthquake region.
• Cut benchmark one-year lending rates to 6.66% (and is expected to keep cutting rates another 100 to 200 basis points).

All of these actions should start to goose growth by the spring, and that could help to inspire corporations to start investing again and banks to start lending again. Chinese banks remain very healthy, with a 70% loan-to-deposit ratio, the lowest in Asia. Non-financial Chinese corporations have, on average, net debt-to-equity ratios below 35%, while that figure is closer to 50% in most major economies. Lastly, Chinese households have been building their savings and sport very strong balance sheets.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.