Published November 11, 2008

China's stimulus cheer echoes in Singapore

Investors, firms with China ops hail boost to business sentiment

By LYNETTE KHOO AND TEH SHI NING
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(SINGAPORE) The US$586 billion stimulus package announced by the Chinese government over the weekend has already buoyed companies with operations in that country.

Though the aim of the stimulus is to boost domestic consumption, some analysts believe poor consumer confidence may pose a challenge.

Investors cheered the news, sending Asian stock markets, oil and commodity prices higher. In particular, key S-share indices Prime Partners China Index (PPCI) and the FTSE ST China Index yesterday gained 4 per cent and 4.2 per cent respectively.

Light, sweet crude for December delivery was up US$4.28 to US$65.32 a barrel in electronic trading on the New York Mercantile Exchange. Gold, copper and mining stocks also rose significantly.

'It's definitely a boost to China and the region's growth and business sentiment. Anything improving the trajectory of trade will lift Singapore's growth too,' said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

Chinese firms that BT spoke to hailed the news. Sino-Environment chief financial officer David Tan noted that the package would lift business sentiment in general and benefit its customers more directly.

'Customers who have been more reluctant to make capex investments might now be less reluctant to make expenditures, and that will come back to benefit us too,' he added.



Midas Holdings, Chinese maker of aluminium alloy extrusion products for the railways and other infrastructure, said it expects to benefit from the transportation and infrastructural projects under this stimulus package and China's earlier stipulated investments in railways. The company is seen as a direct beneficiary, and its stock surged 21.1 per cent yesterday to 43 cents.

Local companies that do business in China may also stand to benefit from the fiscal stimulus. In last quarter's BT-UniSIM Business Climate survey, China was voted the country with the best business prospects for the next six months by 154 local and foreign firms here.

The Singapore Chinese Chamber of Commerce and Industry told BT it expects Singaporean enterprises trading with or investing in China to benefit from an immediate spillover effect in the next few months as China's domestic demand gets a lift from the package.

Sunny Chan, chief financial officer of Chinese handset design firm Z-Obee Holdings, noted that for Singapore companies which have joint ventures in China, the fiscal package may help these JVs obtain bank financing for working capital.

'The financial stability of customers and suppliers also helps them to weather this adverse situation,' he added.

Singapore firm Engro, a specialty cement maker with a presence in China, is confident of gaining from China's pump-priming strategy. 'Companies that have held back investing in China due to the recent financial crisis will find greater confidence to enter the Chinese market,' says the group CFO Eddy Tan. 'Now is the time for Singapore firms to build up resources and position themselves in anticipation of a strengthening domestic market in China, which will not hinge solely on export markets.'

Yet, there are others who were more conservative in their assessment of the fiscal package's impact.

In a report, Citi's China strategist Lan Xue warned that the massive capital injection in an environment of oversupplied capacity could result in deflation and weaker corporate earnings.

Analysts say the fiscal stimulus may do little to lift corporate earnings outlook in the immediate to near term as the hefty US$586 billion boost will be doled out over two years.

Therefore, they are not revising their ratings and earnings forecasts for these companies at this point, pending more information from China. Though the aim of the stimulus is to boost domestic consumption, analysts believe poor consumer confidence may pose a challenge.

'We are talking about a recessionary environment now. It is definitely better than no stimulus at all but whether it will result in a major rerating of earnings, I doubt it,' said OCBC research head Carmen Lee.

Chinese precision engineering firm China Kunda, which recently listed on the Singapore Exchange (SGX), told BT it is more worried about weaker demand, though it may benefit from value-added tax reforms and lower purchasing costs under the stimulus package.

'In short, we believe that the supply-side measures should help to lower the cost of doing business in China but the effectiveness of macro demand-side measures is always difficult to predict, especially in the context of such a turbulent environment,' said Cai Kao Qun, group executive chairman and CEO.

CIMB-GK analyst Ho Choon Seng prefers to bank on domestic consumption stocks like Beauty China, Celestial, China Hongxing and Fibrechem, given their strong cashflows and raw material costs tapering off.

On the trade front, Citi economist Kit Wei Zheng pointed out that Singapore's export exposure to China is not large. Exports to China, including oil, made up 8 per cent of Singapore's total exports in the first nine months of this year.

'The majority of Singapore's exports to China eventually services its export sectors, so our demand is affected more by final demand from the G-3 economies rather than China's domestic demand, which is what the package targets,' he added.

Alongside the fiscal package, China has announced a 'moderately loose' monetary policy, which suggests another interest rate cut. It has already reduced rates three times since September, but Mr Cohen said that with the focus off inflation and on growth, 'an extra percentage point is well within possibility'.