China Watch: No Speed Bumps in Infrastructure Race

TAIPEI -- Almost anywhere you go in China, drills buzz, hammers thump walls and scaffolding towers into the sky while hundreds of migrants from the countryside cluster around the dusty gates of work sites slurping down noodle bowls to be on time for the next shift.

Much of that gritty, noisy construction gets plowed into private projects. But a whole lot is also building airports. Low-cost housing has sprouted as a state priority since 2010 to ease impacts from a surge in commercial property prices. Highways and railways are growing in length, width and number, as any tourist can see.

Overseas equity investors, get on board.

Wait, haven't Chinese officials said they want to ramp down their economy's attention-grabbing economic growth to rely less on investment, and isn't public works construction a major source? The state-driven shift from China's reliance on exports and investment to an economy led by consumers will supposedly slow GDP growth to 7.5% this year from 9.2% last year.

But high on a list of reasons to be skeptical of the slowdown rests the steely fact is that China does not want to stop building. Government agencies can use new infrastructure to build empires and prove their might before an easily awed public. State-invested, herculean-scale builders such as China State Construction Engineering (601668.SS) and railway contractor China Railway Construction (1186.HKG) make money at the same time.

Throughout history, the Chinese have seldom hesitated to tear down and rebuild stuff, often on the personal whims of new leaders. Nothing has changed.

But more importantly, China can't stop building without dropping some of its socio-economic goals that are more sacred than fine-tuning economic growth formulas. It wants the historically poor western regions to advance, explaining the push to open airports and railways lines in places as far off as Tibet.

Beijing hopes the low-cost housing starts to ease a gnawing wealth gap. Railway and telecom projects help ship goods from coal to Web conference signals around the country, all ideal for long-term economic development.

Expressways are already on the road to reaching 100,000 kilometers by 2020, up from 60,000 in 2008.

Infrastructure in China stands at an unusually high 9% of the GDP. As it's pretty hard to hide behind the in-your-face mega-projects, Chinese officials have reformulated their formula: "At a time when external demand shows no signs of improving and domestic consuming habits need time to adjust, well-planned infrastructure investment seems essential, if not the only option for China to boost its sagging economy," the official Xinhua News Agency said last month.

No wonder China got its most-ambitious-ever high-speed railway plan rolling over the past five years and last month announced that it would build 70 new airports plus expand another 100 by 2015. China will speed spending on roads, utilities and more railways to boost growth, the official China Securities Journal adds.

Get ready for an infrastructure boom by year's end, warns Barclays Capital Asia regional economist Wai Ho Leong.

"There is a growing acceptance that after the leadership transition in September, the new administration would unveil more ambitious spending plans," he says. "Corporate planners are now preparing for the resurgence."

So new infrastructure will keep trucking along. But in case something like the debts owed by state-owned developers or unforeseen macroeconomic snags force China to hit the brakes at home, consider Beijing's boom frontier in Africa.

A "concentration of projects" are going up in Angola, Nigeria and Sudan, to name three of 35 African countries invested by China, says the Japan External Trade Organization, a market research agency backed by the government Tokyo. Japan has historically led Asia in largess for the developing world, hence its interest. China sights Africa mainly for power generation and transport.

But despite the speed and scope of new Chinese infrastructure, it's not easy to build a portfolio of related stocks.

China State Construction Engineering share prices have slipped 17% over the past year, modest given market trends worldwide, but it's listed in Shanghai, where foreign investors often feel uncomfortable because of transparency problems.

However, shares of China Railway Construction are traded in less opaque Hong Kong, likewise transport infrastructure builder China Communications Construction Co. (1800.HK). Share prices of both are tacking neither up nor down.

Relatively few overseas firms have helped China build infrastructure because the government distrusts foreign interests in top-priority state projects, hiring them only when local talent is found unqualified.

But those who look at the fine print on infrastructure projects in China will eventually see the name ThuyssenKrupp (TKA.DE). The German metal worker opened its Asia headquarters in Shanghai in 2003. In just its first few years it was selling 60,000 elevators annually to China and had sold technology for the Shanghai airport maglev airport train. Its share prices have fallen a steep 62% since July 2011 but mostly in tandem with the global market slump in August.

Another one to follow, Thales SA (HO.PA), once won a $21.6 million contract for equipment and service at an airport in southwestern China.

China's infrastructure momentum puts a solid support beam under the entire world's No. 2 economy, not just individual companies. When China booms, emerging markets elsewhere tend to tag along and investors in other countries feel warm and safe about risky assets -- meaning stocks as a whole won't fall through the floor.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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