This from Money Morning:

The $585 billion (RMB4 trillion) stimulus package that China announced Sunday may or may not help China’s economy. But with investments in low-income housing, water and energy projects, airports, disaster relief – and $100 billion for new railroads – over the next two years, this financial package provides oodles of opportunities for investors.

There is no doubt China needs infrastructure. Now the world’s fourth-largest economy, China has grown so rapidly that many of its services are stretched beyond belief. Equally, it is not so certain that the government knows what infrastructure to build, or that it can be built, without hopeless corruption. For instance, the Three Gorges Dam became a global watchword for waste and environmental destruction, while the fancy toll roads built between major cities are still very underutilized, because the tolls are too high for all but the rich. In the stimulus package, more than $100 billion is earmarked for railroads, a seemingly 19th Century priority at the beginning of the 21st.

(As Money Morning reported in a market analysis story this past summer, General Electric Co. (NYSE:GE) said it expects its business in China to double to $10 billion a year by 2010 – making that country a key element of the struggling U.S. industrial giant’s strategy to offset its struggles here in its home market by pursuing business in faster-growing markets abroad. GE also announced that it would be providing China with 300 of its most modern locomotives between now and 2010).

Even if the Chinese economy had slowed sufficiently to warrant stimulus, there was a better way of getting it. For a decade, China has enjoyed unbalanced growth, with excessive rates of savings and investment and inadequate consumption. This has resulted in the huge buildup of Chinese foreign exchange reserves, now more than $1.9 trillion –the largest in the world, both in relation to the economy, and in real terms.

To rebalance the economy and maintain growth, China actually needs more domestic consumption. While Bush-style cuts in high-level income taxes would benefit only the “Chuppies” – China’s newly emergent yuppie class – there are other taxes that bear heavily on the economy and could usefully be cut.

The farmland usage tax, for example, levied at 13.6 cents to $1.36 (one to 10 RMB) per square meter in 1987, was late last year boosted to 68 cents to $3.40 (five to 25 RMB) – thus increasing what was already a huge imposition on the poorer farmers, whose margin above subsistence is very limited, only to be made even more so by such regressive taxes. Thus a Chinese government that truly had the welfare of its people at heart would have engaged in tax cuts, not grandiose public sector infrastructure projects.

There is considerable danger of such a massive Chinese infrastructure program leading to inflation. Assuming that China uses $585 billion of its foreign exchange reserves to fund it, increasing the domestic supply of Renminbi, this will increase its M2 money supply by almost 10%

However, The People’s Daily yesterday (Monday) stated that this massive financing package would have a positive effect on “cement, iron and steel producers.” The capital outlay should also be a boon for China’s trading partners: Not so much its three largest trading partners – Japan, South Korea and Taiwan – as they primarily manufacture components that are assembled in China for re-export to the West, or supply manufactured goods, which would benefit from a consumer-led spending surge, rather than this government-led stimulus.

However, suppliers of raw materials – which have already found the long Chinese boom to be a bonanza – can look to benefit further.

And that brings us to some possible profit plays that should rise with the tide of this $585 billion infusion:

• Anhui Conch Cement (Pink Sheets: AHCHF) is China’s largest cement producer – hence, it’s certain to benefit from a major infrastructure program of this kind. Be careful, however: It’s quoted only on the “Pink Sheets,” and is trading on 17 times earnings.
• China Railway Construction (Pink Sheets: CWYCF) is China’s largest construction group, with a special expertise in railroads. Again, it’s traded on the Pink Sheets, this time at 31 times earnings.
• Yanzhou Coal Mining Co. Ltd. (ADR: YZC) is an energy supplier that should profit greatly from the additional infrastructure investment. It’s much-better priced than the two predecessors, trading at only three times earnings and has an alluring dividend yield of 4.3%.
• Huaneng Power International Inc. (ADR: HNP) is a top China energy producer that’s been generating losses lately due to high coal prices. But it’s likely to increase output and profits with the economic expansion that should follow the massive infusion – and the 9.3% dividend yield is rather electrifying, as well.

But a big winner from China’s infrastructure boom (don’t forget, $100 billion in railroad investment) is Brazilian iron ore producer Vale (ADR: RIO), which has increased its prices to China twice in 2008, and that’s now actually holding back supplies while the Chinese market rebalances. China is a huge importer of iron ore, its imports will increase with heavy infrastructure investment, and Vale is the world’s largest supplier. Best of all: With a Price/Earnings ratio of 4.3 and a dividend yield of 4.2%, Vale’s shares are not at all expensive.

Source: Five Ways to Profit From China’s $585 Billion Stimulus Plan

But emerging market IPOs have flourished, accounting for 70% of the total value of public offerings worldwide since April 1.

Globally, the number of IPOs during the second quarter fell by 56% to 205, while the amount of money raised through IPOs fell 64% to $31.5 billion, according to data from Dealogic.

However, that steep decline was largely the result of a collapse in more advanced, Western economies.

