The $585 billion bailout 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 if it can be built, without hopeless corruption.

For instance, the Three Gorges Dam became a global watchword for waste and environmental destruction, while their new 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.

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. GE is looking to offset its struggles here in the United States by pursuing business in faster-growing markets abroad. GE recently 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 a bailout plan, there was a better way of getting it. Here’s how they’re looking to spend their stimulus money, and how investors around the world can profit from it.

The Results of China’s Decade of Unbalanced Growth

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 boosted 68 cents late last year 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 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.

The Chinese Bailout – 5 Possible Profit Plays

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

• 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 our 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 Chinese 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 fromChina’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. It’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-to-earnings ratio of 4.3 and a dividend yield of 4.2%, Vale’s shares are not at all expensive.

China’s bailout may or may not help the average Chinese citizen, but with a just few investments, it can certainly benefit your bottom line.

Good investing,

Martin Hutchinson, Money Morning
Investment U