Riding China’s Infrastructure Wave

03/05/2009 12:01 am EST

Focus: GLOBAL

Andrew Leung

Chairman, Andrew Leung International Consultants Limited

Andrew Leung, chairman of Andrew Leung International Consultants Limited, says the government’s massive infrastructure-spending plan should boost China’s economy.

Q: For the last couple of months, 2009 GDP estimates for China have seemed to be revised almost weekly. Right now, they range from 5% to 7.5%. Lately, the press has been somewhat optimistic due to increased manufacturing activity in both December and January. Where do you see the economy heading in 2009?

A: The improved figures in December and January show that excess capacity is being absorbed. There was $14.6 billion extra spending in [the fourth quarter of] 2008. Moreover, aggressive investments have been announced by the railways, housing, civil aviation, and transport ministries totaling $424.6 billion and extra local government spending of $382.1 billion in Beijing and Guangdong alone. The total impact could be as much as four times the original stimulus package of $586 billion, even allowing for double counting.

The Chinese government [can] implement these budgets, as well as supportive lending policies, much more rapidly than Western democracies. So, while worsening global market conditions may further depress China’s overall economic figures in the first half of 2009, I see increasing likelihood of more positive figures in the second half. On balance, I am inclined towards a forecast of close to 8% in 2009.

Q: Exports are a large part of China’s economy, and as many as one-third of export-dependent SMEs (small and medium enterprises)—especially in the Pearl River Delta—may close. Since domestic consumption remains less than 50% of China’s economy and the countries that import from China are in severe recessions, do you see any good news from this sector?

A: 43% of the stimulus package is being spent on transportation infrastructure, eco-environmental improvements, and technological innovation. These are set to enhance the competitiveness of manufacturing. The rest of the package on rural housing, health care, and social welfare will help domestic consumption. These should augur well when the pains of ballooning unemployment eventually subside.
 
Q: Do you favor any particular commodities as a result of the country’s infrastructure spending spree?

A: Cement and steel and other ferrous metals, not least because the whole world’s other stimulus packages, including those on both sides of the Atlantic and the Middle East, are likewise focusing on government infrastructural projects.

Q: China’s stock market suffered greatly in 2008, down 65%. Prices had been holding up fairly well this year until a spate of selling by funds sent the A-share market reeling. What do you think is in store for the Chinese stock market this year?

A: China’s stock market is still relatively immature—much more driven by government policies [and] popular sentiments than fundamentals. Hence, the much higher volatility. While government signals and policies are positive, factory closures, job losses, and the external economic depression do not bode well, at least during the first half of 2009. There are likely to be safer bets in the latter part of 2009.
 
Q: The International Energy Agency (IEA) estimates that China will be investing $200 billion in renewable energy through 2020. Which alternative energy sector do you believe will benefit the most?

A: China’s renewable energy is expected to grow annually by 7% to 10% by 2010 and 20% by 2020. I would go for technologies in energy efficiency, water recycling, biomass, cold-bed gas, clean coal, wind, and solar. I would also go for green car technologies, such as hybrid and electric cars. But a lot depends on the recovery of world oil prices.
 
Q: The world’s economies will eventually recover from this global malaise, and when that happens, do you anticipate China returning to its previous double-digit growth rates?

A: China needs some 20 million [new] jobs a year to stay even. This level of job creation rests upon a relatively high rate of growth. Moreover, China wants to take advantage of this period of relative internal stability to build a solid economic foundation to face the looming challenges of an aging population in a few decades. These imperatives dictate the need for continued double-digit growth.

Q: If you were going to invest in China, right now, which stocks or funds would be attractive to you?
 
A: I would go for a tracker fund such as FTSE/Xinhua A50 China Tracker (Hong Kong: 2823.HK) and the stock of China’s largest construction company—China State Construction (Hong Kong: 3311.HK). They should now become even more attractive following the introduction of China’s huge stimulus package and the sharp fall in their share prices.

Apart from the stimulus package, China is embarking on the largest urbanization project in human history. This will see 350 million more people living in cities by 2025. Many new cities and towns will be created in the coming decades, which should boost the profits of these large and influential construction companies.

Q: Thank you, Andrew.

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