China's New Geography

Growth is moving west along the length of China as the export-oriented eastern belt stumbles. The question for investors is how to play this shift in the economic geography.While per-capita gross domestic product in China's central and western regions is still 50% to 60% of that in the eastern provinces, the momentum is with the west.That is in part due to the effects of China's fiscal stimulus.

The central and western regions are taking the lion's share of the $586 billion in extra spending by central and local governments, getting about 62% of the spending so far, according to Nomura Research.This is already showing up in faster fixed-asset-investment growth in these areas than in the eastern region and seems to be underpinning higher consumption. The sharp rise in passenger-vehicle sales in China this year is being led by provinces to the west like Shaanxi, Ningxia and Tibet.Clear beneficiaries of this trend will be companies with a strong presence in western China. Morgan Stanley's picks include building-materials company Sinoma International Engineering, which has 60% of its capacity in that area, and auto company Dongfeng Motor Group, which has 50% of its distribution capacity there.Even companies that don't do much business outside eastern China now could benefit. In insurance, Ping An Insurance (Group) Co. of China is way behind China Life Insurance in central and western China. But market penetration for the sector is still so low in these two regions that the potential for growth is clear.One caveat: Moving into China's poorer areas may shrink profit margins as companies are forced to cut prices. But for firms starved of growth in the eastern provinces, the opportunity to expand will be welcome.