When the stimulus comes, here’s where you need to invest in the Chinese economy

On Sunday Chinese Premier Wen Jiabao strongly hinted his government would enact more stimulus in order to catalyze the slowing Chinese economy (FXI, quote), sending global markets higher on Monday. If this economic stimulus does indeed come to fruition, where should investors park their cash to take advantage of increased growth?

Image courtesy Jakob Montrasio: http://www.everystockphoto.com/photographer.php?photographer_id=27445

Shopping in Shanghai

First, it’s imperative to distinguish the differences between the 2008-2009 Chinese stimulus package and the presumed one for 2012. The previous stimulus put in place centered on both a deluge of loans from state-controlled banks and expansionary monetary policy. Given concerns over the health of the Chinese banking system as a result of these myriad loans, an attempt to replicate the previous policy is unlikely.

Because of the government’s preoccupation with inflation excessively expansionary monetary policy is unlikely. Premier Wen emphasized the importance of fighting inflation and maintaining prudent economic policy; however according to some market observers, this doesn’t rule out the easing of some monetary conditions in 2012.

While monetary policy may be slightly loosened, a reversal in Premier Wen’s landmark housing policies designed to harness the bubble in Chinese real estate is unlikely. Premier Wen stated that “(w)e must never allow property controls to suffer a setback, or else our achievements through many years of hard work will come to nothing.”

As Todd Lee, a senior director of IHS Global Insight remarked to the New York Times, “I think they’re signaling they may be a little more aggressive… (t)hey’re trying to set this fine balance between maintaining growth and keeping the real estate market under control.”

The emphasis of new stimulus, according to the Financial Times, is likely to incorporate measures designed to improve consumption trends in the PRC. An emphasis on technology upgrades and energy-saving retail goods could have lasting positive effects on the Chinese economy.

As well, oil prices have recovered from 2012 lows on the back of Wen’s remarks. Traders are under the impression that increased global demand stemming from a Chinese stimulus could see the price of crude jump higher.

Investors looking to take advantage of the proposed stimulus to catalyze Chinese growth should look towards stocks with exposure to Chinese consumption like Yum! Brands (YUM, quote), China Mobile (CHL, quote), Starbucks (SBUX, quote), and for those with the ability to trade in Hong Kong, Gome Electrical Appliances. As well, oil majors like Chevron (CVX, quote) may see an increase in share price.

Conversely, taking Wen’s remarks about the housing sector at face value, it appears as if Chinese housing stocks like E-House (EJ, quote) will not benefit appreciably from the proposed stimulus.

Disclosure: Author’s immediate farmily is long YUM and SBUX, and may start a position in CHL over the next 72 hours


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