Caterpillar Bullish On China, Expects Beijing To Hike Policy Easing To Lift Growth

Caterpillar Inc. (NYSE: CAT), the world's largest maker of construction and mining equipment, is confident that Beijing will step up easing efforts to drive an economic rebound and China's economic growth will probably recover this year.

"There is a sense is that China's government will re-stimulate and get the economy going again," Caterpillar Group President Stuart Levenick told reporters Thursday in Newcastle, Australia. "Our thesis is that effort will continue and we'll probably see China recover later this year or early in the next."

Shares of Caterpillar Inc. (NYSE: CAT) fell 1.30 percent, or $1.12, to $84.97 in Thursday morning trading.

A popular market view is that the current slowdown in China is mainly structural, which means Beijing can't stimulate growth without triggering a sharp rebound in inflation.

Qu Hongbin, chief China economist at HSBC in Hong Kong, thinks otherwise.

"This is wrong," Qu said in an Aug. 27 note to clients. "It's cyclical forces that are to blame, such as slumping overseas demand and the impact of earlier tightening measures."

China's economy expanded 7.6 percent in the second quarter from a year earlier -- the weakest growth in three years and the sixth straight deceleration. Year-on-year growth in fixed asset investments has slowed from a peak of more than 33 percent in the summer of 2009 to 20.1 percent so far this year.

Qu's forecasts suggest that China's potential growth rate remains high, at around 9 percent to 9.5 percent year-over-year through 2015, only a moderate decline from the average of around 10 percent seen in the last three decades.

The current growth of 7.6 percent is around 20 percent below the near-term potential growth level, leading to underutilization of labor and other productive resources.

"We remain confident that Beijing will step up policy easing in the coming months to lift growth to above 8 percent in the fourth quarter of 2012 and beyond," Qu said.

While Caterpillar is feeling the squeeze of a slowdown in China's economic growth, the company is also confident that China has enough gas in the tank to steer its economy toward steady growth.

The Peoria, Ill.-based company, which gets 25 percent of sales in Asia, has cut production at its main Chinese excavator factory, the company said on Aug. 24. China makes up 10 percent of Caterpillar's business in Asia and 3 percent of its overall sales.

Caterpillar has cut working hours in China and it's exporting most production to help ease inventory that built up after an anticipated sales pickup failed to happen, Mike DeWalt, director of investor relations, said this month during a Jefferies Group Inc. event.

"The current sales level in China is quite depressed," DeWalt said according to a transcript. "We ended up with more inventory in China than we needed and it's probably going to take us the rest of the year to work it down."

Rivals Komatsu Ltd (TYO: 6301) and Sany Heavy Industry Co., LTD (SHA: 600031) have also slashed output in the world's biggest construction-equipment market this year, citing similar headwinds.

The Chinese government's measures to cool an overheated housing market have weighed on consumer and industrial demand.

Data released earlier this month showed China excavator sales in July came in at 5,886 units -- the lowest since January, the month of the Chinese New Year holiday.

Industry sales were down 23 percent from the year-ago period and down 29 percent sequentially -- the 15th straight monthly decline.

A separate report showed China's manufacturing sector contracted at its sharpest pace in nine months in August. The HSBC Flash China manufacturing purchasing managers index (PMI) fell to 47.8 this month, its lowest level since November and well down from July's final figure of 49.3.

"We have confidence in long-term commodity demand," Levenick said, adding that developing nations are becoming wealthier and urbanization is driving demand for resources.

"With China's interest rate cuts and the reduction in the reserve ratio, as well as the recent announcement of stimulating infrastructure investment, we are very confident that we'll see a soft landing in China," Kevin Thieneman, country manager of Caterpillar China, India and ASEAN, was quoted by the official Xinhua news agency as saying on Aug. 13.