China April 22, 2009, 9:26AM EST

China's Stimulus Package Boosts Economy

From increased sales for construction companies and automakers to a reawakened real estate market, China's stimulus plan is working—so far

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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.