Investing in the Chinese Stimulus

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The Chinese government has enacted a tremendous spending program to keep the economy moving. China is investing billions to improve infrastructure and boost its economy, which has been dependent on exports to keep growing. However, as developed nations have slowed into recessions, the Chinese government had to take action to keep employment figures healthy.

Why China’s Stimulus is Better than the American One

There is only one reason why China’s stimulus is more powerful than any American one: capital. China’s stimulus works because the billions of dollars that it plans to spend will be derived from China’s bank accounts rather than borrowed or printed. Throughout the previous 20 years of economic prosperity, China has amassed incredible amounts of cash. Deploying that cash now through a stimulus will re-enable its economy to move forward. If the United States were to use its own cash holdings, rather than borrow or print more money, the stimulus would work.

The Chinese Are Producing for the Chinese

The Chinese economy has been a leading exporter, but as global demand slows, the Chinese populace will be working to produce goods that will stay in China. The country maintains huge savings rates from the overall population, and many middle class Chinese workers can afford what used to be luxury products. Rather than export its goods, the Chinese economy could easily turn to consumption, as falling global demand for goods brings lower prices and greater purchasing power for China’s citizens.

The Government Wants to Keep People Employed

By their very nature, centrally planned economies have an interest in keeping the populace employed and working through tough times. Considering that the Chinese government has been delicately playing the line between economic development and its communist policies, keeping its masses employed will allow the government to maintain its power and relevancy.

Finding Good Businesses Isn’t Hard

Playing China’s stimulus boom is easy due to the way the companies are named in the Chinese economy. Even their banks are named appropriately: Industrial & Commercial Bank of China, Industrial & Commercial Bank, China Construction Bank Corp, and Shenzhen Development Bank Co. – just to name a few. The above banks are some of the biggest in China, and their purpose is well defined by their names. These banks focus on making loans to improve China’s infrastructure, whether it be in new factory buildings or new plumbing.

Buy Transporters and Steel Companies

China’s stimulus package will be used to further improvements in the transportation infrastructure, as guiding goods through a very densely populated area can prove to be difficult. The Chinese economy is centered on two low cost and efficient shipping models: railroads and waterways. The sea transporting business is one of the most important, as it is one of the few ways to export goods out of China to faraway buyers in the Western hemisphere.

Steel Companies on Either Side of the Pacific

More demand for steel affects the world supply in one way or another. If you can and prefer, buying Chinese steel companies such as Tangshan Iron & Steel is a great option. Otherwise, investors can place their funds in rising steel prices by purchasing the US based steel firm ETF SLX. Because steel is a fungible commodity and remains the same whether produced in London or in China, buying steel companies in any location is a great way to tap into the Chinese stimulus. The best companies for the steel play are those that are high-cost and low profitability, as these companies will be the first to pop when steel prices rise. High cost investing has been proven profitable with many different kinds of commodities from oil to gold, as these companies provide natural market leverage to changing prices.

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