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Profiting From China’s Effort To Stimulate Domestic Consumption
Corporate Digest | 05 December 2008
By: Xavier Lim
Articles (51) Profile

The global economic downturn triggered by the subprime lending crisis has led to a sharp slowdown in Chinese exports, while millions of jobs are being destroyed due to the financial tsunami.

To mitigate the impact, the Chinese government has taken action by issuing a stimulus package estimated at Rmb4 trillion to be spent over the next two years to finance programs in ten major areas. In addition, China’s central bank has slashed its benchmark interest rate for a fourth time since September by a surprising 1.08 percentage points – the country’s largest rate cut since the 1997 Asian financial crisis.

As a pure-play China retail real estate investment trust, CapitaRetail China Trust (CRCT) will most definitely benefit from the aforesaid policies, which appear poised to stimulate consumer spending domestically.

As a matter of fact, all these policies will create millions of jobs to offset unemployment in the lower-end labour market caused by falling exports. With a stable income, these people will maintain the domestic consumption by taking up loans to buy houses due to the low interest rate, which will in turn translate to demand for electronic items, furniture and utensils, amongst many others.

Infrastructure improvement is one of the focuses of the stimulus package. Hence, more tourists may visit China due to better transportation network, which makes travelling from one province to another much more convenient. Investment in the medical sector, another cornerstone of the package should also spur the growth of the domestic medical tourism industry, which will translate into more dollars for the retail scene.

Besides the two policies mentioned earlier, the Chinese government has also announced a plan allowing farmers to lease or transfer their land-use rights. Furthermore, in a bid to raise rural incomes more rapidly, the government has raised the minimum purchase prices of grains by up to 15% next year. All these should make the farmers feel wealthier and as a result start to build houses on their land, buy motor vehicles, etc pushing up consumption in the vast rural area of the country, and thus creating more domestic demand and jobs.

Despite missing its own 3Q08 gross revenue forecast by 2.9%, due to poor performance of the Saihan Mall, which has been undergoing asset enhancement works, CRCT’s distributable income for the quarter beat the forecast by 10.5%.

CRCT is able to manage its debt at a satisfactory level of 31% versus regulatory cap of 35% and has secured comfortable refinancing terms for its US$105m loan facility that is maturing late next month. The refinancing terms of the loan are based on an interest rate that is within the forecast of 5%, while the next major term refinancing is set at 2010.

In a research report, JPMorgan (JPM) believes the era of virtual cycle fueled by cheap funding has ended, and expects the market to start refocusing on property fundamentals. JPM is of the view that CRCT will stand out given its high quality management, resilient cash flow and strong organic growth. It also believes CRCT offers one of the best and purest proxies for the exposure to China retail and retail property sectors.

For China, it might be true that the external demand is weakening but the expansion of domestic demand is imminent.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

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