BEIJING Oct 26 Excitement around China's
once-a-decade leadership change is spreading beyond diplomatic
circles into corporate boardrooms: many foreign firms believe
Beijing will ramp up state spending and lift demand when its new
government takes office.
Car maker BMW, machinery maker Caterpillar Inc
and steelmaker POSCO are among a growing
group of firms banking on China to spend its way into a stronger
economic recovery after its leadership change on Nov. 8.
Their bold bet pits them against economists who argue that
Beijing won't be digging deeper into its pockets to juice the
economy. Business executives thinking otherwise should steel
themselves for disappointment, they say.
Trapped by gloomy growth outlooks across the world, firms
outside China appear to be hoping for the best in their
fastest-growing market, even if it is wishful thinking.
It is a common refrain among investors - China is not doing
more to shake its economy out of the worst downturn in three
years because it is distracted by politics. But once its
leadership change is out of the way, Beijing will press on full
steam ahead on economic plans.
Caterpillar Chief Executive Doug Oberhelman said he met with
the company's China distributors two weeks ago and the mood was
more upbeat than it had been in some time because of
expectations of change after the Party Congress.
"Unanimously they all believe that is a watershed event," he
said on a conference call with analysts this week. "They also
look for substantial change, whatever that means, by Chinese New
Year, which typically is the selling season over there anyway."
BMW echoed that upbeat view.
"I believe the new government will continue to pursue this
path (of more stimulus)," Friedrich Eichiner, BMW's finance
chief, said in an interview this week.
"So, it is not unlikely that we will see fresh catalysts for
expansionary growth next year," Eichiner said, predicting BMW's
sales growth in China would stay above 10 percent in the medium
term. BMW is estimated to earn between a third and half its
profit in China.
'KIND OF SLOW'
If China's incoming leadership disappoints with the scale of
new stimulus, these rosy forecasts may give way to dire
Asked what he was hearing from Chinese officials,
Caterpillar's Oberhelman pointed to rising numbers of building
permits and a series of announcements about infrastructure
projects - all of which would mean demand for his company's
equipment. Caterpillar is the world's largest maker of tractors
and excavators, and China is the world's largest user of
"I suspect all of that is aimed after the leadership
transition and most of that is aimed towards spring of next
year," he said. "If it happens, it's going to happen then. If it
doesn't, we are in for another kind of slow year in 2013."
As it stands, Caterpillar predicts China's economy will grow
by 8.5 percent next year, some way ahead of the consensus view
of 7.8 percent growth in a Reuters poll of economists.
Like economists, corporate executives have an eye on history
when they predict Beijing's fiscal plans. Both sides have a
point, depending on how they judge the past.
The onset of the 2008 global financial crisis spurred
Beijing into a 4 trillion yuan state spending spree that snapped
the world's second-biggest economy out of a sudden slowdown
within six months, and lifted Asia out of recession.
But that came with a price. Over-zealous state spending left
China's local governments with a 10.7 trillion yuan ($1.7
trillion) debt hangover largely financed by state banks, up to a
third of which analysts estimate could sour.
The wall of cash pumped into China's financial system from
frenzied state spending also helped drive Chinese property
prices to record highs, much to the chagrin of Beijing which
worries unaffordable homes could incur the ire of Chinese.
In contrast, China's stimulus response to its slowdown this
time is piecemeal at best. No dramatic spending plan has been
announced, and expenditure has only been lifted by fast-tracking
infrastructure projects already in the pipeline.
Rather than being too pre-occupied with politics, economists
say this outcome is part of Beijing's carefully crafted plans
drawing on painful lessons learnt.
Nine of 15 economists polled by Reuters this month said they
do not expect Beijing to unveil new fiscal stimulus after its
leadership handover. With China's economy
starting to show signs of recovery, there may be less need for
stimulus. A private survey of manufacturers showed on Wednesday
that key activity indices hit 3-month highs in October.
"It's increasingly clear that no further measures to
stimulate growth are needed," said Dariusz Kowalczyk, an
economist at Credit Agricole CIB in Hong Kong.
Brazil's Vale SA, the world's No. 2 mining
company, agrees. In a detailed assessment of its China view,
included with its earnings results on Wednesday, Vale said it
expects China's economic growth to slip into the 6-7 percent
range until the end of this decade.
That would mark a sharp downshift for a country that has
boasted decades of growth averaging above 10 percent, but is in
line with the view that many economists hold as China tries to
transform into a consumer-led economy instead of one driven by
"In line with the need for change in the macroeconomic
policy framework, the Chinese authorities did not launch another
big stimulus program and the incoming leadership is not expected
to do it either, unless they see the economy on the verge of a
recession, which is not the case now," Vale told shareholders.