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Why The Latest Chinese Stimulus Could Actually Be A Game-Changer
The National Development and Reform Commission (NDRC) announced that it approved 25 rail transit projects in 19 cities, on September 5. The following day it approved 20 investment projects 13 of which are roads.
The investment amount approved for the projects are estimated to total 848 billion yuan. The news sent the Shanghai Composite which had been languishing at 3.5-year lows surging nearly 4 percent.
Bank of America's Ting Lu writes that after cutting interest rates from mid-May to early July this is Beijing's second round of policy easing/stimulus.
Markets weren't buoyed by the local government stimulus plans because most of them were part of the larger five-year plans, and because they typically look to the central government for stimulus, rather than local governments. So, Lu writes that this stimulus is a step in the right direction.
"We believe this new approach of policy stimulus is in the right direction because adding home supply and improving urban infrastructure are the two best ways to contain home prices, speed up urbanization and increase social welfare."
The new rail projects mean that China's subway system will grow to 7,000 kilometers (approx. 4,350 miles) by 2020. That would be 4.3 times the current length. And these would includes coastal cities and inland cities. The road projects are expected to total 2,000 kilometers in length and most are set for the central and western regions like Qinghai, Xinjiang and Hunan.
China's also increasing land supply as it tries to curb home prices
Moreover, a number of first-tier cities like Guangzhou, Hangzhou, Beijing and Shanghai have increased land supply. In September, Beijing is putting 27 land plots on sale, Shanghai and Hangzhou are selling 26 plots, and Guangzhou is selling 4 plots.
Lu writes that while some speculate that local governments are selling land to raise revenue, he believes the land sales are being prompted by the central government "based on a new policy consensus of adding home supply".
Chinese policymakers, according to Lu, are now of the opinion that they should add to new home supply by increasing land supply, while maintaining the tightening measures. Their rationale is that this growing home supply would help cool home prices.
Premiere Wen Jiabao recently pushed local government to increase land supply. But it remains unclear if this falls under China's revised 2012 target for housing land supply, which it cut to 26.9 percent below 2011 levels, and 7.7 percent below from an earlier 2012 target, according to WSJ numbers.
The latest project approvals are expected to boost fixed asset investment (FAI) numbers in coming months, which are an all important gauge of government spending. But Beijing still isn't expected to unleash a massive stimulus on the scale of the 4 trillion yuan it did from 2009-2010 and the economy still faces a soft-landing.
Read more: http://www.businessinsider.com/bofa-china-economist-rail-stimulus-2012-9#ixzz26QA9JngU