EFTA01087841.pdf

September 7, 2012 Beijing Plans Infrastructure Binge By AARON BACK BEIJING—China approved an estimated $156 billion in new subways, highways and other infrastructure projects in recent days, giving markets a boost on Friday, even as economists are increasingly fretting that the country is behind the curve in responding to the economic slowdown. A subway In Xi'an City, China, is set to be running by September 2013. The spending plans send a signal that the Chinese government has belatedly heeded risks from a slowing economy and has become increasingly open to stimulus, economists said. China's central government finally took real actions to arrest the worsening slowdown," Bank of America Merrill Lynch economist Lu Ting said in a note, but he added that the new plans come too late to arrest a further slowdown in the third quarter. Saturday morning, President Hu Jintao addressed the need to upgrade infrastructure to promote stable growth and recovery and warned that the "underlying impact of the financial crisis is far from over." Page I 1 of 3 EFTA01087841 Speaking at the Asia-Pacific Economic Cooperation meeting in Vladivostok, Russia, Mr. Hu said the Chinese economy faces "notable downward pressure." China's economic planning agency, the National Development and Reform Commission, posted approvals on its website for 25 subway projects, 13 road construction projects, five port projects and two waterway projects. The approved projects include plans such as 150 miles of subway tracks and 138 subway stations in the eastern city of Xiamen, and a 190-mile four-lane highway in the northwestern province of Xinjiang. Investment-bank economists earlier this year widely expected the economy to bottom out in the first or second quarter, but many now see the slowdown persisting through the end of the year. Economists say they have been surprised by the relatively cautious approach taken by China so far to support the Slowing Down economy, and offer several possible explanations. The Change from year earlier in slowdown has been far less severe than the shock that followed China's gross domestic product the financial crisis in 2008 and 2009, and many in Beijing now 12% 2ND QTR view the massive stimulus undertaken then as excessive, 7.6% leading to adverse long-term consequences such as inflation 9 and questionable bank loans. III "The economic slowdown has been gradual, unlike the sudden 6 3 11 collapse in late 2008, and hasn't led to significant labor-market pressures," UBS economist Wang Tao said in a note. In addition, property sales and prices already have begun rebounding despite government efforts to rein them in, sparking concerns that an aggressive stimulus could reinflate a 0 property bubble that policy makers have struggled to control. 2009 10 Source: China's National Bureau of Statistics Top officials also may have been distracted by a coming once-a- The Wall Street Journal decade leadership transition that is expected to begin in coming weeks, or months, and the accompanying haggling over promotions and the direction of the country, analysts say. UBS AG and ING became the latest banks on Friday to lower their estimates of China's gross domestic product growth this year. Both cut their forecast for this year's growth to 7.5%, from earlier estimates of 8% and 8.1%, respectively. The moves follow similar downgrades by Bank of America Merrill Lynch, Goldman Sachs Group Inc., and others. China's second-quarter growth of 7.6%, compared with a year earlier, was the slowest pace since the global financial crisis. Page 12 of 3 EFTA01087842 Chinese stocks rallied Friday on signs of the government infrastructure plan, as well as in reaction the bond-buying program unveiled Thursday by the European Central Bank. As news of the approvals spread Friday, the Shanghai Composite Index of domestically traded Chinese stocks rose 3.7%, its largest percentage gain since Jan. 17. Construction-related companies were among the biggest gainers, and steel futures traded in Shanghai rose by their 5% daily limit on optimism that construction activity will rebound. The government hasn't offered a combined figure for the projects. Nomura economist Zhang Zhiwei estimated that the various projects, along with recently announced plans for new airports and energy facilities, would amount to about one trillion yuan ($158 billion) of spending, or about 2% of China's GDP, spread over four years. "We believe the decision for the Chinese government to intensively announce these projects over the past two days signals a significant change in its policy stance from the incremental and reactive approach to a more decisive and proactive approach," he said in a note. Still, the infrastructure spending laid out this week falls far short of the massive stimulus campaign of 2009 to 2010. That package was initially billed at four trillion yuan over two years by the central government. Many analysts estimate it was actually far larger as local governments spent liberally on infrastructure projects and state-owned banks went on an unprecedented lending binge. Page 13 of 3 EFTA01087843