The number of deals in Europe, 66, was down 57% from the same period in 2007. The number of IPOs in North Asia, excluding Japan, toppled 37%, from 59 to 37. And the United States suffered the most, with U.S.-listed IPOs dropping 80%, from 56 offerings last year, to just 11.

For the first time since 1978 there were no IPOs for companies with venture capital financing, the National Venture Capital Association reported (NVCA). If the second half of 2008 matches the first half, there will only be 10 venture-backed IPOs this year, less than half the 2002 total.

About 81% of 660 financiers surveyed by NVCA said they do not see the IPO window opening until next year.

The difference between now and then is that in 2007, investment bankers could take a company that just turned profitable public. But in a bear market, investors are more skeptical, and private companies that don’t want to see stock valuations plummet as soon as they’re listed are far more timid.

Through June, 333 companies went public globally, down from 702 last year, according to Bloomberg data. The $73.2 billion those IPOs generated was a 41% decline from 2007. At least 166 companies withdrew or postponed their initial public offerings in the that time, more than double the amount in the first half of 2007. And roughly a third of those were U.S. companies.

But it’s been a different story in emerging markets where IPOs are taking in the lion’s share of the cash floating around the world’s equity markets.

Emerging Market IPOs Pick Up the Slack

Emerging markets have accounted for 70% of the value of global initial public offerings since April 1, compared with 45% over the same period last year, the Financial Times reported.

The number of emerging market IPOs dropped by 45% in the second quarter, but that compares favorably with a 65% drop in IPO issuance in the developed world.

“IPOs will continue for companies in growth sectors and markets,” Michael Lavell, co-head of capital markets at Citigroup Inc. (C) told the FT. “In many emerging markets, the economies are still expanding rapidly, as are the earnings for the companies based there. This is why the majority of IPOs this year are coming from the emerging markets.”

OGX Petroleo e Gas Participacoes SA, a Brazilian oil and gas company, was the biggest emerging market offering this year, raising $4.1 billion in its June debut. India’s Reliance Power Ltd. and China Railway Construction (PINK: CWYCF) also weathered difficult market conditions to wage successful IPOs, raising $2.6 billion and $2.4 billion respectively.

The Middle East, flush with petrodollars and a robust 8% gross domestic product (GDP) growth rate also added fuel to a fledging IPO market and looks poised to continue.

“There were 52 IPOs during 2007 and in the first half of 2008 there have been 26,” Azhar Zafar, head of mergers and acquisitions at Ernst & Young Middle East, told Gulf News. “The total capital raised in the first half of 2008 amounted to $8.69 billion compared to $4.83 billion from 33 IPOs during the same period last year,” Zafar said.

Indeed, there has been an undeniable upsurge in emerging market IPOs, but what is most amazing is that Asia, and China in particular, has been largely absent from the picture.

That’s because the credit crunch and turbulent markets in the developed world has had a negative impact on Asia, which, unlike Latin America and the Middle East, has been unable to rely on the strength of commodities for growth.

“Asian IPOs have almost reached a standstill,” Leslie Phang, the Singapore-based head of investments at private client unit of Schroders PLC, told Reuters. “Issuers are unwilling to launch at lowered valuations and investors are more focused on reducing their equity positions.”

Of course, that may be about to change.

A Possible China Turnaround

The problem is not a shortage of Chinese companies looking to go public. The problem is that the companies that do are concerned their stock won’t be fairly priced by an apprehensive market.

“The big issue is whether they will attract proceeds at the pricing levels they are looking for and it’s a bit of a disconnect right now between what people think they can get in terms of pricing and what investors are willing to pay for these companies,” Eric Landheer, head of Asia Pacific for Nasdaq OMX Group Inc. (NDAQ), told Reuters.

“We could see a flurry of [Chinese listings] in the fourth quarter should market conditions improve,” Landheer said.

Market turmoil has forced about 35 companies in the Asia Pacific region, Japan excluded, to withdraw plans to raise approximately $20 billion in offerings this year, according to Thomson Reuters data.

If market conditions improve, we could see a rush of Chinese IPOs coming off the sidelines to take advantage of a more bullish market.

“If we had just a little more stability, I think we’d be seeing more IPOs from China. But they are being challenged by some of the same issues as domestic companies. They’re afraid to go out in an environment where pricing fluctuates significantly from week to week,” says Scott Gehsmann, a global capital-markets partner at PriceWaterhouseCoopers.

Last year, a record 31 Chinese companies raised $6.8 billion through U.S. listings, but yesterday (Wednesday), China Distance Education Holdings Ltd. (ADR: DL) and China Mass Media International Advertising Corp. (ADR: CMM) became the first Chinese companies to list on a U.S. exchange since ATA Inc. (ADR: ATAI) was debuted in January.

If China Distance and China Mass Media succeed, they could instill some confidence in other wary companies, as well as restore some much needed investor confidence. Unfortunately, it will take time to gauge their success. ATA dropped 8% during its first day of trading but has since recovered and is up more than 50% from its initial price of $9.50.

Source: IPOs Dry Up in Developed World but Emerging Markets Show Promise