China's Stimulus Package May Boost California, Japan

By John Fraher and Matthew Benjamin

Nov. 13 (Bloomberg) -- China's stimulus package may help support sales of Japanese farm equipment, Brazilian iron ore and California machine tools, taking some of the edge off what might be the worst global recession in three decades.

The ripple effect of the $586 billion plan announced on Nov. 9 underscores China's increasingly important role in the world economy as its policy makers work to keep the country's growth close to 8 percent in 2009. Merrill Lynch & Co. said expansion would have cooled to 5 percent without the program from 9.5 percent this year.

China's economy is still the fastest growing among the world's 20 largest; and its plan, equivalent to 14 percent of gross domestic product over two years, would likely have the strongest impact in countries that are China's biggest suppliers of goods, including Japan, Taiwan and South Korea.

``It's a significant guarantee to growth in China,'' said Louis Kuijs, an economist at the World Bank in Beijing. ``China can boost spending and provide a cushion to growth domestically and to all of its trading partners.''

China's plan allocates money for housing, rural development, railroads, power grids and rebuilding after May's earthquake in Sichuan province. It also allows tax deductions for purchases of machinery to stimulate investment.

``Industries such as railway, construction, cement, steel and other metals will benefit,'' said Ting Lu, a Merrill Lynch economist in Hong Kong. ``These industries are connected with the rest of the world.''

Spur Growth

The nation's slowest growth in industrial output in seven years, announced today, provided more evidence of why the spending is needed. It also helped to drive down Asian stocks.

Merrill estimates the package will add 3 percentage points a year to China's expansion, spurring growth to 8.6 percent in 2009 and 8.5 percent in 2010.

The effect beyond China is harder to determine. The country hasn't explained how much of the stimulus is new spending and how much was already announced. Before China introduced its plan, the International Monetary Fund forecast that growth worldwide would fall to 2.2 percent in 2009 from 3.7 percent this year and that the U.S., Japan and euro region would all contract.

``It's difficult to calculate the short-term impact on China, never mind the broader global impact,'' said Kevin Gaynor, head of economic and interest-rate strategy at Royal Bank of Scotland Group Plc in London. Still, ``it's going to help economies that supply infrastructure to China, like Germany and Australia.''

Most at Stake

Among countries with the most at stake are Taiwan, which shipped almost 36 percent of its total exports to China last year; South Korea, which sent 25 percent; and Japan, which shipped 19 percent, according to UBS AG.

For every 1 percentage point that China increases its growth rate, the rest of Asia will be boosted by half that, according to Huang Yiping, chief Asia economist at Citigroup Inc. in Hong Kong.

Japan's economy, the world's second-largest, likely stagnated in the third quarter, rising at an annualized rate of 0.1 percent, according to the estimates of 26 economists surveyed by Bloomberg News. Korea, the fourth-largest economy in Asia, is expected to slow to 3.3 percent in 2009, its weakest pace in five years, compared with 5.7 percent in 2007. Taiwan's economy grew 4.3 percent in the second quarter compared with a year ago, the slowest in more than a year.

Engineering and construction companies are likely to be among the major beneficiaries of China's plan, said Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets.

`Welcome Boost'

``Spending on necessary infrastructure such as rail, roads and affordable housing are expected to reinforce China's long- term growth potential,'' said Vivek Tulpule, chief economist for London-based Rio Tinto Plc, the world's second-biggest exporter of iron ore. ``The package will provide a welcome boost to Chinese economic activity and the resources industry.''

Shares of Kubota Corp., Japan's largest maker of agricultural equipment, have surged 19 percent since the package was announced, and Hitachi Construction Machinery Co. in Tokyo, Asia's second-largest maker of earthmovers, gained 15 percent.

The stimulus is ``a big chance'' for Tokyo-based Komatsu Ltd., the world's second-largest construction-machinery maker, said Masahiro Yoneyama, the company's director of China operations. ``This will contribute greatly to Komatsu's overall profitability.''

Government Contracts

In Singapore, Hyflux Ltd., a water-treatment company that gets about 90 percent of sales from government contracts, expects to gain from China's plan. Hyflux builds plants in provincial Chinese cities as well as the Middle East, and the stimulus package ``is going to help to unblock'' current projects that are ``stalled and create new ones,'' Deputy Chief Executive Officer Sam Ong said Nov. 11.

Three European makers of electricity grids and equipment - - ABB Ltd. in Zurich, Schneider Electric SA in Rueil-Malmaison, France, and Atlas Copco AB in Stockholm -- may get more orders because of China's plan.

In a research note, Exane BNP Paribas analyst Arnaud Brossard said ABB ``could benefit from accelerated spending'' on power plants, Atlas's construction and mining business might be helped, and Schneider could see a boost in its operations that supply building and manufacturing.

Aerospace Industry

Oxnard, California-based Haas Automation Inc. sold more than 1,000 machines used for aerospace, automotive and other production in China during 2007 at prices ranging from $30,000 to several hundred thousand dollars and expects to sell 1,250 machines there this year.

``Any stimulation of manufacturing in China is going to have an effect on our business,'' said Scott Rathburn, Haas's marketing product manager.

Erin Ennis, vice president of the U.S.-China Business Council, said China's desire to improve its health-care system could also help American providers of medical products and services. ``Our hope is that the spending is as broad as possible,'' she said. The Washington association represents 250 U.S. firms that export to China.

The impact may even spread to Brazil, where Rio de Janeiro-based Cia. Vale do Rio Doce, the world's biggest iron- ore producer, is based. China accounted for 20.5 percent of the company's total third-quarter revenue of $12.1 billion.

`Extremely Positive'

``We don't believe there's going to be any immediate effect, because it takes time to reactivate an economy,'' said Fernando Thompson, a company spokesman, in an e-mail. ``But it's extremely positive, as the bulk of these investments will be in infrastructure, which makes intensive use of steel and ore.''

China's current role in the world economy contrasts with its status during the last global recession of comparable size, in the early 1980s, when its GDP was about 2 percent of last year's value of 24.95 trillion yuan ($3.653 trillion). Commercial links with Europe and the U.S. were minimal, and former leader Deng Xiaoping was battling to persuade his Communist party colleagues to open up the economy after decades of self-imposed isolation under Mao Zedong.

``It's important psychologically to have one of the largest players helping out,'' said Angel Gurria, secretary- general of the Organization for Economic Cooperation and Development. ``It spells a good thing for those who sell to China, whether it's commodities, manufactured goods or services.''

To contact the reporters on this story: John Fraher in London at jfraher@bloomberg.netMatthew Benjamin in Washington at mbenjamin2@bloomberg.net