How to Invest in China's Stimulus


Last week, China announced infrastructure projects totaling $280 billion. This, combined with news of a European stimulus, rocketed stocks to levels not seen since 2008.

But those rushing to the East should tread lightly, as this new policy shift could mean big bucks for some companies and the beginning of the end for others.

What you need to know
China's National Development and Reform Commission announced Wednesday that it had approved 25 new subway and city rail projects totaling $130 billion. The next day, the commission revealed 13 road and port construction plans that will have a more immediate impact on China's slowing economy. China's GDP is currently growing at an annual rate of 9.1%, equal to its 2003 growth and significantly lower than its 2008 high of 14%.

China Real GDP Growth Chart
China Real GDP Growth Chart

China Real GDP Growth data by YCharts.

The Great Recession and the European crisis are partially to blame for China's export-centric economic woes, but dwindling infrastructure is a constant concern for this booming country. Following hot on the trail of summertime plans to expand its airport and energy infrastructure, these newest initiatives are expected to spur China's economy into a new round of investment and international commerce.

When China says "jump"...
Following the announcements, investors began pouring money into the market. The S&P 500 jumped to 1,437, and coal stocks skyrocketed. Arch Coal (NYS: ACI) and Cliff Natural Resources (NYS: CLF) rose 23.7% and 18.5% last week, respectively, on the news.

ACI Chart
ACI Chart

ACI data by YCharts.

Investors saw it this way: Stimulus for infrastructure projects leads to demand for steel and, therefore, demand for energy to make steel -- and thus demand for coal. However, as my fellow Foolish writer Travis Hoium points out, thermal coal continues to pull these companies down, and any signs of a long-term sector recovery have yet to be seen.

Investing in a stimulus
Figuring out how to invest in an invigorated economy is growing more and more difficult. Traditionally, buying shares of coal or oil might have been a surefire way to get in at the foundation of an economic boom. Now, energy sources are becoming increasingly interchangeable.

Even as China continues to be the world's largest coal consumer, its strides in wind and solar technology are setting these industries up for unprecedented growth. Trina Solar's (NYS: TSL) stock barely budged last week, even though China has invested billions of dollars in solar projects and plans to generate at least 15% of its energy from renewables by 2020.

If you'd rather leave energy analysis alone, there's another way to get in on China's infrastructure announcement. Building big things takes big machinery, and Caterpillar's (NYS: CAT) construction equipment is exactly what China needs.

The company enjoyed $4.3 billion in Asia-Pacific sales last quarter for a 15% increase over last year. This region now accounts for more than 25% of Caterpillar's total revenue. Its stock price rose 6.8% last week -- a sign that investors believe in China's construction story.

Whatever you do, don't consider this stimulus cash in hand for Chinese consumers. If you think Chinese small caps such as E-Commerce China Dangdang (NYS: DANG) are good buys (which I don't), buy them based on the company and not on macroeconomic events alone.

Chinese consumer companies are caught in a catch-22: If consumption goes up, multinational companies swoop down to claim their piece of the pie; if it doesn't, Chinese companies suffer. Just this week, Chinese auto sales growth slowed to 3.7%, even as GM announced its China sales were up 7.3% from a year ago.

Foolish bottom line
The only sure thing $280 billion of infrastructure projects will do is...well, create $280 billion worth of infrastructure. Whether you're Keynesian or Austrian, the effectiveness of these initiatives will only truly be known once they're completed and incorporated into China's overall economy. Make investments in China's growth as you see fit, but do so with a critical eye toward China's future -- a future that shares little resemblance to its past.

Motley Fool analyst Brendan Byrnes has examined Caterpillar with his very critical eyes, and his findings are laid out for you in his newest premium report. It outlines Caterpillar's Chinese growth story, as well as what you can expect from recent acquisitions and a focus on efficiency. It comes with a full year of free updates and is available for a limited time only, so grab your copy today.

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Fool contributor Justin Loiseau owns none of these stocks. You can follow him on Twitter, @TMFJLo, and on Motley Fool CAPS, @TMFJLo.Motley Fool newsletter services have recommended buying shares of General Motors. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Originally published