By Chua Kong Ho
Nov. 10 (Bloomberg) -- China's 4-trillion yuan ($586 billion) stimulus plan will boost stock-market sentiment, Morgan Stanley said, predicting short-term rallies for steelmakers, building materials producers and financial companies.
``Beijing has done the right thing to beat market expectations on stimulus package size,'' Morgan Stanley's analyst Jerry Lou wrote in a note to clients today. ``That is why we think market sentiment will improve.''
The stimulus package, of which 100 billion yuan is earmarked for this quarter, will be spent on low-rent housing, roads, railways and airports and infrastructure in rural areas. The funds, equivalent to almost a fifth of China's gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday on its Web site.
China's CSI 300 Index, a measure of local-currency stocks traded in Shanghai and Shenzhen, has declined 69 percent this year as the global economy slowed, cutting demand for the nation's exports. The stock measure, the worst performer in Asia, gained 6.3 percent to 1,783.19 at 10:11 a.m. today.
``Higher social welfare spending and rural reforms will help boost consumption,'' Jing Ulrich, chairwoman of China Equities at JPMorgan Chase & Co., said in an e-mail. While economic risks remain, ``the stock market will start to anticipate the positive impact,'' she wrote.
The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.
To be sure, ``considerable uncertainties'' remain over the ultimate size of the plan, Goldman Sachs Group Inc. economist Song Yu said in an e-mailed report today.
``The amount of `extra' investments involved is still not clear at this point,'' wrote Song, adding that not all of the 4 trillion yuan will be spent by the government.
To contact the reporter responsible for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net
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