Global firms count on China's new leaders to open spending taps

Koh Gui Qing

BEIJING, Oct 26 (Reuters) - 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.


If China's incoming leadership disappoints with the scale of new stimulus, these rosy forecasts may give way to dire warnings.

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 construction equipment.

``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 investment.

``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.