Looking for the turnaround

If the United States or the eurozone had just released data like that, all eyes would be on the Federal Reserve and the European Central Bank because, when it comes to growth in those economies, those two central banks are the only game in town.

And certainly this latest batch of bad economic news has raised expectations among investors that the People's Bank will act -- and soon. In fact, one of the reasons for the continued struggle of Chinese stocks has been puzzlement over the slow response from the central bank. If growth is continuing to slow, why hasn't the bank moved more vigorously to cut bank reserve ratios again, which would increase the money banks can lend? And why hasn't the bank delivered the cut to the benchmark lending rate that everyone has been looking for?

I'd argue that investors and traders are looking for that signal from the People's Bank before putting money into China's markets. They want a guarantee that the government isn't going to let growth fall much further.

There are no guarantees, of course. Even a move by the People's Bank wouldn't guarantee that growth is going to pick up in China.

But investors waiting for a move by the People's Bank are overlooking recent signs of a very big response to slowing growth from sources other than the central bank. The government hasn't unleashed anything like the high-profile $586 billion stimulus package unleashed in 2008, but as one program after another rolls out of Beijing, the numbers are starting to add up.

For example, the Railway Ministry, one of the agencies that led the 2008-2010 infrastructure spending boom, has announced plans to increase spending -- again -- on the country's rail system. Spending will run at a rate of 67 billion yuan a month through the end of the year, bringing the total to 496 billion yuan ($78 billion) for 2012. The new plan is an increase -- the third since July -- from the old 470 billion yuan budget, and a 7.6% increase from railroad spending in 2011.

On Sept. 5, the National Development and Reform Commission, China's top economic planning agency, approved the construction of 2,018 kilometers (1,253 miles) of roads and subway projects in 18 cities. The price tag for those projects is 1 trillion yuan ($158 billion), according to to Japanese financial holding company Nomura.

Let's see: $78 billion for railways plus $158 billion for roads and subways puts the total at $236 billion. That's still short of $586 billion, true, but China isn't done, either.

For example, although it's difficult to put a yuan figure on it because it's hard to separate new money from already budgeted spending, the National Development and Reform Commission has said it will accelerate approvals of the construction of new airports this year. The commission has already approved 10 to 20 new airports this year, it recently told the press. And on the same day that the commission announced those spending plans for roads and subways, it approved nine new sewage-treatment plants, five port and warehouse projects, and two waterway upgrades. The commission didn't announce the amount of that investment.

Total infrastructure spending by the central government could increase to an annual 20% growth rate in the next 12 months from the current 15% rate, HSBC estimates.

And then, of course, there's the always-tough-to-estimate contribution from infrastructure investments announced by local governments. In the past two months, local governments have announced $1.02 trillion in new infrastructure spending on projects including new subways and steel mills. How much of this spending will actually materialize is anybody's guess, since local government officials typically overpromise in an effort to win promotions. This year, the delivered-to-promised ratio is likely to be even lower than usual, since many of China's local governments are broke. (More on that later in this column.)

So how do you figure all of this into your investing strategy? Let's look at the short, medium and long term.

Short- and medium-term plays

Short term, while the bulk of traders may be waiting for the big dog, the People's Bank, to bark, others are pushing up the price of stocks with the most exposure to the announced wave of infrastructure spending. So, for example, Anhui Conch Cement (AHCHY), China's biggest cement-maker by market capitalization, has climbed 12.5% since the Sept. 5 announcement by the National Reform Commission. Other stocks that are getting a big push from the infrastructure announcements include Sany Heavy Equipment International (trading in Hong Kong as 631.HK), China's biggest maker of construction equipment. Producers of commodities have also been moving up on the infrastructure announcements. Aluminum Corp. of China (ACH) is up 7.7% since the Sept. 5 announcement. Jiangxi Copper (JIXAY), China's largest copper producer, is up 9.3%.

I'd call most of these relatively short-term trades. The stocks should see their biggest pop in the early stages of belief in an infrastructure-led growth rebound (or growth bottom) in the third or fourth quarter of this year.

But I wouldn't stick around in these stocks for too long. Many of these sectors have long-term supply/demand problems that will resurface in traders' minds after the initial gains. For example, Aluminum Corp. of China is looking at a big addition to China's aluminum supply this year as new capacity in Northeastern China comes on line.

In the medium term, say, after the leadership transition in October, I'd be looking to the stocks of companies that would benefit from an actual interest-rate cut from the People's Bank and the subsequent expansion of any uptick in the economy to consumer sectors. Among these stocks, I'd look at Sands China (trading in Hong Kong as 1928.HK) or parent Las Vegas Sands (LVS); noodle giant Tingyi (TCYMF), real-estate developer China Overseas Land & Investment (CAOVY), Internet leader Tencent (TCEHY) and women's shoe retailer Belle International (BELLY). You can also expand your potential universe of medium-term picks to include U.S.-based companies with big exposure to China's consumer sector such as Yum Brands (YUM) and Coach (COH).