No Slowdown in China's Growth

02/03/2010 1:00 pm EST

Focus: STOCKS

Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor-in-chief of China Stock Digest, says the recent crackdown on lending won’t dampen China’s growth, and he likes a Chinese utility with good earnings growth.

We all know markets hate uncertainty, and that’s the immediate environment we are facing. Although the long-term outlook for China is very strong, Beijing is currently moving heaven and earth to rein in its enormous banking industry.

As we enter February, Beijing will likely open the spigots again for new loans while attempting to rein in the eagerness of banks to issue as many loans as quickly as they can. At the moment we have a situation in which the market perceives a potential tightening of credit and a possible slowdown in the economy.

But that’s not what Beijing is aiming for. The Chinese government has repeatedly stated its goal of growing gross domestic product (GDP) by approximately 9% during 2010. Excessive lending can lead to unproductive growth such as property speculation and the creation of excess industrial capacity. Beijing’s task is to walk the fine line between reining in excessive growth and encouraging real economic expansion.

We are comfortable that Beijing has given every signal that it will not tolerate runaway overheating. Our experience has shown that Beijing routinely meets or beats its economic growth targets for the year.

Although we’ve experienced considerable volatility in the rush of events recently, we are confident about the intermediate- and long-term prospects of the Chinese economy and of the companies which stand to profit from this growth.

Huaneng Power International (NYSE: HNP) has delivered an earnings surprise with a new report that it has turned an expected loss into a profit. The company told Hong Kong’s stock exchange that it probably returned to profit in 2009, according to unaudited numbers.

China’s biggest listed electricity producer says it benefited from lower fuel prices and higher tariffs. A contribution from newly operational units also boosted profit. Huaneng reported a net loss of 3.7 billion yuan ($542 million) in 2008. The company says, “The net profit attributable to the company’s shareholders as compared to the period last year increased by more than 100%, thereby turning the loss to profit.”

Huaneng is also improving its output. The Beijing-based firm says it produced 420.1 billion kWh (kilowatt hours) of electricity in 2009, 13% more than in the previous year. At the end of last year, Huaneng’s total installed generation capacity had increased 21.5% year over year to 104.38 million kW, of which about 15% was clean energy.

Production will continue to increase in 2010. Huaneng says it plans to increase its electricity output to 466.5 billion kW this year, up 11% from a year ago. It also plans to add over 15 million tons of coal production capacity this year, and boost its total coal production capacity to 56.86 million tons this year, a 29% increase compared with that of 2009.

Share prices have yet to reflect Huaneng’s improved prospects. (The ADRs closed above $24 Tuesday—editor.)

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