China's stimulus vow could make move unnecessary

By Jason Subler - Analysis

BEIJING (Reuters) - China's promise to launch another fiscal stimulus package if it needs to could be the very thing that will make such a move unnecessary.

Premier Wen Jiabao made the vow in the middle of last month, in a statement broadcast live on television and replayed for days on big screens in railway stations and public squares across the country.

Calling confidence "more important than gold or money," Wen effectively guaranteed that Beijing will do whatever it takes, on top of the 4 trillion yuan ($585 billion) package it launched last November, to maintain growth at an acceptable pace.

Signs so far suggest that investors and consumers have taken that promise to heart, using it as their cue that it is now safe to loosen their purse strings a bit.

Nowhere is the new-found hope more visible than at a vast new market for excavators, cranes, dump trucks and other construction equipment being set up on the southern outskirts of Beijing.

Red firecracker chaff left behind after store-opening celebrations attests to the optimism of many investors.

"I think this is a quite good time to be starting up. Sure, there's the financial crisis, but the government is doing plenty of things to help," said Chen Hong, a manager with China Founder Machinery, which sells equipment made by Sany Heavy Industry Co.

In short, the promise to spend more to aid the economy is likely to act in much the same way as deposit insurance helps to prevent bank runs -- knowing that the government will step in if required, people will spend and invest of their own accord with the result that Beijing has no need to redeem its pledge.

EXPECTATIONS GAME

To be sure, it is too early to call a bottom to the economy.

Though investment in railways, roads and bridges has shot up in the wake of the government's support, factory output and exports have worsened over the past couple of months, with exports falling 25.7 percent in February from a year earlier.

The purchasing managers' index (PMI) issued by Hong Kong brokerage CLSA suggests that the manufacturing sector worsened in March after three months of tentative improvement. The PMI fell to 44.8 from 45.1 in February.

But a rally in Shanghai stocks -- up 30 percent in the first quarter -- and hints of a pickup in property sales suggest Beijing has made a good start in building confidence, said Paul Cavey with Macquarie Securities in Hong Kong.

"To some extent, it is an expectations game, and that is clearly what the government has been trying to manipulate over the course of the last couple of months," he said.

Even if exports, the big wild card of the China growth story, continue to weaken, Beijing can probably rely enough on the other two main growth drivers -- infrastructure investment and real estate -- to make a new injection of fiscal stimulus unnecessary, Cavey said.