China Shares May Lag Global Exports Recovery

China could be an unexpected laggard to any global recovery, with its economy set to remain sluggish after a long run of bubble-like investment in factories and other fixed assets wears off, some analysts say.

The world's third-largest economy is likely to struggle with a "W"-shaped recovery, with another big down leg is coming, as growth in government-led fixed-asset investment eases to around 10% during the next 12 months, Deutsche Bank analysts said in a research note Monday.

Even a rebound in exports won't be enough to offset the decline in stimulus investment. Fixed-asset investment (FAI) is about three times more important than exports in contributing to gross domestic product growth, according to Deutsche Bank chief Greater China economist Jun Ma.

China's FAI growth was 33% higher in the January-through-May period than in the same months of 2008. But Deutsche Bank says overall FAI will fall by 30 percentage points during the next 12 month, with relatively strong flows into real-estate helping cushion the decline.

"We think government-led fixed asset investment growth will fall precipitously from 60% year-on-year in the coming one to two months to zero in mid-2010, showing an inverted V-shaped trajectory," Ma said, adding the pattern would be a repeat of what was seen in 1998-1999, following the Asian Financial Crisis.

He cautioned that the coming slump would be negative for sectors such as materials and construction equipment.

Instead, Deutsche Bank favors equities in South Korea and Taiwan in coming quarters, economies which should see more direct benefits when global consumers begin to spend again.

Other themes that should do well are consumer and technology companies across Asia. Ma thinks these sectors should be winners when the government, frustrated by its efforts to fuel growth through infrastructure spending, shifts its focus to supporting social welfare and consumer consumption.

In fact, stimulus spending by Beijing and regional provincial governments may have peaked in terms of supporting FAI growth. New infrastructure project approvals are down from highs in the fourth quarter of last year, and new project starts appear to have reached a zenith in the second quarter.

Standard Chartered Bank also cautioned that China's FAI growth is likely being manipulated to the high side by local officials that have incentives to report " good-looking numbers."

For now, however, Chinese industrial stocks appeared to benefit from general confidence in government-led investments there, extending their gains of recent months during Tuesday's session.

Hong Kong-listed shares of Angang Steel Co. were up 2.5% at midday Tuesday, while Jiangxi Copper Co. had advanced 2.2%, and Aluminum Corp. of China Ltd., also known as Chalco , was 0.5% higher.

The moves compared to 0.5% rise in the Hang Seng China Enterprises Index, or H-share index, which tracks mainland Chinese shares traded in Hong Kong, and a flat performance from the Shanghai Composite Index.

Elsewhere around the region Tuesday, Taiwan's benchmark Taiex was up 1.2%, South Korea's Kospi rose 0.3% and Australia's S&P/ASX was down 0.3"

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