23rd July China’s President Hu Jintao confirmed that the Communist Party wants to keep using the proactive fiscal policy and push domestic demand. The whole world regards more Chinese demand as the rescue for all of us, so it’s certainly worth to watch his comments.
President Hu claims that the jump in the yearly GDP growth from 6,1% in Q1 this year to 7,9% in the second quarter is caused by the Chinese stimulus package. He is actually right, because fixed-asset investments jumped a stunningly 33,5% – the main reason behind the higher GDP reading in the second quarter.

What should the investor use of Hu’s speech ?
Like any other country with a stimulus plan the aim is to maximise the domestic growth outcome and not to save or help other countries. China just has one strategic advantage compared to many other countries. The fixed asset investments are true investments with a future pay-off because China develops rural areas where new growth will arise, and not just repairing existing infrastructure as western developed countries can do. This way China builds new infrastructure in areas with lower labour costs than in the coastal areas where almost the whole export production is placed today. Another problem that is partly solved is the unemployment among domestic emigrant workers. 20 million out of 120 million lost their jobs within the last 12 – 18 months. Some of them find jobs in all the infrastructure projects.
We have already seen the effect on some commodities like base metals that has gone up. I think the demand will consist for some time, so mining stocks are still worth to consider, and the related bulk shipping companies will be supported as well. But please don’t expect the whole world to be saved by the Chinese stimulus, and some of the commodity purchase is pure speculation as mentioned in the last update. Just companies outside China with well organised export to the very specific sectors that are supported by the stimulus package will benefit. These are Japanese building companies and producers of machinery plus some German, and then the Chinese mainland and Hong Kong based companies of course.
President Hu gave a few more hints. The Communist Party wants to continue the boost of grain production and increase farmers’ income. This is interesting as the agricultural sector is big and we are talking about new demand. Chinese companies producing equipment for the agricultural sector with a B listed stock are long term investments. Producers of products like fertiliser with listed B stocks are difficult to find. I would look for non-Chinese companies with production in China or serious export to China. If the peasant’s household income jumps, then their demand for durable goods increases. Several producers of household goods and retailers with decent results have listed B stocks to invest in.
The stock market
Like in any other country with cheap and excess liquidity some of the funds find their way into the stock market. It is also the case in China (mainland and Hong Kong) but no official number will ever be released on this subject. Go for 20 % of the more than 7 trillion Yuan of credit growth during the first 6 months, that is a decent guess.
It’s hard to argue that the Chinese stock market is overvalued as it is still only trading at 50 % from the peak, but you probably feel my scepticism about the speed of the turnaround. There are too many signs of leverage instead of real earnings behind the rise since November last year. I admit to have been too slow to advice about coming back into the market. The first 33 % of the expected investment in Chinese stocks I recommended to buy at a break of 180 in Shanghai B, the second 33 % trance must happen when 225 breaks. To be honest, I don’t feel comfortable about it, but if the market goes up you need to be in it. Just keep an eye on all the risks factors, they are growing and not getting smaller.

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