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China's Stimulus Package Boosts Economy

Things are looking up for Xugong Group, China's largest heavy machinery maker. Driven by Beijing's five-month-old $586 billion fiscal stimulus, sales of its bulldozers, wheel loaders, and construction cranes reached an all-time high in March, a spokesman says. Although he won't reveal the exact amount of sales for the month, the Xugong spokesman says the company now expects to reach its 2010 revenue target of $7.4 billion a year early. Xugong, which has a small Shenzhen-listed subsidiary, earned pretax profits of $443 million on sales of $6 billion last year.

Across China, steelmakers, cement producers, and construction companies are seeing sales soar as Beijing's stimulus plan opens the spigot on funding for railways, airports, and power plants. The economic surge isn't just about earth-moving. The Shanghai stock market is up 35% so far this year, one of the fastest-growing bourses in the world. The long slumbering property market is showing signs of a revival, with sales volume growing 29% in seven of China's biggest cities including Beijing, Shanghai, and Chongqing in the first two months, says Jing Ulrich, managing director of China equities at JPMorgan Chase (JPM) in Hong Kong, though prices have not yet recovered. And in March auto sales grew 27.2%, following a cut in taxes on smaller vehicles that took effect on Jan. 20 and helping first-quarter sales grow a respectable 3.9%.

While first-quarter gross domestic product grew 6.1%, the lowest in almost a decade, many analysts are now turning more bullish on China's economy. On Apr. 22, Goldman Sachs (GS) said it expects Chinese GDP growth to hit 8.3% this year, compared with an earlier forecast of 6%. Other banks have become more optimistic, too. Citing what she called "very strong stimulus-related bank-lending growth," Tao Wang, head of China economic research at UBS (UBS), last week upgraded the bank's 2009 GDP growth forecast to 7.5%, from its earlier forecast of 6.5%. "While the external outlook remains bleak, there have been signs of domestic activity picking up in China, as a result of the government's policy stimulus," she wrote.

Beijing's leaders are patting themselves on the back for moving fast to prime the pump. Speaking at a conference over the weekend, Li Rongrong, head of the watchdog organization for China's largest state-owned enterprises, said earnings at those companies grew 26% in March compared with the same period a year ago. In a speech on Apr. 18 at the same conference, on the tropical island of Hainan, Premier Wen Jiabao said the government deserved credit for the good news. "China's rapid reaction in rolling out the stimulus package has resolved some prominent problems in the economy, strengthened market confidence, and stabilized people's expectations," Wen said.

"Vigor and Commitment

Much of the juice is coming from state-owned banks. While the Obama Administration struggles to get U.S. banks to start lending again, Chinese banks are following government orders and flooding the country with loans. In the first three months of the year, new lending by Chinese banks grew 30%, to $676 billion. That means the banks are already more than 90% toward Beijing's target for the whole year. "It looks like the banks have fulfilled their brief with vigor and commitment," says Standard Chartered Bank's (STAN.L) head of China research, Stephen Green. However, many believe such a lending bonanza could lead to higher levels of nonperforming loans further down the line.

With more than $1.95 trillion in foreign reserves, the central government can afford to open its coffers, too. Earlier this month, Beijing announced it will spend $125 billion to build hospitals across China, as well as to expand medical insurance to cover 90% of China's 1.3 billion people by 2011. The government has also announced a significant expansion of its pension program. Since the global recession is hammering China's exports (they fell 20% in the first quarter of 2009), economists say the country must rely more on consumption to drive economic growth. And to boost consumer confidence, the government needs to provide better medical care, more secure pensions, and higher-quality schools, though many say it could take a generation before the Chinese abandon their penurious ways. Consumption in China now only makes up some 37% of GDP, compared with 70% in the U.S. "The government needs to carry out reform to unleash potential demand and turn it into purchasing power," says Xu Xiaonian, a professor of economics and finance at the China Europe International Business School in Shanghai. That will "get people to spend money instead of saving it."

For all the hopeful signs, many economists worry all the Chinese spending isn't helping much. As in years past, they say, the vast majority of lending is being tapped by well-connected state enterprises rather than more commercially minded and job-creating small and medium-size companies. And given the speed at which Beijing has issued new financing, there are also fears that inevitably money will be lost to the inefficient pet projects of local governments. Many economists also think a big portion of the stimulus money is flowing into stock market and property speculation rather than the infrastructure and social welfare benefits necessary to spark a lasting economic recovery. "A short-term stimulus package is not the same thing as a long-term development strategy," cautions Fan Gang, director of the Beijing-based National Economic Research Institute China Reform Foundation.

Roberts is BusinessWeek's Asia News Editor and China bureau chief. With Huang Zhe in Beijing

Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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